SMEs under threat from 2007 Corporate Manslaughter & Homocide Act

The fine of £338,000 levied in February against a small Gloucestershire engineering business for a breach of health and safety will not go down in history as one of the largest. But being the result of the first conviction of a company for the death of an employee under the UK’s corporate manslaughter and homicide Act, the case of Cotswold Geotechnical could prove worrying for all directors – including finance directors.

The 2007 Corporate Manslaughter & Homicide Act, which came into force in April 2008, has made it an offence for a company to organise its activities “in such a way as to cause a person’s death, where such organisation amounts to a gross breach of a duty of care”.

Cotswold Geotechnical was found guilty on 15 February for failing to ensure the safety of a geologist employed by the business, Alexander Wright, who died in September 2008 when a deep trench on a development plot he was working in collapsed on him.

By focusing on the part members of the senior management team play as individuals in causing a “substantial element in the breach of duty”, the legislation makes it easier for mid-sized companies to be pursued for failures – such as those that prosecutors said led to Cotswold’s geologist’s death – by creating the concept of a collective level of blame without the need to pin blame on a single person. It was precisely this technicality that caused the collapse of corporate manslaughter charges against companies in the Zeebrugge ferry disaster and the Hatfield rail crash.

Unanswered questions

Though the Cotswold case is a symbolic first, it does not answer many fundamental questions around future liabilities for finance directors.

“Companies already face fines under the 1974 Health & Safety at Work Act, which still applies,” says Jonathan Grimes, partner at law firm Kingsley Napley. “But what this case hasn’t quite tested is a concept that the 2007 Act enshrines: the ability of judges to fine a company out of existence if they see fit.”

According to the Sentencing Guidelines Council of England and Wales (SC) – an arm of the Ministry of Justice charged with ensuring that sentences are fair and transparent – a tough stance is advocated. It thinks fines for such cases should start at £500,000 – and even head into the millions – for corporate manslaughter because “it requires gross breach at a senior level” and “a level of seriousness significantly greater than a health and safety offence”.

Cotswold’s fine is much lower than that guide price: and the judge allowed for it to be paid over 10 years rather than paying the full amount up front and immediately, seemingly recognising the company could go bust if it was required to do so. “Ten years is unusually long,” says Grimes. “No clear precedent on the expected size of fine seems to have been set.”

Another unanswered question is the individual liability of FDs. Cotswold was convicted of corporate manslaughter, which cannot be applied to a specific person. Confusingly, the company’s sole director, Peter Eaton, was originally set to appear in court as an individual under the much less fanfared Health and Safety (Offences) Act 2008. This does make it possible for individuals to be sent to prison if convicted of health and safety offences under the Health and Safety at Work Act 1974. In the event, Eaton became too ill to be tried so the case was progressed under the newer corporate manslaughter act.

FDs in the dock

That means the case provides no clues as to how individuals might fare under the Act. Eaton was a sole trader: even if he was personally tried and convicted, the case provides little clues around how a case against a larger company, involving a significant chain of managers, would fare.

But Adrian Darbishire, from law firm QEB Hollis Whiteman, who acted for the Crown in the Cotswold case, said FDs must be vigilant in future about their responsibilities.

“The case will put some lead into the prosecution’s pencil,” he says. “It’s possible to imagine a case where there is tension in the boardroom about taking adequate safety measures and the costs this may involve. While most larger businesses are well schooled in not putting profit above safety, any FD thinking of limiting funds that could impact on safety would be well advised to think again now.”

Darbishire does not foresee a massive surge in corporate manslaughter cases – this is the first in three years – but he does see a situation “where both the company is pursued for corporate manslaughter and individual directors are up in the dock in parallel. The opportunity to convict individuals will simply be too good to resist”.

Two years in prison could be the personal penalty for FDs found to be negligent in practices that cause death. But while the principle is that small and large businesses should not be treated differently, and that a fine is “intended to inflict painful punishment”, perhaps the better news is that the lower fine imposed means judges may show restraint in corporate manslaughter cases.

The SC also provides for a clause that puts the onus on defendant companies to supply judges with enough financial data to calculate what any fines will be.

It rules that a “fixed correlation between the fine and either turnover or profit is not appropriate”, but suggests that, if FDs co-operate and ensure maximum transparency should their business face prosecution under the Act, they can to some extent mitigate the size of the fine.

Only if a business fails to provide “relevant information”, says the SC, is the court justified in making adverse assumptions as to its means, and may be obliged to impose at least the minimum half a million pounds – a painful and potentially life-threatening proposition for SMEs everywhere.