Court of Appeal affirms the approach to sentencing corporate defendants ultimately owned by parent companies

Following our recent consideration of the Court of Appeal’s decision in R v NPS London Ltd [26.02.19], we consider further guidance given by the Court on the sentencing of a subsidiary company for health and safety offences.

In R v Bupa Care Homes (BNH) Ltd, the Court of Appeal considered if, and to what extent, a sentencing judge “is properly able to reflect on the fact” that a defendant company is a wholly-owned subsidiary of a parent company with a large turnover, and to uplift the defendant company’s fine as a result.

Background

The Health and Safety Executive (HSE) brought a prosecution against both Bupa Care Homes (BNH) Ltd (Bupa Care) and Bupa Ltd for an offence contrary to s.3(1) of the Health and Safety at Work etc. Act 1974. The prosecution was brought following the death of one of Bupa Care’s residents who sadly died in June 2015 having contracted legionnaire’s disease while he was a resident of a nursing home, owned and operated by Bupa Care.  

Bupa Care was a wholly-owned subsidiary of its immediate parent company, Bupa Care Homes CFG Plc, which in turn was owned by the ultimate parent company, Bupa Ltd.

Bupa Care pleaded guilty at the first opportunity, but Bupa Ltd entered a not guilty plea in relation to its alleged failure to instruct, supervise and monitor Bupa Care in its day-to-day management of legionella-related risks.

During pre-trial negotiations, the HSE agreed to discontinue its case against Bupa Ltd, on the basis that Bupa Care agreed that its sentence could and should reflect the “economic realities” (as referred to in the Definitive Sentencing Guideline for Health and Safety Offences (the Guideline)) of the Bupa group and Bupa Ltd’s financial position.

The marked difference in the respective turnover/revenue of the two organisations is of note – Bupa Care’s turnover in 2016 was £89 million; Bupa Ltd’s revenue in 2016 was just short of £11 billion.

Sentence imposed in June 2018

In applying the Guideline, the Sentencing Judge found that Bupa Care’s failings resulted in a finding of high culpability and harm category 2. By virtue of its turnover exceeding £50 million, Bupa Care was categorised as a “large organisation” for the purposes of the Guideline which resulted in a starting point fine of £1.1 million, with a category range of £550,000 to £2.9 million. The Sentencing Judge considered that an upwards adjustment of the starting point fine to £2.25 million was justified.

In assessing whether the proposed fine of £2.25 million was proportionate to the overall means of Bupa Care - particularly in light of the basis upon which the HSE discontinued its case against Bupa Ltd - the Sentencing Judge considered that she was entitled to properly take into account the resources of Bupa Ltd.

In doing so, the Sentencing Judge doubled the starting point fine to £4.5 million to reflect, amongst other matters, the economic realities of the Bupa group as a whole, including Bupa Ltd’s revenue. This was then reduced by one-third to account for Bupa Care’s early guilty plea, resulting in a fine of £3 million.

Bupa Care’s appeal

Bupa Care was granted leave to appeal its sentence on two grounds, the second of which is relevant to the issue of parent company turnover, in that the Sentencing Judge had erred in law by adjusting Bupa Care’s fine upwards at Step Three of the Guideline on the basis of Bupa Ltd’s turnover/revenue.

Court of Appeal’s decision

The Court of Appeal dismissed the first ground of the appeal (which related to a separate issue of “double counting” at Step One and Step Two of the Guideline). In allowing the second ground of appeal, the Court of Appeal concluded that the Sentencing Judge was wrong in principle to increase Bupa Care’s starting point fine based on Bupa Ltd’s turnover/revenue, for the reasons set out below:

• As per the Court’s observations in R v NPS London, the Guideline has to be applied in a way that is consistent with established company law principles, in that each corporation is to be treated as a separate legal entity;
• As per the Court’s rulings in R v Tata Steel UK Ltd [2017] and NPS London, ‘economic realities’,  “cannot be extended to mean that the parent’s resources belong to the subsidiary organisation simply in order to justify a large increase in fine at Step Three”; nor can the parent organisation’s resources “be taken into account to increase the size of the subsidiary’s turnover for the purposes of the tables in Step Two”; and
• As accepted by the Court in Tata Steel and NPS London, there are special circumstances in which it is permissible to ‘lift the corporate veil’ and treat the defendant organisation as part and parcel of the larger parent organisation for sentencing purposes, but this was not one of those cases.

The Court of Appeal declined to speculate on what might constitute “special factors” to enable it to take into account the resources of a parent organisation. The Court did, however, set out several features that led to its determination that this was not one of those exceptional cases:

• The subsidiary organisation had not delegated its duties to its parent organisation;
• The ‘economic realities’ were that the subsidiary “was a large profitable organisation in its own right”, and there “was no suggestion that it would be unable to pay the fine and require instead the parent to pay it, or that it would not be a going concern absent the financial support of the parent company”;
• A subsidiary remitting its profits to its parent organisation is irrelevant; and
• The fact that fining a subsidiary would decrease the amount remitted by it to its parent organisation does not alter the economic realities.

The Court of Appeal concluded that, after having considered Step Three of the Guideline, Bupa Care’s fine should have remained at £2.25 million, which should have then been subject to a one-third discount for its early guilty plea.

The Court of Appeal quashed the fine of £3 million and substituted it with a fine of £1.5 million, resulting in a substantial 50% reduction.

Comment

The Court of Appeal’s ruling represents a welcome decision for corporate defendants that are part of a wider group structure. It reinforces well-established company law principles. In doing so, it clarifies that the larger turnover of a parent company (set up as a separate legal entity) cannot and should not be routinely taken into account simply as a means by which to impose a significantly larger fine on a smaller, subsidiary company.

We can also glean some further guidance from the Court of Appeal as to when a case will not be considered sufficiently “exceptional”  to warrant the court piercing the corporate veil and taking into account the resources of a linked organisation. However, the courts remain reluctant to prescribe a list of “special factors” that would enable it to do so. 

Related item: Guidance from the Court of Appeal on the sentencing guideline and linked organisations

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