The sentencing approach to ‘linked organisations’
“Normally, only information relating to the organisation before the court will be relevant, unless exceptionally it is demonstrated to the court that the resources of a linked organisation are available and can properly be taken into account.”
When the final Sentencing Council Guideline on Sentencing Health and Safety Offences (“the Guideline”) was published on 3 November 2015, one of the ‘highlights’ for practitioners was the above provision. At first glance, it appears to allow the Courts the ability to pierce the corporate veil and go beyond the corporate entity to be sentenced when assessing the relevant size of the offender to be punished. Those in complicated group structures, or under the ownership of rich international organisations, felt threatened. Could one part of a group be punished as if it represented the whole? Nearly two and a half years on from the introduction of the Guideline, have these fears come to fruition? What does that qualifying phrase ‘exceptionally’ really mean?
Back to the Beginning
Whilst the provisions of the Guideline have been well-versed by many commentators, the Consultation Response document that preceded it garnered less attention. Following the initial Consultation, concerns were raised regarding the ‘linked organisation’ provision. In its response, and to quell such concerns, the Sentencing Council stated:
“Following consideration of this provision, the Council is satisfied that the wording in the guideline is merely a restatement of the legal position as it stands, and should not be interpreted as either extending or restricting the circumstances when the resources of a linked organisation can be taken into account.”
In short, the status quo remained.
The final wording in the Guideline does remind us of the status quo: “Normally, only information relating to the organisation before the court will be relevant”
It then goes on to limit the endeavour of the Courts in exploring linked organisations by making two statements:
- linked entities will only be considered in “exceptional” circumstances; and
- the Court must also be satisfied that the resources of a linked organisation can properly be taken into account.
The two qualifications above have seemingly achieved a restriction in any anticipated ‘free for all’ by prosecutors.
If the Sentencing Council did not feel itself to be revolutionary in including the ‘linked organisations’ provision, we turn to the Courts to understand how it has been interpreted since February 2016.
Tata Steel UK
In June 2017, Tata Steel UK Limited was before the Courts having appealed a health and safety fine as being manifestly excessive. One of the arguments made by Tata Steel UK was that the resources of the wider Tata Steel group should not have been considered by the judge in the court of first instance when setting the level of fine.
On the facts of the case, it was said that the wider Tata Steel group had financially supported Tata Steel UK and therefore those resources should be considered when setting the appropriate fine level. It was submitted by the appellant during the appeal that to do so was irrational, as it saw the group being penalised for properly managing its financial affairs in order to keep Tata Steel UK trading.
In its response, the Court of Appeal re-iterated the stance of the Sentencing Council, and confirmed that there was no attempt to merge the separate corporate personalities of Tata Steel UK and the parent company. However, within the 2015 Group Accounts, the following statement was made:
“After making enquiries, the directors have a reasonable expectation that the Company has adequate resources (including the support of its ultimate parent, Tata Steel Limited (TSL)) to continue in operational existence for the foreseeable future.”
It was this statement that allowed the Court of Appeal to conclude that the resources of another company could properly be taken into account when sentencing the subsidiary. The Court said that it was simply recognising the ‘economic reality’ of the situation.
The lesson from this case is that the Courts will be interested in the stated financial position of the subsidiary, scrutinising formal accounts as part of that process. However, the applicability of this decision to others has to be seen in its proper context. This was not a case where the fine was increased as a result of healthy group finances. It is a case where the Defendant (Tata Steel UK) was arguing for a downwards adjustment of a fine of £1.8 million as a result of its poor financial position. This may be the type of ‘exceptional’ case where ‘linked organisations’ will have relevance.
The Last Year
Since the Court of Appeal decision in June 2017, there has been very little use of the ‘linked organisation’ provision. This is unlikely to be a result of group organisations not coming before the Court.
The more likely explanation is that the ‘linked organisation’ provision is truly reserved for exceptional situations, it is not there to unfairly punish those organisations that happen to be part of a wider structure.
A recent civil decision in the Court of Appeal goes further to supporting this thinking. In a civil claim involving Unilever Plc, and a Kenyan subsidiary, the Court reminded us that a parent and a subsidiary are separate legal entities, each with responsibility for their own separate activities. In the case, the Court identified the very exceptional scenarios when a duty of care may be established between a parent company and the employees of a subsidiary; it was not willing to challenge the status quo on the basis that the two Unilever organisations were ‘linked’.
It must also be borne in mind that a plea of impecuniosity has wider implications than the level of sentence. An organisation that goes before the Court and alleges an inability to pay a fine (and thereby trigger the need to consider linked organisations) may find itself breaching banking covenants, attracting investor/shareholder and customer concern and generating worrying publicity. This could be much more damaging than simply accepting the level of fine suggested by the Guideline. The need to look into the group, therefore, may be limited even further.
We do not see the current position changing significantly over the coming years; it will only be those organisations that seek to plead some level of financial hardship that will invite the Court to pay closer attention to the economic reality of the situation. For the most part, organisations should not shy away from supporting their group counterparts and organising their business in the most efficient fashion; sharing really is caring.