Commercial & Corporate Law for Accountants

Questions: 1.Can a company be liable to its own shareholders under tort law? What happens if an employee is also a shareholder and/or a director? Explain with reference to relevant cases? 2.What are the principles the court will apply in determining whether a company is guilty of a crime? Answers: 1. Vicarious liability is a principle formed under the doctrine of agency and makes the superior responsible for the acts of their superior to a third party. This principle makes the employer liable for the acts done by their employee (Giliker 2010). In the following parts, a discussion has been made on whether the company is liable under tort law for the acts of its shareholders. And whether there is a change, in case an employee becomes a shareholder or director of the company. The company is a separate legal entity and hence, for the actions of others, the company cannot be held liable. Because of these reasons, the company is not considered as liable under the tort law, for the acts done by its shareholder. However, there is an exception to this rule, which occurs when the court decides to pierce the corporate veil (Wibberley et al. 2017). In Creasey v Breachwood Motors Ltd [1993] BCLC 480; 10 ACLC 3,052, the corporate veil was pierced by court to determine the ownership of the new company and its shareholders. This was because the new company was formed for the sole purpose of avoiding the liabilities arising under negligence for the old company (French et al. 2016). CSR Ltd v Young [1998] Aust Tort Reports 81-468 involves the case of tortuous liability of the subsidiary company. The judges considered that the position of the holding was similar to that of subsidiary company and so, the corporate veil was lifted and the holding was held liable for the ac tions of subsidiary (Anderson 2008). Hence, if the court is of the view, that for justice and fairness purposes, the company has to be held liable for the actions of the shareholder, it can lift the corporate veil and hold the company responsible for the torts of the shareholder (Wibberley et al. 2017). However, there have to be justified grounds for lifting the corporate veil. The principle of vicarious liability dictates that the employer is liable for the actions of the employees, whether they relate to any omission or negligence (Faure 2009). Based on the Latin phrase of qui facit per alium facit per se also, which translates into, a person is considered as acting for himself, when he acts through some other person, the employer is held liable for the acts of an employee (Giliker 2010). In Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited [1971] 2 QB 711, the company secretary was considered as the employee of the company, and as a result of this, the company was held liable, based on the principle of vicarious liability (French 2014). Hence, when an employee becomes the shareholder and/or director of the company, the company would be vicariously responsible for his actions. For being a shareholder, the principle of piercing the corporate veil can be used for holding the company responsible. When the employee is the director of the company, his position is changed, but he continues to be an employee of the company. For the reasons of being an employee of the company, the company can be held responsible for the actions of its employee, or in this case, its directors. 2. Corporate liability is a term under the criminal law, which helps in determining the guilt of the company for a crime committed by them. As per this principle, a company or a corporation, as a legal person, can be held liable for its acts or omissions, in the same manner as is applied for a natural person. At times, this principle is considered as an aspect of the vicarious liability which is criminal in nature (Stoitchkova 2010). In the following parts, a discussion has been carried on this principle. Under criminal law, corporate liability outlines the extent to which any company, by being a legal body, can be held responsible for the wrong done by the natural people employed by it. There are certain circumstances under which a company can be held liable. One of such is the identification doctrine. This is the key rule for establishing the liability of the company in both the criminal and civil cases, when carried out through the servants or agents of the company. This theory dictates that the minds of the individuals who control or direct the corporation, both collectively and individually, are the mind of the corporation. Hence, it is also known as the directing mind theory (Simester et al. 2016). The concept began through the case of Lennards Carrying Co. Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, in which the actions of the directors were held to be controlling the minds of the company (Swarb 2017). In Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307, the place of residence of the company was held as the place from where the will of the company and its mind was directed, for the reasons of being operated and controlled from there, through its senior officers (Swarb 2015). The doctrine of attribution is another manner of establishing the guilt of the company (Simester et al. 2016). While affirming the doctrine of identification in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] UKPC 5, Lord Hoffman stated that the earlier doctrine was based on a generalized rule and so, a specific rule of attribution could establish the association after considering the memorandum, articles and the rules of agency (British and Irish Legal Information Institute 2017). This rule is helpful in determining the alter ego of the company. Another theory to establish this is the aggregation theory, under which, the combined fault of a number of individuals faults is charged to the company, where each of the individuals lack the needed mental state, intention or mens rea (Minkes Minkes 2008). Though, the element of mens rea and consideration of actus reus, i.e., physical acts, under this theory are aggregated. Moreover, these apply on in such cases where there is presence of elements of directing the minds and the will of the company (Simester et al. 2016). Though, the aggregative doctrine remains inefficient regarding deterrence in the manner that there is a lack of advance notice to the company, on what can be done by them, so as to keep the possible risk of criminal liability to the minimum or to ensure their maximum protection. Also, the doctrine does not consider the main reason of the offence. In the case of R v HM Coroner for East Kent ex parte Spooner (1987) 88 Cr App R 10, the aggregation theory was rejected (Wong 2012). One more theory in this regard is the vicarious liability or the indirect legal liability. As has been highlighted earlier, for the acts of the employees, the employer can be held liable under this theory (Faure 2009). Hence, by using these theories, like identification doctrine, doctrine of attribution, aggregation theory and principle of vicarious liability, a company can be held guilty of the crime, for the acts done through or on behalf of it. References Anderson, H 2008, Directors Liability for Unpaid Employee Entitlements: Suggestions for Reform Based on their Liabilities for Unremitted Taxes, Sydney Law Review, vol. 30, no. 470, pp. 478. British and Irish Legal Information Institute 2017, Meridian Global Funds Management Asia Ltd v The Securities Commission [1995] UKPC 5 (26 June 1995), https://www.bailii.org/uk/cases/UKPC/1995/5.html Faure, M 2009, Tort Law and Economics 2nd edn., Edward Elgar. French, D, Mayson, S, Ryan, C 2014, Mayson, French Ryan on Company Law, 31st edn., Oxford University Press. Giliker, P 2010, Vicarious Liability in Tort: A Comparative Perspective, Cambridge University Press. Minkes, J Minkes, L 2008, Corporate and White Collar Crime, SAGE Publications Ltd. Simester, AP, Spencer, JR, Stark, F 2016, Simester and Sullivan's Criminal Law: Theory and Doctrine, 6th edn., Bloomsbury Publishing Plc. Stoitchkova, D 2010, Towards Corporate Liability in International Criminal Law, Intersentia. Swarb 2015, Daimler Co Ltd v Continental Tyre and Rubber Company (Great Britain) Limited: HL 1916, https://swarb.co.uk/daimler-co-ltd-v-continental-tyre-and-rubber-company-great-britain-limited-hl-1916/ Swarb 2017, Lennards Carrying Company Limited v Asiatic Petroleum Company Limited: HL 1915, https://swarb.co.uk/lennards-carrying-company-limited-v-asiatic-petroleum-company-limited-hl-1915/ Wibberley, J, Chambers, G, Gioia, M.D 2017, Lifting, Piercing And Sidestepping The Corporate Veil, https://www.guildhallchambers.co.uk/uploadedFiles/PiercingtheCorporate%20Veil.JW,MDG.pdf [Accessed on: 30/02/03/17] Wong, K 2012, Breaking The Cycle: The Development Of Corporate Criminal Liability, https://www.otago.ac.nz/law/research/journals/otago041733.pdf