Case Studies

Barely a day goes by without a court making a decision about something interesting. This is where we tell you about our favourites and those that we think you should know about.
  • 23/02/2017 Insolvency: The High Court considers the issue of costs on an appeal against a bankruptcy order

    Cooke v Dunbar Assets Plc is the first reported case to deal with the issue of costs on an appeal against a bankruptcy order. There is surprisingly no previous direct authority on the matter and this was described as "remarkable" by Jeremy Cousins QC sitting as a Deputy Judge of the Chancery Division when giving his judgment in the present case. Sundip Mapara considers the impact this case has on clarifying the law in this area.

    Cooke v Dunbar Assets Plc [2016] EWHC 1888 (Ch)

    Background

    A bankruptcy order was made against Mr Brian Cooke on 18 December 2014 on a petition presented by Dunbar Assets Plc ("Dunbar"). Mr Cooke appealed the bankruptcy order and this was dismissed by the Judge on 6 April 2016. At this time, it became apparent that there was a fundamental disagreement between the parties as to the costs order which should be made on the unsuccessful appeal. More particularly, counsel for Mr Cooke suggested that the costs should be treated as a cost and expense of the bankruptcy, and counsel for Dunbar suggested that Mr Cook should be ordered to pay the costs personally. As a result, judgment was reserved in order for the parties to make further written submissions on the issue of costs.

    Key Facts

    The Issues

    The parties agreed that the costs should fall into three possible categories, namely:

    1. as a cost and expense of the bankruptcy in accordance with the order of priority set out in Rule 6.224(1) of the Insolvency Rules 1986 ("IR 1986") ("Category 1");
    2. as a provable debt in the bankruptcy ("Category 2"); and
    3. as a liability outside of the bankruptcy, ordered against Mr Cooke personally ("Category 3").

    The parties also initially agreed that the issue of costs was a matter of law and not discretion for the court.

    In light of the above, the court had to consider:

    1. under which of the above three categories the costs order can be made; and
    2. whether this decision was in the discretion of the court or a matter of law.

    The Parties' Legal Submissions

    Counsel for Mr Cooke argued that the costs order should fall under Category 1 and relied upon the provisions of Rule 12.2 IR 1986, which states at Rule 12.2(1):

    "All fees, costs, charges and other expenses incurred in the course of winding up, administration or bankruptcy proceedings are to be regarded as expenses of the winding up or the administration or, as the case may be, of the bankruptcy".

    Counsel for Mr Cooke argued that a bankruptcy appeal is not a standalone action that can be divorced from the bankruptcy proceedings and therefore the costs should be treated no differently to the costs of the petition, which it is common ground fall as a cost and expense of the bankruptcy.

    Alternatively, counsel for Mr Cooke argued that the costs awarded would constitute a bankruptcy debt as defined in Section 382 of the Insolvency Act 1986 ("IA 1986") and should be treated as a provable debt. Section 382(b) defines a provable debt as:

    "any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy".

    Either way, the costs should be payable from the bankruptcy estate, albeit, ranking differently in the order of priority of payment.

    Counsel for Dunbar relied on Rule 7.51A IR 1986 in applying Part 44 (General Rules About Costs) and Part 47 (Procedure for Assessment of Costs and Default Provisions) of the Civil Procedure Rules 1998 ("CPR") and argued that the court had an unfettered discretion as to the costs awarded on an appeal and that Rule 7.51A IR 1986, and consequently, CPR Parts 44 and 47, amounted to the only statutory guidance on the treatment of costs of appeals from bankruptcy order. Furthermore, it was Dunbar's case that any award for costs should fall into Category 1 or Category 3.

    Counsel for Dunbar also submitted that an order for costs could be made in the alternative, i.e. that Mr Cook be ordered to pay the costs (Category 3), but if not paid by him, they be treated as a cost of the bankruptcy (Category 1). They could not fall within Category 2 because the liability was incurred post-bankruptcy as the litigation in this case did not exist before the bankruptcy proceedings.

    Judgment

    The Judge ruled that the purpose of Rule 12.2 IR 1986 was to safeguard the interests of those who have incurred costs and expense in promoting the interest of the creditors and not those who make unsuccessful claims causing the bankruptcy estate to incur costs. In his judgment he explained that Rule 12.2 does not contain an "exhaustive statement as to how costs are to be treated".

    Furthermore, as there is no inconsistency between the provisions of Rule 12.2 and CPR 44, the general rules in CPR 44 would apply which includes the provision that the unsuccessful party will be ordered to pay the costs of the successful party. Therefore, the starting point would be that Mr Cooke should pay Dunbar's costs. CPR 44.2(2)(a) also makes provision that the court may make a different order.

    The Judge went on to explain why he considered there to be good policy reasons why Rule 12.2 should not have the affect for which Mr Cooke's counsel contended:

    "(1) Neither a bankrupt, nor some other party whose interest are aligned with his, or who has his own reasons for wishing to litigate in the bankruptcy, should be afforded the opportunity to do so without being at risk as to costs. The risk of an adverse costs award acts as a deterrent against the advancing of cases that are without merit.

    (2) A person in the position of Mr Cooke, who appeals against the making of a bankruptcy order, does so of his own volition. As the provisions to which I have referred to above demonstrate, a bankrupt actively needs to pursue permission to appeal; an appeal is a distinct process initiated by the appellant. It is not something which flows inexorably from being caught up in the initial bankruptcy proceedings.

    (3) The bankruptcy estate should be protected, where possible, from the need to fend off unmeritorious disputes which will dissipate the estate to the prejudice of creditors".

    Submissions made on behalf of Mr Cooke that the costs of the appeal were a contingent liability so as to give rise to a provable debt (Category 2) were dismissed on the basis that the costs would need to rank twice, i.e. as a priority as an expense and then as a much lower ranked non-preferential debt. The Judge explained that "such a notion would not be harmonious with the priority of debts established by s328; the expenses of the bankruptcy are afforded priority over other debts, preferential or otherwise".

    Mr Cooke was ordered to pay Dunbar's costs personally, and to the extent that they were not satisfied by him, they should be treated as an expense of the bankruptcy.

    Conclusion

    This case confirms that bankrupts will not be immune from adverse costs risks should they unsuccessfully challenge a bankruptcy order by way of an appeal. This should serve as a deterrent for unmeritorious appeals but it is debateable whether a personal costs order has much impact in practice given the financial status of a bankrupt.

    If you have any issues regarding bankruptcy please contact Sundip Mapara on 0116 2473587 or email him at sundip.mapara@howespercival.com. Sundip is a specialist insolvency solicitor and will be able to advise you on all matters relating to personal and corporate insolvency.

    For further information on this case please click here.

    © Howes Percival LLP

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  • 14/02/2017 “Self-employed” plumber held to be a worker

    In Pimlico Plumbers Limited v Smith, the Court of Appeal has upheld the decision of the Employment Appeal Tribunal to find that Mr Smith, who was engaged as a self-employed contractor, was also a “worker” under the Employment Rights Act 1996 and the Working Time Regulations 1998 and an “employee” under the wider definition of that term in the Equality Act 2010.

    NEWS

    In Pimlico Plumbers Limited v Smith, the Court of Appeal has upheld the decision of the Employment Appeal Tribunal to find that Mr Smith, who was engaged as a self-employed contractor, was also a “worker” under the Employment Rights Act 1996 and the Working Time Regulations 1998, and an “employee” under the wider definition of that term in the Equality Act 2010.

    DETAILS

    Mr Smith (S) signed a ‘self-employed operative’ agreement with Pimlico Plumbers (PP).  The agreement provided for the performance of “building trade services” by S.  His working hours would be agreed between the parties; PP was not obliged to provide work, nor was S obliged to accept work.  It also expressed that S would comply with all reasonable rules and policies of PP, including those contained in its company manual.

    The manual set out numerous work requirements, including wearing a PP uniform, carrying a PP ID card at all times, working at least 5 days and 40 hours a week, leasing a van from PP adorned with the company logo and holding a mobile phone (with the tariff deducted from monthly wages). Plumbers had to contact the PP control room frequently and make all customer contact, appointments and scheduling through the control room.  Plumbers would also not be paid until PP had received payment from customers and could even receive wage deductions if a customer did not honour a payment or made a late payment.  The agreement also contained eight restrictive covenants which restricted the post-termination business activities of S.  The agreement did not include any express right for S to send a substitute in his place.  However, S did have to provide his own tools and equipment and pay for accounting costs and professional indemnity insurance.  He also filed tax returns and believed himself to be self-employed.

    Following the termination of the agreement, S brought claims alleging unfair dismissal, wrongful dismissal, entitlement to pay during the period of a medical suspension and failure to provide particulars of employment.  These claims all depended on S being an “employee” within the meaning of the Employment Rights Act 1996 (ERA), i.e. employed under a contract of employment.  The Employment Tribunal (ET) held that S was not employed under such a contract and so had no jurisdiction to hear these claims. 

    S additionally claimed unpaid holiday pay and unlawful deductions from wages.  This required him to show he was a “worker” under ERA and the Working Time Regulations 1998 (WTR).  That is, an individual either working under a contract of employment or any other contract whereby he personally performs any work or services for another party who is not a client or customer of any profession or business carried on by the individual.  S also claimed disability discrimination, which required him to be an “employee” within the extended definition of that term under the Equality Act 2010 (EA) and such definition essentially follows the definition of “worker” in the ERA and WTR.

    The ET found that S was a “worker” for the purposes of the WTR and ERA.  Therefore, he was also entitled to the protection of the EA.  The purpose of the agreement was for S to personally provide work for PP, which included completing minimum working hours without the right to a substitute.  Although S had autonomy in respect of the estimates he gave and in carrying out the work, PP enjoyed such a degree of control that S could not be considered to be self-employed and running his own business.  PP appealed.  

    The Employment Appeal Tribunal upheld the decision of the ET.  The ET had correctly considered the facts, including that S had no right to provide his services through a substitute and that the restrictive covenants were inconsistent with the idea that S was running his own business.  PP subsequently appealed to the Court of Appeal.

    The Court of Appeal supported the decision of the ET and held that S was a “worker” and not carrying out a business on his own account.  The express wording of the agreement required personal performance from S.  S also had no right of substitution and was obliged to work a normal 40 hour week under the company manual.  Furthermore, the notion that S was under no obligation to accept work was undermined by this minimum working hours requirement and the practical realities of the relationship.  As S had to cover costs, such as tools, van expenses and a mobile phone tariff, the relationship between PP and S would only work if S was given and worked a minimum number of hours to cover those costs and make a profit.  For these reasons, the appeal was dismissed.

    COMMENT

    Paula Bailey comments: "Following several high profile cases, this decision offers further guidance on the issue of worker status and worker rights.  Once again, the courts have emphasised that contracts will be rigorously scrutinised against the realities of the working relationship when determining employment status.  Here, personal performance and the degree of control exercised by the company were critical factors".

    If you require further assistance please contact a member of the team.


    © Howes Percival LLP

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  • 07/02/2017 Refusing employee’s request for leave to attend religious festivals was not discrimination

    In Gareddu v London Underground Ltd, the EAT has held that a Catholic employee was not indirectly discriminated against when his request for 5 weeks’ consecutive holiday to attend religious festivals was refused.

    NEWS

    In Gareddu v London Underground Ltd, the EAT has held that a Catholic employee was not indirectly discriminated against when his request for 5 weeks’ consecutive holiday to attend religious festivals was refused.

    DETAILS

    Mr Gareddu, a Sardinian Roman Catholic, had taken five consecutive weeks of holiday each summer since 2009 to attend religious festivals with his family in Sardinia.  He was informed by a new manager that, from 2014, this arrangement could not continue as he was unlikely to receive more than 15 days’ consecutive leave in the summer months.  When his usual holiday request was refused, G brought a claim of indirect discrimination.  He argued that attending the religious festivals was a deeply significant manifestation of his religious belief and that London Underground’s practice of capping consecutive holiday during the summer at 15 days was indirect discrimination.

    An ET held that G’s asserted religious belief had not been made in good faith.  Whilst the ET admitted that participation in religious festivals could constitute an important part of a person’s religious belief, this was not the case in G’s specific situation.  In 2013, he had only attended 9 of the 17 religious festivals he had claimed he attended each year.  Furthermore, which festivals he attended varied depending on his family’s arrangements.  Therefore, it did not accept that G’s religious belief required him to return to Sardinia for a period of five weeks each year.  The religious festivals clearly differed in number and identity from year to year and the reason for extended leave was connected to family arrangements rather than his religious beliefs.  G appeal to the EAT.

    The EAT dismissed the appeal.  The issue was not whether participation in religious festivals could be an important manifestation of religious belief, nor whether G’s religious belief itself was genuine. The real issue was whether the particular manifestation of religious belief that G had asserted (attendance at specific festivals over a five-week period each summer) was genuine.  As such, the ET had been correct to note that the festivals G attended differed in number and identity each year. The ET had not erred in finding that the specific five-week period in question was a result of G’s non-religious family motivations and not his religious beliefs or their manifestations.  The mere fact that attendance at a single festival could be a genuine manifestation of a person’s religious belief did not inevitably mean that attendance for a five-week period to do so was also a genuine manifestation. 

    COMMENT

    Hannah Pryce comments: "In this case, the religious reasons given for the extended holiday were held not to be genuine.  However, employers should always judge such holiday requests on their individual facts and be willing to review any policies that may disadvantage a particular segment of the workforce".  


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  • 20/01/2017 Type 2 diabetes could be a disability

    In Taylor v Ladbrokes Betting and Gaming Ltd, the employment appeal tribunal considered the argument that type 2 diabetes should be treated as a progressive condition under the Equality Act 2010 and therefore deemed to be a disability.  The case was remitted to the employment tribunal to be reconsidered in light of further medical evidence.

    NEWS

    In Taylor v Ladbrokes Betting and Gaming Ltd, the employment appeal tribunal considered the argument that type 2 diabetes should be treated as a progressive condition under the Equality Act 2010 and therefore deemed to be a disability.  The case was remitted to the employment tribunal to be reconsidered in light of further medical evidence.

    DETAILS

    Under the Equality Act 2010, a person whose condition is progressive and who, in the future, is likely to end up with an impairment which has a substantial adverse effect on their ability to carry out normal day-to-day activities as a result of the deterioration of their condition, is to be regarded as suffering from a disability, before they have got to that stage. 

    T suffers from type 2 diabetes.  This is controlled by medication and may be further controlled by T modifying his lifestyle, diet and exercise.  T was dismissed by Ladbrokes Betting and Gaming Ltd and subsequently brought claims of unfair dismissal and unlawful disability discrimination.  At a preliminary hearing, the employment tribunal decided, relying on two medical reports by a consultant physician with a special interest in diabetes, that T was not disabled.  T appealed.

    Although mindful of opening up the floodgates by regarding a condition as a disability when it might be suffered by a significant proportion of the population and can be controlled by a very commonplace and simple measure, the EAT allowed the appeal. 

     The EAT determined that the employment tribunal had not properly addressed the question of whether type 2 diabetes was a progressive condition, which would amount to a disability.  The EAT held that the correct approach was to consider whether T’s condition is “likely” to result in T having an impairment which has a substantial adverse effect in the future?  

    In the circumstances, the EAT concluded that the medical evidence produced to the employment tribunal was sufficiently unclear to enable it to establish the extent to which the longer-term effects of type 2 diabetes would have a substantial adverse effect on day-to-day activities.  In remitting the case for rehearing, the EAT observed that if there was a small possibility of deterioration of the condition in the population that would be enough to make it “likely” that it might result in the particular individual having such impairment.  

    The EAT distinguished the case of Metroline Travel Ltd v Stoute, which addressed the question of whether type 2 diabetes was a disability through consideration of the effect of medical treatment on the condition.  In Metroline, the EAT held that the abstention from sugary drinks was not a measure such that the condition of type 2 diabetes was not a disability.  The EAT observed in this case that the extent to which a person could reasonably be expected to modify their behaviour (in T’s case by changing his lifestyle, diet and exercise) as well as any medical treatment, should be taken into account within the context of determining whether a progressive condition amounts to a disability, was unclear. 

    COMMENT

    Simon deMaid comments: “This case adopts an interesting approach to the question as to whether type 2 diabetes amounts to a disability, though it is far from clear whether it will be successful.  Obviously, given the incidence of type 2 diabetes within the general population, the decision of the tribunal could have far-reaching implications for employers.  The case also highlights the importance of both parties asking the right questions of a medical expert relevant to the issues at hand.”

    If you require further assistance please contact a member of the team.

     

    © Howes Percival LLP

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  • 18/01/2017 Insolvency: Court finds nothing special to justify overturning director disqualification undertaking

    In the recently decided case of Taylor v The Secretary of State for Business, Innovation and Skills the High Court considered an application by a director disqualified by way of undertaking for a reduction in the agreed disqualification period. Mark Baldwin considers the judgment. 

    Taylor v The Secretary of State for Business, Innovation and Skills [2016] EWHC 1953 (Ch)

    Background

    Mr Taylor was a qualified independent financial adviser and one of five directors of Quintillion Asset Management Limited (the “Company”). By the time the Company entered insolvent liquidation in August 2012 he was one of only two directors. In April 2014 the Insolvency Service (“IS”) wrote to Mr Taylor explaining that the Secretary of State for Business, Innovation and Skills (“SOS”) considered he should be disqualified from acting as a director or being involved in the management of a company for a period of 12 years. An undertaking for a period of 11 years was offered by Mr Taylor, and accepted by SOS in August 2014.

    On 24 April 2014 the IS had written to Mr Taylor pursuant to Section 16 of the Company Directors Disqualification Act (“CDDA”) to notify him that the Official Receiver (“OR”) intended to apply to the Court for a disqualification order pursuant to section 6 CDDA (“the Section 16 Notice”). The Section 16 Notice briefly summarised the matters of conduct which, in the opinion of the OR, made Mr Taylor unfit to be concerned in the management of a limited company. The IS subsequently provided the draft evidence in support of the application on a confidential basis which included allegations that Mr Taylor caused or allowed the Company to misappropriate client funds by making inappropriate investments without authorisation, and failed to keep adequate books and records. The Section 16 Notice informed Mr Taylor that he may wish to seek independent legal advice. On 14 May 2014, Mr Taylor replied to the draft evidence provided by the OR  stating that: 

    Unfortunately due to the time constraints imposed and the fact that I am no longer in the UK, I have been unable to obtain legal advice on this matter.”

    On 22 May 2014 the IS wrote to Mr Taylor asking if he required further time in order to obtain legal advice. He responded quickly by e-mail on 1 June 2014 attaching further representations and refuting the allegation that he caused or allowed the unapproved movement of client monies to happen, which transactions he claimed were carried out by his fellow director, a Mr Silva-Peake. He ended by saying that it would be unjust to disqualify him. The SOS’s solicitors responded to that letter indicating that it was still the intention to bring proceedings and again suggesting that he may wish to seek legal advice.

    Mr Taylor had secured a post as an independent financial adviser in Switzerland and, claimed that because of financial difficulties brought about by the demise of the Company, he was unable to afford legal advice. He wrote to the IS on 5 August 2014 saying that he had no option but to give an undertaking and one was sent to him by the SOS’s solicitors who informed him that if he signed the undertaking before 13 August 2014 no costs would be sought against him.  Mr Taylor gave the undertaking.  Mr Silva-Peake also gave an undertaking for 11 years. 

    Subsequently the disqualification received some publicity and the Cumberland News and Star contacted Mr Taylor’s new employers. Soon thereafter his employment was terminated and from September 2014 he claimed he was unable to obtain employment as a financial adviser. 

    Key Facts

    By a claim form issued in December 2014, Mr Taylor requested that the period of the undertaking be reduced from 11 years to between 2 and 5 years pursuant to Section 8A CDDA which provides: 

     “(1) The court may, on the application of a person who is subject to a disqualification undertaking:
    (a) reduce the period for which the undertaking is to be in force, or
    (b) provide for it to cease to be in force.
    (2) On the hearing of an application under subsection (1), the Secretary of State shall appear and call the attention of the court to any matters which seem to him to be relevant, and may himself give evidence or call witnesses.”

    The hearing of the application before Registrar Briggs lasted 5 days and the deponents were cross-examined on their evidence. In the leading authority in this area, Re INS Realisations Ltd, Secretary of State for Trade and Industry v Jonkler and Spencer-Jonkler [2006] 1WLR 3433, Hart J held that the court should only interfere with an undertaking where “special circumstances” exist being “…..where circumstances have subsequently arisen which, by reason of their type or gravity, were not circumstances which were intended to be covered or ought to have been foreseen at the time the undertaking was given.” Hart J also stated “There will be many cases in which the director will be able to plead that he only gave the undertaking because he could not afford legal advice and assistance. There may also be many cases where undertakings are given for periods in excess of those subsequently found appropriate by the court in relation to other directors involved in the same insolvency and the same misconduct. I agree with the Secretary of State that the jurisdiction should only be sparingly exercised where the application is based on arguments of that general kind”.

    Mr Taylor argued that he had not envisaged when he gave his undertaking that it would lead him to lose his job and to be unable to find employment as an independent financial adviser and if he had, he would not have given the undertaking in the form that he did. He further argued that he did not “cause” the misappropriation of the client funds. He also argued that circumstances of the “general kind” were present. 

    Mr Taylor did not, on the giving of his undertaking, inform his regulator (the FCA) or his employer, notwithstanding that the Section 16 Notice warned that the IS may seek to publicise the undertaking and that it may affect his membership of his professional body. 

    Judgment

    The Registrar found that Mr Taylor knew or should have been aware of the ramifications of the undertaking on his work in the financial sector. In his judgment, the Registrar did not find these circumstances special and found that Mr Taylor ought to have been foreseen at the time of the undertaking that were it to be disclosed to his employers he may lose his contract.  

    The Registrar disapproved of the suggestion that a failure to take legal advice, when advised to do so, could give rise to the exercise of the Section 8A discretion and stated that “the court will be strained to find that after the undertaking was entered into, there arose a circumstance of a quality and nature that was not intended to be covered or foreseen.” He did not regard Hart J’s dictum in relation to circumstances of a “general kind” as establishing a different category to “special” circumstances.

    Mr Taylor was concerned to show that he personally had not misappropriated the client monies and the Registrar was prepared to find that he did not cause but allowed this. However, he concluded that “this is not a rare case where circumstances of a general kind and other circumstances amalgamate in such a way to preclude offending the principled approach to the exercise of discretion. There is no new event that could not have been foreseen. The undertaking is not expressed to allege causing only. It is expressed in the alternative. The finding of ‘allowing’ and not ‘causing’ the high-risk investments are insufficient in terms of its type or gravity when weighed against all the background.”

    The Registrar also concluded that the OR had been entitled to accept an undertaking using “caused or allowed” in circumstances where Mr Taylor and Mr Silva-Peake had given conflicting versions of events.

    Conclusion

    The decision shows that the Court is loathe to intervene in the bargain reached between the OR (or SOS) and directors embodied in an undertaking and that a failure to take legal advice prior to offering an undertaking will not, of itself, amount to a special circumstance justifying a reconsideration of the period. 

    Please contact mark.baldwin@howespercival.com for more information on this subject, or to ask a question.

    © Howes Percival LLP. 

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  • 18/01/2017 Litigation - Insolvency - Corporate veil stays in place despite the smell behind it.

    The test for lifting the corporate veil in relation to confiscation proceedings was recently considered in the Court of Appeal in R. v Powell (Jacqueline) last year. Patrick Manning reviews the case.

    R. v Powell (Jacqueline) [2016] EWCA Crim 1043

    Background

    In 2002 Jacqueline Powell (“P”) and a former partner set up Wormtech Ltd (“Wormtech”), a waste processing company.  As part of its business, Wormtech held a permit from the Environment Agency (“EA”) to turn food waste into compost. The process was conducted in South Wales, on land owned by the Ministry of Defence (“MoD”).  

    Key facts

    Wormtech failed a number of inspections by the EA and was found to have breached conditions of its permit.  Eventually, the site was left abandoned. By late 2012, food waste had rotted in such quantities (hundreds of tonnes) and to such a degree that leachate (a liquid formed by rainwater which drains through landfill/waste) had formed overflowing lagoons.  Wormtech was subsequently wound up by order of the Court and the MoD was left with the task of clearing the site.  The clean-up cost the public purse £1.125m.  Wormtech and the two directors were charged with criminal offences connected with breaches of the environmental permit.

    The case against Wormtech itself fell away when required permissions to pursue the insolvent company were withheld.  P’s co-director, a Mr Westwood (“W”), pleaded guilty to certain of the charges made against him on the basis of neglect.  He and P were both convicted of consenting or conniving in Wormtech’s failure to comply with conditions of its permit and of handling waste in a manner likely to cause pollution.  

    The question then arose of the extent to which, in light of Wormtech’s insolvency, the public purse could recoup any of the clean-up costs.  The Crown Court in Newport found that P and W had benefitted personally from Wormtech’s offences and, on that basis, imposed confiscation orders on P and W under the Proceeds of Crime Act 2002 (“POCA”) of £60,000 and £30,000 respectively – as well as suspended prison sentences, community work orders and disqualifications as directors of 5 years each.  

    The Crown had asked for an order that P and W be held personally liable for the clean-up costs on the basis that Wormtech, controlled by them, had avoided those costs itself by abandoning the site.  However, the judge refused to impose the clean-up costs on P and W personally. The Crown appealed and the Court of Appeal (“CA”) gave its decision at the end of July 2016.  The decision turned on the degree to which the ‘corporate veil’ could be lifted for a company’s directors to be held liable. 

    In the lower court, the Crown had asked the judge to impose personal liability on Wormtech’s directors in line with the case of R v Seager (Mornington Stafford) (2009) EWCA Crim 1303, where the CA held:

    “In the context of criminal cases, the courts have identified at least three situations where the corporate veil can be pierced … Secondly, where an offender does acts in the name of the company which (with the necessary mens rea) constitutes a criminal offence which leads to the offender’s conviction, then “the veil of incorporation” is not so much pierced as rudely torn away.”

    The Crown court judge found that this principle could only apply where a company was run by a person misusing the protection of limited liability who was the sole controller or sole owner of the company. Here, P and W were only two of five shareholders. 

    The directors argued, successfully, in the original case that the Crown could not rely on Seager when, in Petrodel Resources Ltd v Prest [2013] 2 AC 415, the Supreme Court found that there were two principles arising from Seager under which the veil might be lifted – the concealment principle and the evasion principle.  

    The concealment principle was that the “the interposition of a company … so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing.

    The evasion principle was that “the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”.

    Judgment

    The CA held that the concealment principle could not apply to the present circumstances: Wormtech had, the directors pointed out, been set up not as a vehicle for criminal acts but as a legitimate company which had initially traded perfectly appropriately. Both P and W had injected funds into Wormtech which they lost through its insolvency and the Crown accepted that the concealment principle did not apply. 

    The key question, therefore, was whether the evasion principle could apply.  The appeal judges found that the lower court’s finding in relation to “sole ownership or control” was wrong (P and W accepted as much at the appeal) but nonetheless upheld the original decision.

    They did so because they had to find a legal right existed against the individual controlling a company in those circumstances and which was distinct from the rights of action against the company itself.  Here, no such right could be found. Wormtech’s criminal act came from a breach of conditions attaching to a permit to handle waste which was held by Wormtech itself.  Wormtech had not been “interposed” in any way so as to frustrate any rights of action against the directors individually and they were not subject to any separate obligations of their own under environmental law; any liability on them arose in secondary fashion. The judges rejected the Crown’s assertion that the directors had a separate obligation to obey the criminal law irrespective of Wormtech’s position. 

    The appeal judges concluded that only in the rarest cases could the corporate veil be pierced. Accordingly, the appeal failed and the confiscation orders made by the lower court were unchanged.  In the judgment’s concluding passage, the judges “reminded [them]selves of … the endnote in R v May [2008] 2 Cr App R 28: ‘In determining whether under the [POCA] whether D has obtained … pecuniary advantage… the court should… apply ordinary common law principles to the facts as found. The exercise of this jurisdiction involves no departure from familiar rules governing entitlement and ownership… He ordinarily obtains a pecuniary advantage if… he evades a liability to which he is personally subject…”.

    Conclusion

    Whilst the CA’s decision turned on its assessment of case law, it illustrates how difficult it is to pierce the corporate veil even where the public purse had lost out substantially by reason of a company’s actions and what was, in effect, deliberate pollution.  

    Please contact patrick.manning@howespercival.com for more information on this subject, or to ask a question. 

    © Howes Percival LLP

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