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M&A Weekly Update: fraud, bribery and money laundering sentencing guidelines; limited liability partners as workers; and more
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22 August 2014
The Government has generated a fair amount of publicity for its proposed legislation to convict those responsible for corporate killing. But is this all spin or can we expect more substance behind these latest moves? The rather watered-down proposals announced by David Blunkett a few weeks ago may have prompted a collective sigh of relief in boardrooms across the country, but perhaps directors would be better advised to take a closer look at them before becoming too complacent.
It is true that the original plan to impose criminal liability on individual directors as well as the company appears to have disappeared. The prospect of directors being slung in jail for their company's failure to comply with Health and Safety legislation is probably no longer a threat, although a significant number of labour backbenchers and trade unions are lobbying hard for this to be reintroduced. So how much difference will the new legislation make to the liability of companies? The courts will be able to impose an unlimited fine, but they can already do this under existing Health and Safety legislation. So what's new?
David Blunkett has said that the new law must "bite properly" on large corporations, and the Home Secretary is not someone who pulls his punches. Having dragged its feet on introducing punishment for corporate killing (it has been a manifesto pledge since 1997), the Government is unlikely to allow itself to go into the next election with this as unfinished business. But how exactly will it bite properly?
For a start, the Government will expect the courts to interpret "unlimited" fines as fines which hurt. The current record (under Health and Safety legislation) of £1.5m, which was awarded against Great Western Trains for the 1997 Southall rail disaster, is likely to be multiplied by at least a factor of ten. As legal representative for one of the parties at the Southall Public Inquiry, I vividly recall the astonishment at the inquiry when it was announced that the court had imposed such a low fine. It would not be surprising if David Blunkett introduced statutory guidance on the level of fines, to avoid any further run-ins with judges who refuse to do his bidding.
There are other expensive and potentially crippling remedies which were included in the Government's original proposals and which will probably survive. These include the power to order companies to remedy the cause of the death(s) within a time period set by the court. For a train operating company, that could mean withdrawing all its rolling stock from service while a defective safety system is replaced.
There is then the power to freeze a company's assets pending the outcome of a corporate killing prosecution to prevent those assets being put beyond the court's reach. Both of these measures could put a company's survival in real jeopardy. While that, arguably, penalises employees and shareholders, the overriding issue is whether or not a company which causes a disaster on the scale of Southall or Ladbroke Grove deserves to remain in business.
The impact on insurance premiums should also not be underestimated. Although there is no indemnity for fines, the costs of defending criminal proceedings are often covered. Because convictions against companies will now be significantly easier to achieve (with the 'controlling mind' hurdle - that is, the responsibility of an individual - removed), there are likely to be more proceedings, hence hikes in premiums.
The messagefor company directors, therefore, is loud and clear. Do not take health and safety off the boardroom agenda. Indeed, by moving away from looking at the responsibility of an individual to the conduct of the whole company, the new legislation is likely to lead to more exacting standards. A company cannot plead human fallibility as an excuse for failing to operate proper health and safety procedures.
Responsibility for health and safety should be given a genuinely high-profile role (a main board director and a proper budget) to demonstrate to shareholders and insurers that this is not a company with a conviction waiting to happen. This may mean a gravy train for health and safety consultants, but that's probably a price worth paying.