Liability creep | Why health and safety compliance and failure to prevent offences are a group-wide concern

Written on 14 Dec 2020

Previous articles in this liability creep series (see our articles on: mass tort claimseconomic tortsthe actions of regulators and parent company liability) have explained the growing number of ways in which liabilities relating to the business of one group company can translate into liabilities for other companies in the group, shareholders and/or directors. In the last of our series, we look at some other areas of regulation where issues can arise and to which group companies should be alert; in particular, tax and health and safety.

Tax

The imposition of personal and group liabilities has long been part of the tax collection toolkit. Tax legislation imposes duties in respect of group compliance on a specified officer of the group, for example, and allows for unpaid tax due from a subsidiary to be clawed back from other group companies.

Various other statutory provisions relating to tax law impose liability on the "directors and officers" of a company and the meaning of officer tends to include persons with a de facto management role in the business whether or not they are actually employed by the company – this can therefore include employees of parent companies.

A full review of those provisions is beyond the scope of this article, but one compliance risk worth highlighting in particular is the offence of failing to prevent the criminal facilitation of tax evasion.

A corporation will be guilty of this offence if:

  • a tax evasion offence is committed by a tax payer (a tax evader);
  • the commissioning of that offence is criminally facilitated by a third party (the facilitator); and
  • the facilitator is 'associated' with the corporation.

The definition of an 'associated person' is deliberately broad and includes subsidiaries and other group companies.

The legislation comprises two separate offences: (i) a UK tax evasion offence, where the tax evader must be a UK tax payer, but the corporation can be from anywhere in the world and needs no UK nexus in order to be guilty; and (ii) a foreign tax evasion offence, where the tax evader must have committed a tax evasion offence in the country in question, but the conduct must also amount to an offence in the UK.

In respect of foreign tax evasion offence, unlike the UK offence, the corporate must have some connection with the UK in order to be brought within the scope of the foreign tax evasion offence, but this could be as remote as part of the facilitation being carried out in the UK.

The indirect nature of the offence means that this is a risk that cannot be ignored within corporate groups, who need to be able to demonstrate that they have "reasonable procedures" in place to prevent the facilitation of tax evasion. We discuss what constitutes reasonable procedures in this Insight.

Health and safety

Earlier in our series, we have discussed the potentially difficult balancing act of (i) trying to avoid the risk of tortious liabilities being imposed on a parent company by becoming too closely involved in the management of a subsidiary's business; and (ii) satisfying the corporate governance interest of implementing group-wide policies and practices in order to prevent acts that may give rise to a claim in the first place.

That issue is of acute importance when it comes to health and safety issues. In a 2012 landmark decision, the Court of Appeal held in Chandler v Cape plc that a parent company can, in certain circumstances, owe a direct duty of care towards an employee of one of its subsidiaries, where the parent company has assumed responsibility for that employee's health and safety. Of particular relevance in that case was the fact that the parent company had superior knowledge on a certain aspect of health and safety (and knew or ought to have foreseen that the subsidiary or its employee would rely on that) and was aware, or ought to have known, that the subsidiary's system of work was unsafe.

In relation to the subsidiary's/claimant's reliance on the parent company's superior knowledge, the Court of Appeal said: "it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The Court will look at the relationship between the companies more widely. The Court may find that [reliance on the company's superior knowledge] is satisfied where the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues."

This is not an uncommon scenario. Parent companies may provide 'group health and safety standards' or 'expectations' which all group companies are expected to follow. These are often higher than base-line legal compliance and the parent company may audit group companies against these standards.  Parent companies may also have some influence over health and safety budget or targets for the group.  Central compliance teams will commonly be employed by the parent company but advise the whole group.

Where these sorts of arrangements are in place, the parent company needs to ensure that terms of reference and audit procedures are established with one eye on the legal liability position. One approach is to make clear that the parent company is auditing/monitoring for reputational reasons but each group company is responsible for ensuring legal compliance. However, whether there is 'liability creep' will depend on an analysis of the true factual position.

From a regulatory law perspective, even where a parent company is not held responsible in its own right following a breach of health and safety regulations, there are circumstances where it is permissible to 'lift the corporate veil', and treat a corporate defendant as part of a larger organisation for the purpose of sentencing (as also happens in respect of competition law enforcement).

Under the Sentencing Council's 'Definitive Guidelines: Health and Safety Offences, Corporate Manslaughter and Food Safety and Hygiene Offences' any proposed fine must be proportionate, whilst also ensuring it has a "real economic impact". The court has to take into account the "economic realities" of the offending organisation. In certain situations, that can involve looking at the turnover of the parent company. As the Court of Appeal's decision in R v NPS London Ltd [2019] recognised:

"An example of a case where it would be appropriate to treat the relevant figure for turnover as that of a parent company might be one where a subsidiary had been used to carry out work with the deliberate intention of avoiding or reducing liability for non-compliance with health and safety obligations".

Practical guidance

As we have draw out in this series of articles, the apparently clear distinctions between different companies in a group structure are being tested in numerous different ways.  The liabilities relating to a business of a subsidiary, increasingly have the potential to be extended to parent companies, shareholders and, in some cases, individual decision makers.

On the regulatory side, this trend is fuelled by a desire to empower regulators to impose effective punishments on businesses and true decision makers, while on the private litigation side, it is fuelled by creative litigants testing the boundaries of tort claims in search of 'deep pockets' or jurisdictional advantages.  These trends are unlikely to retreat.  Looking ahead, in-house counsel need to pay close attention to them.