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.
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