Fines to be fixed to bring home a message to directors and shareholders

In the last few months, the combination of a Court of Appeal judgment and a new sentencing guideline issued for Environmental Offences has meant that the level of fines for Health & Safety and Environmental Offences, particularly for large companies, is expected to rise very significantly. Companies, and their directors, who ignore their responsibilities could pay a heavy price for any failures.

The Court of Appeal

Sellafield Limited and Network Rail Infrastructure Limited 

In January 2014, the Court of Appeal heard conjoined appeals against sentences in the lower courts. One was a “pure” Health & Safety case and the other involved both Environmental and Health & Safety issues.

The “mixed” case involved Sellafield Ltd. A failure in the nuclear company’s segregation system led to radioactive waste being incorrectly classified and then sent to landfill for four months before the issue was  identified. It was accepted that there was no deliberate intent and no harm had been caused. However, the company was fined £700k notwithstanding full co-operation and an early guilty plea. This was said to be equivalent to a little more than one week’s profit for the company.

The “pure” Health & Safety case involved Network Rail which was fined £500k following an incident where a 10 year old boy received severe injuries when a car was struck by a train at an unmanned railway crossing. Again, the substantial fine was imposed despite there being an early guilty plea and no suggestion that the company had put profit before safety.

In both cases it was argued that the level of fine was manifestly excessive considering the absence of a fatality. However the Court of Appeal reinforced the guidelines in the Criminal Justice Act 2003 and the judgment in R v F Howe (Engineers) Ltd to the effect that the level of fine should bring home the  message that Health & Safety must be taken seriously not just by managers of the company but by shareholders. Far from overturning the decisions below, the Appeal Court judges indicated that, certainly as far as the Network Rail fine was concerned, they would not have interfered with a materially greater fine.

The court also indicated that it expected companies to produce their accounts for the court to examine, together with details of their corporate structure, so as to enable the court to assess the financial circumstances  of the company and the most efficacious  way for giving effect to the purposes of sentencing.

The sentencing guideline for Environmental  Offences

The Sentencing Council recently issued its definitive guideline on the sentencing of Environmental Offences which applies to all offences sentenced after 1 July 2014. The guideline requires the court to work through a step-by-step process:

  • First it must consider whether a compensation order or confiscation order (in the Crown Court) is appropriate
  • Then it must consider the culpability and harm caused
  • Once that is done it must then refer to a table of potential fines which are related to the degree of culpability and harm caused, and which reflect the financial means of the company
  • Once that process is complete, the court must decide if the combination of orders (compensation, confiscation and fine) removes any economic benefit derived from the offence
  • It must then check if the proposed fine based on turnover is proportionate to the means of the offender

Other factors must also be considered, eg whether the organisation is charitable or not. Reductions may be given for assistance and for a guilty plea. In all cases the court must consider whether any ancillary orders should be made (deprivation of property, remediation etc). Where there is more than one offence, the court should also consider whether the total sentence is proportionate to the offending behaviour. The court must also give reasons for its sentences.

The tariff that is used to identify the range divides companies into four categories: micro, small, medium and large:

Micro – turnover less than £2m

Small – turnover between £2m and £10m

Medium – turnover between £10m to £50m

Large – turnover £50m and over

The range of culpability is in four categories: deliberate, reckless, negligent and low/no culpability. Each one of those categories is also sub divided into the four categories of harm done depending on the categorisation of the environmental damage caused. These are categorised from 1 to 4 with category 1 being the most serious.

For a large company, the range is from £7k for a low/no culpability event causing only a category 4 environmental incident to £3m for a deliberate incident causing a category 1 environmental incident.

Ominously, the guideline suggests that for  a very large company (ie where a company’s turnover greatly exceeds the threshold for large companies) it may be necessary to move outside the suggested range to reach a proportionate sentence.

Summary

As a result of the developments described above, the level of fines can be expected to increase significantly. The courts have been reminded of the need to send a message both to directors and shareholders in fixing the level of these fines. The idea of hitting director’s bonuses was specifically discussed in the Network Rail case.

Companies of any size should take note. If such regulatory matters have not been taken seriously and a prosecution should be brought, the financial consequences could be severe, for individual directors as well as the corporate body.