Insolvency proceedings is the phrase used to describe formal measures taken either voluntarily or imposed by a court to deal with a company’s debt.
There are different types of insolvency proceedings. Although the word insolvency implies the inability of a company to discharge its debts or a lack of funds, it is important to bear in mind that not all companies subject to a formal intervention are in fact insolvent and some may have funds.
This article considers whether prosecutions for breaches of health and safety law, gross negligence manslaughter and corporate manslaughter can be brought against bankrupt individuals or companies who are subject to insolvency proceedings, and also the duties imposed on insolvency practitioners (IPs) themselves.
Health and safety issues can arise in any appointment during insolvency proceedings – whether they affect the receiver, administrator or liquidator. It is therefore important for IPs to have an awareness of the duties that they owe under the health and safety regime and the potential risks that they may be exposed to during their appointment.
No bar on health and safety prosecutions
There is no blanket bar on health and safety prosecutions being brought against a bankrupt individual or a company subject to any type of insolvency proceedings. However, depending on the type of insolvency the Health and Safety Executive (HSE) may need to make an application to the court before bringing a prosecution.
The key question for HSE will be whether it is in the public interest to bring proceedings. This involves, among other considerations, balancing the likely penalty against the cost of bringing the case. However, even if it is unlikely a large fine would be imposed (or indeed paid) if a company has no funds, in the most serious of cases, prosecution and conviction, with a resulting hefty sentence, might be considered in the public interest as a deterrent to others.
It is important to point out that proceedings cannot be brought against companies which are dissolved. However, the HSE can apply for a company to be reinstated in order that proceedings can be brought.
The latest statistics on company insolvencies, Company Insolvency Statistics: January to March 2023 (www.gov.uk) and Monthly Insolvency Statistics (www.gov.uk) indicate rising business insolvencies in the UK. In the second quarter of 2022, total company insolvencies, on a seasonally adjusted basis, in England and Wales was at its highest quarterly level since quarter three (July to Sept) 2009.
This increase brings into sharp focus the impact of insolvency on health and safety duties and in particular the potential for criminal investigation and prosecution of appointed IPs who may be in control of a business or a portfolio of properties at a time when alleged health and safety failings occur.
There is no blanket bar on health and safety prosecutions being brought against a bankrupt individual or a company subject to any type of insolvency proceedings. Photograph: iStock
IPs may also come into control of premises which require specialist safety considerations – for example, if they contain inherently dangerous equipment or chemicals.
Any failure by IPs to properly consider health and safety issues could have a significant impact on their appointment in a variety of ways. Additional time and resources may need to be devoted to dealing with issues not anticipated at the outset of the appointment. The insolvency process may be unnecessarily prolonged by an ongoing health and safety investigation. The realisable assets
of a company may be devalued in the event of a prosecution and adverse publicity may be attracted, affecting both the value of an insolvent company and the reputation of any IP concerned.
The Health and Safety at Work Act 1974 imposes various general duties on employers, employees, manufacturers and those who control business premises. These apply whether a company is solvent and managed by a board of directors or whether a company is insolvent in the control of an appointed IP. In the event of any breach of those duties, the company itself or an IP in their individual capacity could attract potential criminal liability.
Risk of personal criminal liability
As IPs accept appointments personally, any breach of the health and safety provisions that apply specifically to individuals could result in personal criminal liability being incurred. It is worth noting that the penalties for breaches by individuals of the health and safety regime can be significant – including unlimited fines and/or up to two years imprisonment.
In the event of a serious workplace incident that results in a fatality, an IP could face the prospect of being investigated for gross negligence manslaughter, whereby the breach of duty of care owed by them to an employee, or another who is affected by the insolvent company’s undertaking, is considered to be so grossly negligent that it deserves criminal sanction.
Alternatively, the insolvent company could be investigated for corporate manslaughter if it was deemed that there had been a gross breach of the duty of care owed by the organisation to the deceased and the way in which the business’s activities were traded or organised were regarded to have caused the death and were a substantial element in the breach.
Laura White: "The Health and Safety at Work Act 1974 applies whether a company is solvent and managed by a board of directors or whether a company is insolvent in the control of an appointed insolvency practitioner."
The trend for increasingly large fines for serious health and safety failings should not go unnoticed. Nor should the fact that the Sentencing Council’s 2015 Definitive Guideline applicable to health and safety offences assesses fines against turnover and not profitability.
The degree to which an IP is exposed to criminal liability for breaches of health and safety law will vary from appointment-to-appointment. For example, an IP will likely face greater risk if they elect to trade an insolvent company that operates within an inherently dangerous sector, such as construction.
Similarly, an appointment involving the management of old business premises may lead to an increased likelihood of maintenance and asbestos issues arising. In all circumstances, IPs need to be alert to the risks that they are exposed to and they must have in place risk assessments and control measures to guard against them.
Once appointed, IPs assume the same duties as would the former company directors, including the responsibilities owed under health and safety legislation. IPs do not benefit from any special dispensation under the legal regime – they can be held to account for any breach of duty in just the same way as a company director, albeit they are indemnified by the company to the extent it has assets and a fine is levied.
In fact, in some circumstances the enforcing authorities may even find IPs a more attractive target for prosecution than the former management or the insolvent company.
Civil claims for negligence
IPs and the companies they are appointed to manage may also face civil claims for negligence (breach of the primary duty of care owed to ensure a safe place of work, safe systems of work, safe plant and equipment and competent fellow employees), vicarious liability (for negligence of employees acting in the course of their employment) and occupiers’ liability (breach of the duty of care owed by those who occupy business premises, through ownership or lease, to people who visit or trespass).
IPs are also exposed to financial and loss of livelihood risks. Although insurance can be provided to cover against civil compensation claims brought by individuals for death or injury at the workplace, it is not possible to insure against the criminal penalties that may result from a successful prosecution for a breach of health and safety law – including fines, mandatory court charges and victim surcharge fees. Additionally, it is open to the courts to disqualify an IP because of their breach of the law while appointed.
The potential for difficulty is all too easy to envisage. Take, for example, an administrator who is appointed to a property holding company which leases commercial and residential properties. Although a number of fire risk assessments have been completed across the company’s property portfolio, no such document appears to exist for a property that is visited by the relevant Fire Authority, following the IP’s appointment, when a number of fire safety failings are identified.
The administrator is likely to be investigated, and possibly prosecuted, for breaches of the Regulatory Reform (Fire Safety) Order 2005. Or what about the administrator appointed with a view to trading the insolvent manufacturing company? As part of the insolvency process, a number of the company’s assets may be dismantled to be sold. During the engagement of that work, an individual is injured. Again, the incident, and IP, are liable to be investigated and potentially prosecuted by HSE, for potential health and safety failings.
These scenarios demonstrate the very real risk of prosecution that IPs face for perceived breaches of the health and safety regime. IPs really do need to have an awareness of the law if they are to best protect their reputations and even their liberty.
Laura White is a senior associate at Pinsent Masons law firm. She specialises in representing large companies and senior individuals in relation to health and safety and fire safety. Contact her at: pinsentmasons.com/people/laura-white
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