Health and safety prosecutions against companies in liquidation: Part 2 – liquidators’ duties

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2019-12-12

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This article was co-authored by Sally Milner, Litigation Assistant, Sheffield.

Following our article, ‘Health and safety prosecutions against companies in liquidation: Part 1 – public interest’ (see here), we now consider the duties of liquidators of companies prosecuted by the Health and Safety Executive (HSE), particularly where others such as co-defendants and/or insurers have an interest in the prosecution.

Liquidators’ duties in the event of a prosecution

The liquidator must respond to the proceedings on behalf of the company in liquidation or risk being held in contempt. It is often, but not always, the case that the court and the Crown accept non-participation by the liquidator particularly if the company alone is being prosecuted.

Notwithstanding such acceptance, the court must proceed with a trial on the basis that the company lays itself upon the mercy of the court. This is regardless of whether the company has any culpability and in full knowledge that conviction and fine will inevitably follow.

Such a conviction may have no financial or other implication for the company with limited funds and the view may be that the legal costs of participating in any viable defence would not be a good use of whatever funds may be available. To participate on this basis may represent a disservice to the creditors.

In these circumstances, and if the court agrees, an attendance at court by the liquidator may be dispensed with by agreement, and the company convicted and fined in its absence and regardless of actual culpability.

Such circumstances may considered to be reasonable discharge of the liquidator’s duties not to participate.

Where others have an interest in the prosecution

Difficulties may arise however, where others have an interest in the outcome of a prosecution of the company, for example a co-defendant and/or insurer with insurable interest in the company and/or its former directors and officers.

In relation to the duty of a liquidator, Fletcher, in The Law of Insolvency (Fifth Edition) identifies this fiduciary duty and at paragraph 22-077, states:

He must act honestly and impartially, serving the interests of the general body of creditors, but be mindful also of the residual interests (if any) of the contributories. He must afford all interested parties reasonable assistance and information so as to enable them to ascertain and exercise their rights.

The liquidator may therefore have ongoing direct and fiduciary duties to the court, creditors, co-defendants, and insurers in circumstances where they have an interest in the prosecution of the company.

Duties owed to former directors and officers

When prosecuting a company in liquidation for health and safety breaches, it is not uncommon for the HSE or other Regulator to prosecute a director or other senior manager involved with the company for their part in the commission of the company’s breach.

Companies are most commonly charged with a breach of s.2(1) or s.3(1) of the Health and Safety at Work Act 1974 (the HSWA) (relating to general duties of employers to their employees and persons not in their employment) and/or breach of subordinate legislation. Former directors and/or senior managers may for example face a charge of breach of duty under s.37(1) of the HSWA for their involvement in the company’s breach.

This is a so-called ‘parasitic offence’ where a former director, manager, secretary or other similar officer of the company in liquidation is alleged to have been complicit in the company’s breaches due to the former officer’s consent, connivance or neglect in relation to those breaches.

The parasitic nature of the offence is such that if the company is acquitted there cannot be a conviction of the former officer under s.37(1). However, a failure by the company to participate in a defence would permit a conviction of the company in circumstances where it might not otherwise be convicted. This conviction removes a very substantial barrier to the conviction of the former officer. The former officer’s guilt will be gauged by their involvement in the offence for which the company has by default been convicted. This might leave the officer unduly vulnerable and having to defend themselves in relation to the company’s undefended breaches for which the company may not have been culpable, but has been incorrectly convicted.

Others to whom a fiduciary duty may be owed

Others may have a vested interest in the outcome of a prosecution of a company in liquidation in a number of ways.

A conviction of the company in liquidation may result in insurance coverage being withdrawn for representation of the company and its former directors and officers in associated proceedings leaving the creditors and the former officers with the expense of defending themselves.

Such a conviction might also encourage claims from third parties directly and indirectly involved with or affected by the consequences of the incident giving rise to conviction. This may in turn increase the costs and liabilities of insurers and others.

Insurers may also have a liability to pay prosecution costs in the event of a successful prosecution and may in those circumstances require some control over how the proceedings are conducted. Prosecution costs accumulated over a lengthy investigation prior to and post liquidation can be substantial. Insurers will consider the liquidator to owe a fiduciary duty to limit those costs in circumstances where there is a viable defence and where a failure to defend will have a detrimental impact on the company’s former directors and officers.

Insurers may expect a company to defend itself where it has a viable defence and may take a robust view if their liabilities and expenses, include the costs of representing former directors and officers who are detrimentally affected as a consequence of a failure to defend.

In these circumstances, it may not be sufficient for the liquidator to assume no role in the prosecution by the HSE. It may be incumbent on the liquidator to consider his duties to others and play an active part in such proceedings with ramifications to creditors and others if he does not observe his duties and fiduciary duties owed to others.

Content included within this article was first published in the August 2019 edition of RECOVERY magazine and reproduced with the permission of R3 and GTI Media.

Related item: Health and safety prosecutions against companies in liquidation - Part 1: public interest

Read more items in Health, Safety and Environment Brief - December 2019