Offences by bodies corporate, “reasonable excuse”, directors’ duties under the Companies Act 2006, and local authorities’ duties in investigating and in serving abatement notices
Environmental legislation containing provisions for the prosecution of companies would be exceptional that legislation did not also include a means of prosecuting their directors and other officers.
Such provisions are misleadingly referred to as “offences by bodies corporate”, although their purpose is decidely the prosecution specifically of the individuals responsible, whether or not criminal proceedings are also instigated against the corporate body.
This article outlines key issues affecting the potential criminal liability of financiers or other professionals who take on a directorship in order to turn round a failing business. This is in the context of the statutory nuisance regime under Part III of the Environmental Protection Act 1990 (“EPA 1990”), an examination of which throws a spotlight on areas within the regime which are rarely considered, in this instance the duty of inspection on the part of a local authority, the duty to identify the correct recipient of an abatement notice and the extent of the defence of “reasonable excuse” in a prosecution for contravention of an abatement notice under s.80(4) EPA 1990.
An example of a ‘turnaround’ director would apply, for instance, in the hypothetical circumstances of a company which owns numerous properties, each one of which is valued at millions of pounds and which provides rental and sale income for the company. Where the company is floundering because of loss of rents and of sales, it is not unknown for its lenders to be so alarmed at the apparent collapse of the business (and therefore their capital) that they will demand the installation of their nominee as a sole director in order to secure revenue and the sale of some of the properties. The director will be there only on a short-term basis to turn round the company.
In the EPA 1990, s.157 contains the “offences by bodies corporate” provision which applies in cases of statutory nuisance, (although s.157 is not part of Part III at all), allowing for the prosecution of any officer if it can be said that the corporate offence has been committed with their consent or connivance or is attributable to any neglect. (Hereafter in this article, “director” will be used in place of “officer”, reflecting the usual position where an “offences by bodies corporate” clause is invoked.)
This wording (“consent or connivance or is attributable to any neglect”) is the conventional formula in any “offences by bodies corporate” provision, for instance under the Environmental Permitting Regulations 2016. So far as can be judged from the usual legal search engines, s.157 itself has never in fact been considered by the higher courts in the context of statutory nuisances. Its breadth is very considerable (as in most legislative schemes), extending to any director or officer “who was purporting to act in any such capacity”, i.e. not just a de jure director.
As in all contemporary prosecutions concerned with directors’ duties, the framing of the general duties of a director under Chapter 2, Companies Act 2006, plays an important part, in particular s.172 (Duty to promote the success of the company) since this section requires a director to act in the way that director considers would be most likely to promote the success of the company for the benefit of its members, having regard, amongst other things, to “… the impact of the company’s operations on the … environment”. Section 157 EPA 1990 is most likely to be invoked on the basis that the offence in question (the breach of an abatement notice) is attributable to the neglect of the director (rather than to any consent or connivance), so that a breach of duty under s.172, with its express reference to the impact on the environment is an added attraction on the part of a prosecutor in respect of any offence, including a breach of an abatement notice under s.80(4) EPA 1990.
A ‘turnaround’ director is very unlikely to have an immediate eye to the environmental consequences of his / her actions in securing the continued success of an ailing company. The director’s job is to ensure that the lender’s losses are stemmed as quickly as possible, even if this may have consequences, direct or indirect, on the occupants of the properties, such as on their living conditions. They may well be other circumstances at play, for instance the involvement of a managing agent (appointed by the company in previous years) who has day-to-day responsibility for the occupants’ welfare.
In the hypothetical case under consideration, the sort of environmental consequences which could be identified as falling within s.79 (which define the classes of statutory nuisance) are those which arise from the state of premise. The risk of the occurrence of a legionnaire’s outbreak, for instance, if environmental cleaners have been cancelled by managing agents because of a lack of funds, would be one example, being likely to be “prejudicial to health”. If a contract had been concluded for the sale of the premises where the risk was discovered, there could well be a dispute about responsibility for payment of necessary cleaners. (This example leaves aside alternative statutory schemes available in such circumstances, but it is quite possible to think of other more conventional consequences arising from the state of premises such as mould growth.)
On the basis, in this example, that the local authority discovers the existence of legionnaires, and it was satisfied that this constituted a statutory nuisance, the local authority would have to decide on which party the notice should be served. This requires an assessment to be made under s.80(2). The starting-point is that it should be served on the “person responsible” (in preference to the owner). But who is the person responsible? Is it the original company because, in the circumstances under consideration, it ceased to fund the cleaners, was it the new company because the new company had an obligation to fund the cleaners under a contract of sale, or was it the managing agent if the managing agent itself had brought about the cancellation? It should be remembered that there is an express power of appeal if an abatement notice has been served on the wrong party.
The only way to establish the person responsible would be to carry out an investigation. A duty of investigation by an environmental health officer undoubtedly exists under the 1990 scheme, but it is very rarely the subject of detailed consideration. Section 79(1), for instance, states that “it shall be the duty of every local authority to cause its area to be inspected”, although this appears to be a requirement designed to identify the existence of statutory nuisances, not to understand the ‘true’ cause of a statutory nuisance. The duty to investigate must exist, otherwise an environmental health office would not be able to establish the right person on which to service an abatement notice under s.80(2). In order of priority, the person on whom to serve an abatement notice is: (i) “the person responsible”, (ii) the owner (where a nuisance is caused by a defect of a structural character) and (iii) the owner only if has not been possible to find the person responsible.
Part III of the EPA 1990 continues to throw up areas where term needs to be implied to make the legislation work (see now Ball (R) v. Hinckley and Bosworth BC [2023] EWHC 1922 (Admin) (the power to vary an abatement notice) and R. v. Bristol City Council Ex p. Everett [1999] 1 W.L.R. 92 (the power to withdraw an abatement notice)). In Southampton City Council v. Odysseas (OP Co) Limited CO/2804/2017, the company served with an abatement notice went on to win its costs because the Court decided that the Council had acted unreasonably in serving a noise abatement notice. If the Council had only carried out a proper investigation, then, contrary to the firm belief of the investigating officer that the company was causing a noise nuisance, the council would have discovered that there were plenty of other clubs playing loud music and that the one in question had in fact been subject a power cut. This case provides support for the existence of a duty of investigation to be implied into the 1990 Act.
Unfortunately, experience shows that councils are not particularly rigorous in carrying out such investigations. If on the facts of this case the local authority had decided that prompt action was necessary and had served an abatement notice on the company requiring abatement or remediation within a very short period and if the company neither complied nor appealed within the requisite 21 days, what would the position of a turnaround director be on a subsequent prosecution?
Section 80(4), EPA 1990 states that if the person on whom a notice is served, without reasonable excuse, contravenes or fails to comply with the notice, then that person shall be guilty of an offence.
Authorities suggest that the recipient of a notice who does not appeal on the grounds of appeal which are set out in the Appeal Regulations cannot go on to rely on those same grounds to raise a defence of reasonable excuse. However, this is not clear cut. See for instance A Lambert Flat Management Ltd v. Lomas [1981] 1 WLR 898, in which a statement made to this affect was arguably obiter (i.e. not as a true precedent) and also Hope Butuyuyu v. Hammersmith LBC [1997] Env LR D13, in which the Divisional Court decided that, on the unusual facts, a person who did not appeal within 21 days should be allowed to raise the same points in her defence.
It is even less clear that a director who is prosecuted by reason of alleged neglect under s.157 EPA 1990 cannot raise such points, still less a director whose focused role is to secure the success of the company by way of its financial survival, especially where, for instance, a second entity (such as managing agents) can be relied on to manage day-to-day affairs concerning those likely to be affected. In an egregious case, where the duty to investigate was not observed by the local authority and, with the benefit of hindsight, the abatement notice was served on the wrong undertaking, it could be said that it offends any sense of justice that the director should be prosecuted because that director did not respond to requirements of the notice. Especially if the facts contradict the consequences of the local authority’s stated enforcement policy, the circumstances may be such as to offend the court’s sense of propriety and justice, giving rise now to a legitimate abuse of process argument by reason of Mansfield v. DPP [2022] QB 335.
The hypothetical facts of the example which has formed the basis for this article are partly based on those of a prosecution which was in fact commenced by a local authority. There is no judicial outcome to report, but important lessons should be learnt. On the one hand, a director appointed in order to bring about the satisfaction of a lenders’ debts and to get a company on an even keel, a director who must act quickly and decisively, cannot ignore the environmental consequences of inaction, including those which exist under Part III, EPA 1990.
On the other hand, a local authority considering whether or not to serve an abatement notice, must exercise its duty of investigation proportionately in to establish all the relevant facts. Sometimes this will not take long, but in other cases, especially where there are many parties, some complicated legal issues and a real issue as to the correct party on which to serve an abatement notice, then a detailed investigation will be required. A local authority which does not do so, faces the risk of a challenge to its decision to prosecute, an argument as to service and an order for costs should it go ahead with a prosecution against a director.
GORDON WIGNALL