On 9 July 2021, Canterbury Crown Court imposed a record £90 million fine on Southern Water after the water and sewerage company admitted widespread and long term breaches of environmental law.

Sentencing, the Honourable Mr Justice Johnson is reported* as saying he was aware that the company’s “continued viability” may be reviewed following the fine, but that this was “an acceptable consequence of the seriousness of those failings”.

The £90 million penalty is more than four times the previous record of £20.3 million imposed on Thames Water in 2017 following environmental breaches. Southern Water pleaded guilty to 51 sewage discharge offences committed between 2010-2015 relating to the dumping of poisonous and noxious substances into coastal waters and rivers across Kent, Hampshire and Sussex.

The Environment Agency, who brought the landmark case to court, began a five year investigation after oyster beds in the River Swale were contaminated with E.coli. Shellfish in the areas exposed were made unfit for human consumption and withdrawn from the market, but not before an estimated 9-10 thousand had entered the human food chain. The Environment Agency found evidence that the company systematically discharged pollution for a total duration of 61,704 hours.

The Judge reportedly described the company’s offending as showing a “shocking and wholesale disregard for the environment”, aggravated by “its persistent pollution of the environment over very many years”. Furthermore, he is reported as saying that Southern Water deliberately presented a misleading picture of compliance to the Environment Agency, hindering proper regulation of the company.

The Judge initially set the fine at an eye watering £135 million. The amount was reduced by a third in recognition of Southern Water’s early guilty pleas.

What makes this fine different?

It is clear that this fine is substantial at almost 40% of Southern Water’s most recently recorded annual profits of £213 million; it is equally clear that a fine of this amount is unprecedented. However, there is no upper limit on the amount a corporation can be fined for environmental offences - what makes this fine particularly out of the ordinary is its acknowledged potential to threaten the viability of the company.

Fines which threaten the viability of a company

Handing down a fine that threatens the viability of a company is an exceptional approach for a court to take. Ordinarily courts take into account a company’s financial position by looking at factors such as its annual turnover and accounts in order to work out what it can afford to pay.

In the case of R v F Howe & Son (Engineers) Limited [1998] EWCA Crim 3531 (which was before official Sentencing Guidelines for Environmental or Health and Safety offences), the court at first instance took a similar firm approach when dealing with a small engineering company with limited resources by imposing a fine of £48,000 for breaches of health and safety after an employee was electrocuted at the company’s factory. The case was appealed on grounds including the financial means of the company, and the Court of Appeal allowed the appeal and substituted a fine of £15,000. The Court of Appeal commented that “Any fine should reflect not only the gravity of the offence but also the means of the offender, and this applies just as much to corporate defendants as to any other”. It added though, “A fine needs to be large enough to bring... [the] message home where a defendant is a company not only to those who manage it but also to its shareholders”. These sentiments are broadly reflected in the official Sentencing Guidelines we see today.

Counsel for the company sought to argue that a fine should not be so large as to imperil the earnings of the employees or create a risk of company insolvency. The Court of Appeal addressed the submission as follows: “Whilst in general we accept that submission… there may be cases where the offences are so serious that the defendant ought not to be in business”. That was not found to be the case for F Howe & Son. The court did not give any direct further guidance on the sort of offending where it might be.

A number of years later, the Court of Appeal in the case of R v R&S Recycling Ltd [2014] EWCA Crim 2302 looked again at the issue of imposing a fine that potentially threatened the viability of a company. In this case, the appellant company appealed against a fine of £100,000 after an employee died collecting recycling materials when a bale fell on him. The judge at first instance considered the sentencing guidelines then in force, which stated that the court should look carefully at both turnover and profit and also assets in order to gauge the resources of the defendant, and adopted a starting point of £125,000 before giving a 20% credit for the late guilty plea.

On appeal, the company argued that the Judge had not accurately assessed their financial status, as although the company had a large turnover it had made losses for three of the previous four years and was not in a solid financial position. It was said that the size of the fine put the future of the company in jeopardy. The appeal was allowed and it was found that the Judge had chosen a significantly too high a starting point. The Court of Appeal found that although the fine had to “carry with it a sting” in order to hit home with management and shareholders, the resources of the company and the company’s actual ability to pay also must be taken into account. A revised starting point for the fine was set at £80,000, reduced to £65,000 allowing credit for the guilty plea.

In the case of R v Pyranha Mouldings Ltd [2014] EWCA Crim 533, the decision went the other way and an appeal to overturn a fine of £50,000 after an employee suffered serious crush injuries in the back of the company’s shipping container was dismissed, despite the fact that the offending company was struggling financially. The Court of Appeal found that although fines should take into account the means of the offender, a significant financial penalty was called for in this instance to reflect the seriousness of the offending, in circumstances where the company’s actions fell significantly below the standard imposed by the Health and Safety at Work Act. In any event, the company had been allowed a full 12 months to make payment of the full amount.

It should be noted that the court did not find or infer, in either case, that the offences were so serious that the defendant ought not to be in business.

Why might this have been the approach in this case?

Sentencing in pollution matters is governed by the Environmental Offences Definitive Guideline, which requires the court to make an assessment of culpability and harm, as well as taking the company’s turnover into account. In this instance, the offences were reported as being found to be deliberate (the court finding that there was “an intentional breach of, and flagrant disregard for the law, by the board of directors”), causing major (Category 1) environmental harm. In addition, Southern Water’s annual turnover very greatly exceeds £50 million, the point at which the court should consider it a “very large organisation” and where there is limited guidance to follow on the size of any penalty, it very much being a matter for the Court’s discretion (applying the proper principles).

Mr Justice Johnson was not impressed by Southern Water’s history of continuous offending, having received 168 previous convictions and cautions since August 2013. He reportedly noted that “there is no evidence the company took any notice of the penalties imposed or the remarks of the courts”, but rather, “its offending simply continued”.

Another reported aggravating factor was the nature of the company’s interactions with the Environment Agency. Employees reportedly went to “unprecedented” efforts to hinder the Environment Agency during its investigation, and it was said that “on multiple occasions, employees would refuse to permit Environment Agency officers to take away documentation it wished to seize under statutory powers, refused them to walk around sites citing health and safety, and refused to answer questions despite the Agency’s powers to require answers”. It is reported that three employees, including a senior solicitor, were eventually convicted for obstruction.

It appears therefore that the combination of the highest possible culpability and harm, along with the very serious aggravating features found, led the court to the conclusion that the circumstances of this case were so exceptional that a fine which might affect the continuing viability of the company was appropriate.

Conclusion

Although exceptional, courts are willing to impose fines that threaten the viability of a company in appropriate cases, and have the backing of legal precedent to allow them to take such an approach. However, such cases are likely to be very few and far between. When considering the potential for this approach to be repeated it is important to note the extreme combination of factors that led to this unprecedented fine.

Whether the court’s decision will be appealed by Southern Water remains to be seen. If it is, the appellate court will be presented with an excellent opportunity to provide up-to-date guidance on the circumstances when it is appropriate to impose such a large fine upon a company that it may be put out of business.

* To date we have not been able to obtain a copy of the official Sentencing Remarks and rely on what has been reported in various press sources.