Cardium case creates new law to protect business owners

When an ailing business faces insolvency, an insolvency practitioner will often seek to sell it as a going concern. But what if that company is under investigation for health and safety infractions? Will the new owners find themselves facing hefty penalties?

That was what happened to the new owners of a pop-up hotel firm that they rescued from insolvency after it had gone through a Company Voluntary Arrangement or CVA.

Cardium Law was called in and saved the client from ruinous fines with an innovative approach that has established a new law.

Niche business

The pop-up hotel firm is a niche business, providing shipping containers converted into temporary hotel rooms for audiences and spectators at motoring events and music festivals.

Before it went into administration, the firm was on site and looking to convert a barn for use as a dining room for hotel guests. A contractor was hired to repair the building’s leaking roof and carry out landscaping work.

Discovering a sub-contractor on the roof, the site managers ordered him to get down, but although he initially complied, he subsequently scaled the building on more than one occasion. His last attempt ended grimly when he plunged through a skylight and despite being airlifted to hospital, lost his life.

Police and investigators from the Health and Safety Executive (HSE) were soon on site, and an inquest followed. Meanwhile, being forced to abort the project created a cashflow crisis for the firm. Liquidators came in and recommended a CVA.

CVA

Typically, under a CVA, the insolvent company agrees to repay creditors according to a schedule drawn up with an insolvency practitioner. In this case, the main creditor waived its right to repayment in return for ownership of the business which it swiftly sold on to the current owners, now Cardium Law’s clients.

Crucially, the HSE was informed of the CVA process but did not make any claim as a creditor.

The sale of the business appeared to be a success for all concerned. It kept the firm going and saved jobs. The CVA and sale also provided tax benefits allowing the company to offset accumulated losses against future profits, which would not have been the case if it had been liquidated and reconstituted as a new entity.

But then the HSE brought a corporate manslaughter case against the Company under the management of its new owners and the old pre-CVA directors.

Now the business faced a potentially ruinous multi-million-pound fine. Suddenly, the firm rescued from the brink of insolvency was once more looking over the precipice.

Criminal case

Cardium’s team reckoned they had a reasonable argument in the criminal case that the worker who died had been repeatedly told not to climb on to the barn roof and had ignored this instruction. However, due to the way HSE decided to prosecute the company’s fate was interlinked with the old directors. If the Jury wanted to convict the old directors they would need to convict the company.

Given this, Cardium did some blue sky thinking to look at ways of improving their client’s odds of avoiding insolvency. This led to launching a parallel civil case to argue that any fines levied by the criminal court were unenforceable because the CVA process discharged all the company’s liabilities including those that were contingent at the time of the CVA (including any potential HSE fine).

Civil case

In the civil case, the team did not dispute that the HSE was entitled to prosecute. They only argued that the HSE fine and the prosecution costs were not enforceable as debts against the company because they had been discharged by the CVA.

A case win would render any fines or costs uncollectible.

The civil ruling backed the Cardium team’s claim over fines, though not for prosecution costs if any were to be awarded against the client in the upcoming criminal case.

But the favourable ruling in the civil court meant the client went to Crown Court knowing that even if the worst happened and they were found guilty of corporate manslaughter, they would not have to pay the resulting fines.

Crown court

In the Crown Court, Cardium and Mark Watson KC of Six Pump Court persuaded the prosecution to drop the corporate manslaughter charges against the Company at the close of the prosecutions’ case on the basis of no case to answer, and instead to focus the remainder of the trial on a technical HSE infraction for failing to prevent the contractor climbing onto the roof of the barn on the first occasion without the necessary health and safety equipment.

That incurred a £140,000 fine, nowhere near the millions that would be levied for a guilty corporate manslaughter verdict, but of course even this was not collectible because of the civil case ruling.

The company was ordered to pay prosecution costs of £26,000, a decision which the team and the client decided was not commercially viable to appeal, even though they felt there were solid grounds to do so.

The civil case has established a new law. It is now something that a business looking at buying a company can consider if it discovers that the target is under investigation for HSE or other infractions but has since been through a CVA.

It means the company and its new owners are safeguarded from fines relating to events before the CVA where a prosecution isn’t already underway.

Intuitive thinking

Cardium’s Chris MacQueen says: “This is an example of the intuitive thinking that we use to try to find a way to win cases before trial. We look at problems in a way that other law firms may not. Another firm might have seen this as a purely criminal matter, and their best result might have seen the company having to pay a £140,000 fine or worse with £26,000 prosecution costs.”

He adds: “Because we’re broader specialists, we look first at what the client wants which in this case was to avoid insolvency. That led us to attack this from an angle that frankly no one else would probably have thought of.”
Because it is new law, there may be wider implications. Lenders financing a takeover may stipulate that it is a breach of contract if the company receives a fine.

How does that play out if a fine is levied but it isn’t payable? If a lender decided to invoke that covenant, the decision could be challenged.

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If you are facing a similar situation or want to get in touch with us to discuss how we can assist you with any legal issues, please contact us.