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Group finances and inter-linked companies: Who is the Weakest Link?
It’s been four years now since the Sentencing Guidelines for health and safety (and some food law offences) were introduced. Although most people in the industry know that fines are now based on categories of company size and turnover, we are still getting queries about how the courts would treat complicated corporate structures where the resources and financial procedures may in some ways be inter-linked.
Some forward-thinking companies in dangerous industries have asked us to review their current arrangements and - given some fairly intricate and unusual inter-group tax, safety and accounting procedures - protect them as best we can. Others may transact the entire business and turnover of the group through one very large overall Group plc organisation. This can leave its resources looking artificially high when it comes to what fine it could afford to pay. Given so much can turn on this (in one case the issue was whether the court should consider corporate resources to be £100 million for the group or £10 million of the subsidiary) the courts have again looked at this issue and recent case law gives us some guidance on what will be taken into consideration and the reasons why.
What we have learnt from recent case law
The starting point for any criminal offence is to look at the defendant in the dock. Just as a human defendant’s own personal finances are considered when they stand convicted and facing a fine, the same is true of corporate defendants. The rule is that no person (whether human or corporate) can be fined for a crime that legally it did not commit, so should not suffer hardship just because it may have greater resources than the “true” offender. There are, perhaps unsurprisingly, one or two exceptions to the rule.
BUPA Care Homes  EWCA Crim 1691
In this case the court looked at the position of the first defendant [Bupa] as well as one of its wholly owned subsidiary companies, and second defendant, [BUPA BNH], which was directed by and acted under the instruction of the first defendant. It was, said the prosecution, the responsibility of the first defendant to guard against, identify and correct deficiencies, in this instance relating to Legionella compliance.
“The immediate operational failures were those of the subsidiary second defendant, but the failures of management and control which permitted the creation of a deficient culture at [the scene of the offence], were the failures of the parent first defendant."
Lord Burnett CJ had this to say:
“The Court can and should be informed of the position of Bupa Care Homes (BNH) Ltd as a wholly owned subsidiary and that sentence can and should reflect the 'economic realities' of the Bupa group (Whirlpool  EWCA Crim 2186)."
From this, we can see that it is possible for the ‘economic reality’ to be taken into account. However, this does not mean a court should always look at the collective position or even just the larger resources of the bigger parent company:
The mere fact that one company may be the wholly owned subsidiary of a larger parent (with larger financial resources) does not automatically mean that the resources of the parent can be treated as available to, or as part of the turnover of, the subsidiary company. That of itself would be unrealistic and probably inaccurate.
The Guideline phrase 'economic realities' cannot be extended to mean that the parent's resources belong to the subsidiary in order to justify a large increase in fine.
So for a court hearing a sentencing exercise, to treat the resources of the parent company as available to the subsidiary, there must be exceptional circumstances (below).
Some Case law examples:
NPS London Ltd  EWCA Crim 228
The appellant company was fined £370,000 for a health and safety offence. It was a small organisation as defined within the Guidelines; its turnover at the relevant time being £5 – 6 million pa. It was a joint venture company, 80% owned by a larger company and 20% by the London Borough of Waltham Forest. The parent company’s turnover was £125 million.
The judge had incorrectly treated the appellant as a large organisation. He reached that conclusion because of the passage in the Guidelines at Step Two which states that, exceptionally, the resources of a linked organisation can be taken into account. He had regarded the parent company as a linked organisation. But that is not the relevant turnover to consider which category the defendant belongs in.
If it is generally wrong to take into account the turnover of the parent company (which was not charged with any offence) and use that figure when looking to sentence the subsidiary, then it would also be wrong to increase the subsidiary's turnover figure at Step Two and take the sentencing range into a much higher category. It is also wrong to use it to increase the fine at Step Three in the absence of some particular factor or link between the corporate group of the type identified in the case of Tata Steel Ltd, or NPS London.
Why is this?
As seen above and in Tata Steel, the parent company's turnover was taken into account not because it could somehow be treated as belonging to the subsidiary company, but because the economic reality was that the subsidiary would not have been a going concern without it, and so it could not completely be ignored as part of that reality. Because the parent company's turnover was substantial in both cases the court chose not to reduce the fine against the subsidiary. In other words the court took into account the larger group financial position by leaving the sentence at it was. It imposed no discount to reduce the fine against the subsidiary company they were not cases where the larger resources and group picture was used to increase the sentence to be imposed and the overall level of the subsidiary's fine.
The court will not simply substitute a higher turnover figure but there are some exceptional cases where it might be unrealistic to sentence fairly without at least some enquiry into the arrangements and reality behind the corporate organisations and structure.