If your company faces an enormous penalty for breaking health and safety laws one option is to dissolve the company entirely. But is it right, wise, or even legal?

If breaching health and safety laws results in death or serious injury, those at fault could face civil claims and criminal prosecution. Although insurance can cover civil claims, fines cannot be insured against as a matter of public policy. This is because they are designed to punish companies for bad conduct and, as such, must be paid for using its profits.

A sufficiently large fine could sink a company that is struggling to keep afloat. In addition, the Health and Safety (Offences) Act 2008, which from 16 January made health and safety failings punishable by imprisonment (30 January, page 52), means the outlook for directors in breach of safety laws is even darker than before.

For companies facing huge fines, and directors facing jail, is voluntarily winding up a company a reasonable option?

This debate began in earnest in early 2006 when North West Aerosols placed itself in voluntary liquidation four months after a fatal accident at its Liverpool factory. Two years later the company was convicted of two counts of breaching section two of the Health and Safety at Work Act 1974 and ordered to pay just £2 in fines and £1 in costs. Mr Justice Morrow expressed the view that if the company had been profitable, he would have considered a fine of at least £250,000.

Faced with the prospect of a fine from which the business might never recover, its directors elected to wind up the business. The company ceased trading with assets of £284.

The case caused a fierce backlash from campaign groups, which questioned whether directors should be allowed to do this. Families against Corporate Killers (FACK) pointed to North West Aerosols as the “reason why the law needs to be changed, so directors can be held personally liable”.

On the other hand, some people said that striving to keep a company afloat only for it to be killed off by a heavy fine is pointless.

As far as companies are concerned, is this drastic strategy recommended?

Creating a new company with a similar name, function and board as before is a criminal offence

Well, directors are advised to be wary. First, the timing of such a step needs to be right. If the court imposes sanctions while a company is still in the process of winding up, then the prosecution can still initiate legal proceedings with the permission of the court.

Also, setting up a new company to take over the dissolved company’s assets may not mean you are safe, as section 216 of the Insolvency Act 1986 gives prosecutors the option to prosecute both the old and new companies.

Furthermore, creating a phoenix company – a new business with the same or a similar name, function and board as the one that become insolvent – is a criminal offence punishable by imprisonment and a fine if it is shown that the arrangement is a sham.

UK sentencing policy dictates that if the guilty party is solvent, the court must set a fine that it is capable of paying. Mr Justice Morrow’s suggestion of £250,000 as a starting point was hypothetical – it was a figure he would have used if money was no object. In real terms, he would no doubt have ordered North West Aerosols, if it had remained solvent, to pay a sum that would simply have made its management miserable for a few years.

The uncomfortable fact about the North West Aerosols story is that FACK and similar groups mainly wanted the directors to be brought to justice.

The directors appeared to avoid prosecution through their actions, but in reality those same actions will have led to much greater scrutiny of their conduct. Sections 36 and 37 of the Health and Safety at Work Act 1974 allow regulators to prosecute the directors of a company irrespective of whether the company is prosecuted, if they can be shown to have connived, consented to or been neglectful of the company’s failings. That position is not affected by insolvency.

It is a fair bet that if the prosecution had had enough evidence to prove that the directors were guilty of any offence, they would have been prosecuted.

Therefore, sinking a company faced with prosecution may seem a good way out, but if it is your own skin you’re looking to save, it should be the last thing you consider.