Week 4- Corporate Liability PDF

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Corporate Liability Primary liability  Primary (personal) corporate liability means the wrong is done by the corporation itself  Registered company is a legal person (124, Salomon)  Therefore, the corporation is cable of legally engaging in conduct even where someone else (director) is physically performing the action  To fix corporate liability is to place the legal personality given to a company with the personality of an individual with all human attributes Section 124(1) of the Corporations Act confirms that companies have all the powers of a natural person and other powers relating specifically to bodies corporate. It follows logically that companies have the legal capacity to:  Enter into contracts;  Commit torts; and  Commit the acts and form the intention necessary for crimes. However, since companies are abstract legal concepts they cannot do anything without human assistance. In other words, companies can only enter into contracts and commit torts and crimes by or through living persons.

H L Bolton Engineering Co Ltd v T J Graham & Sons Ltd 

Where the law requires fault for liability, then the fault of the managers and directors will be the personal fault of the company

Organic approach Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] 

Locating those people in the company whose mental state can constitute the directing mind and will of the company

Organic theory:  Those people entrusted with a high degree of responsibility for the management of the company can be said to represent the company’s directing mind and will  Allowing the company to be identified with the individual who are in charge and control  Directors and executives can be said to be acting as the company rather than for the company  This way, their state of mind is attributed to the company and is determinative of the company’s liability for a civil wrong or crime

Consequence of the organic approach 1

Tesco Supermarkets Ltd v Nattrass [1972] (powder sale) Lord Reid –   

He is not a servant, representative, agent or delegate He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is of the company If it is a guilty mind then that guilt is the guilt of the company

Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd           

Borrower applied for a loan Relying on the valuation and assessment of the property indicated in a report by Propell , which stated that the report could be relied on for the purposes of assessing and approving the subject property as security for a loan Property valuated at 1.6 mil Loan given for 1.2 mil Borrower went bankrupt The property sold at auction for 0.98 mil Lender lost 0.41 mil Lender sued Propell for negligent advice regarding the report Court sought expert advice on valuation of the property After comparing prices of the valuation of the property prior to the loan, it concluded that the property was worth 1.2 and with a 15% generous tolerance maybe 1.35 mil 1.6 mil valuation was outside the range and therefore, court considered property was ‘gross over-valuation’ that was misleading and deceptive and negligent

Secondary Liability (Vicarious)  When corporation liable for acts or omission of natural person (employee, agent)  The person is not the directing mind or will of the company  Question is whether the corporation is responsible for an act or omission committed by a person with whom the corporation has a special relationship.  Civil law matter known as vicarious liability Vicarious liability  Liability imposed on one person for the wrongful act of another on the basis of the legal relationship between them, EX: that of employer and employee  It seems straight forward to distinguish vicarious liability but it will have a different operation depending on the wrong committed o Tort o Breach of contract o Criminal  In relation to tort and criminal liability, you require proof of fault or guilty mind on behalf of the company, in determining whether the company managers, who

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may be deemed to represent the ‘directing mind and will’ of the company (HL Bolton)  Once facts have been uncovered, it becomes a question of law, courts will determine whether: o Wrong acts done by employee or agent = vicarious liability or o By persons acting as the directing mind and will of the company – primary liability which attaches to the company  Determining primary or secondary, actions of the natural persons need to be considered

Torts Primary liability  Courts have developed a process looking at the actions of those natural persons who occupy a sufficiently senior position within the company so as to allow the courts to deem that person’s acts be the acts of the company itself  The tort was committed by the directing mind or will of the company

Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]         

Appellant company, L owned a ship which had problems with the boiler L also owned another company – managing director of both Ship was to be delivered to AP but the ship’s engine failed Ship blew up and caused the cargo to be lit on fire to AP sought damages from L for loss of cargo of the ship L relied on statutory defence to the claim of damages, allowing the ships owner to avoid liability for damages arising without their fault or knowledge Even if L was at fault, this was not the fault of the appellant company, therefore, defence should apply HofL: L was directing mind and will of the company therefore, L’s knowledge of the cause of accident was knowledge of the company Defence did not apply, AP entitled to damages Where the court determines that the natural person is the directing mind and will of the corporation, the conduct and mind of the natural person is the conduct and mind of that corporation

Vicarious liability/ secondary liability in tort  Company is liable for the actions of its human representatives through secondary liability  Where actions do not personify the company but sufficiently connected to the company, this satisfies to making the company liable

Lloyd v Grace Smith & Co [1912] 

Solicitor firm (Grace Smith) employed Mr. Sandles who was their manager of 3

conveying and their managing clerk Sandles had authority to arrange and negotiate real estate sales, carry them out and also receive deeds for safe custody  Mrs. Lloyd approached form to get advice on two cottages she owned  Sandles advised to sell cottages and bring deeds  Lloyd signed forms without explanation and she thought necessary to sell the properties BUT forms were for transferring the property into Sandles name  Months later fraud was discovered and Sandles was sued  Firm denied L had instructed the firm, arguing she conveyed deeds to Sandles not the firm  L said she was induced to execute the conveyance by fraud of Sandles who was acting in the course of his employment  HELD: firm responsible for fraud done by its representative Lloyd was applied in Bugge v Brown (1919)  High Court stated: it does not matter if the employer did not authorize, permit, sanction or know of the actual wrongful acts or omissions of the employee  The question is whether the employee was acting within the scope of his employment and the employee may be doing so even when acting without express authorization from his employer 

Hollis v Vabu (2001)         

V owned a courier service that engaged individual couriers to deliver parcels Appellant (H) was injured by negligent act of an individual bicycle courier while making a delivery Courier could not be identified but he was wearing a uniform of the company H sued the company H argued V was vicariously liable for acts of bicycle courier V denied liability arguing the bicycle couriers were not employees but independent contractors HELD: found that the courier to be employee of V therefore, V liable  if he was found to be an independent contractor, no liability General law – employer is vicariously liable for torturous claims of an employee but that a principle is not liable for the tortious acts of an independent contractor Employers vicariously liable does not extend to the tortious acts of independent contracts

 Companies can be liable for civil actions of their employees and agents  Companies have insurance, therefore, courts keen to hold someone legally responsible when there is a clear breach of duty  Distinction between independent contractors and employee tortious claims for establishing VL has been subject to judicial criticism – (Leighton Contractors Pty Ltd v Fox 2009) Criminal Liability Two key elements to all criminal offences

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 The guilty act (actus reus), which represents the physical element and  The guilty mind (mens rea), which represents the mental element  An act itself does not constitute guilt unless done with a guilty intent How do you hold a company criminally liable?  Corporate criminal liability has developed in a similar way to the civil law  Corporation can be held liable o primarily (directly) or o under a statute vicariously (secondary)  Criminal proceedings are commenced by ASIC or the Commonwealth DPP A company may itself be convicted of a crime 1. Where the act was committed by directors or senior employees, who are deemed to be acting as the company (Australian Communications and Media Authority v Radio 2UE Sydney Pty Ltd) 2. Company may be convicted of a crime by virtue of its failure to perform a nondelegable statutory duty Non-delegate statutory duty  a legal obligation that cannot be satisfied by delegating responsibility to someone else  1 and 2 are forms of direct liability 3. A company may be convicted by the acts of their employees within the scope of their employment  only possible under statutory criminal law

Tesco Supermarkets v Natrass [1972]     

 

Tesco offering a discount on washing powder, advertised on posters displayed in stores. Once the store ran out of the lower priced product, the store replaced it with regular priced stock. The manager failed to take down the sign and customers were charged the regular price Tesco was charged under the Trade Descriptions Act 1968 for false advertisement. Tesco argued that the company took all reasonable precautions and due diligence, therefore, conduct of manager could not attach liability to the corporation. HofL: accepted Tesco’s defence, found that the manager was not a part of the ‘directing mind’ of the corporation therefore, his conduct was not attributable to the corporation. Corporation did all it could to enforce the rules regarding the advertisement. Tesco demonstrated that the manger was classed as ‘another person’ a system of delegating responsibility to that person was performance of due diligence not avoidance of it

HL Bolton Engineering Co Ltd v TJ Graham & Sons Ltd (1956) 5

  

A (landlord) company opposed tenancy proceedings on the ground that it intended to occupy the premises for the purpose of its business Although the directors met infrequently as a board and had not passed any resolution or recorded their decision in any minutes. The Court considered the nature of the company and held that, having regard to the standing of the directors in control of the company’s business, the intention of the directors was, in the circumstances, the intention of the company.

Primary or direct criminal liability at common law  At common law, viewpoint, is that, in determining direct corporate criminal liability, the court will turn to the individuals in charge of the company  Where that person is in a position to be acting as the corporation itself, than that person’s conduct and mental state is taken to be that of the corporation o Failing to perform a non-delegable statutory duty = primary (direct) liability of the company Mental state of embodiment of company

S&Y Investments Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 

Company can be guilty of manslaughter (death caused by accident) where its directing mind (director or senior manager with guilty intent) kills a person during the course of their employment

 Application of the organic theory would mean that conduct of junior employees and managers below the top tier of control would be unlikely to be held to constitute conduct of the company itself  In other words, a company may escape criminal liability if the wrongful conduct was caused by the actions of low-level employees  This undesirable limitation has been recognized by the courts and it was stated in the following case

Meridian Global Funds Management Asia Ltd v Securities Commission [1995]  

Acts and knowledge of persons who could not be identified with the company’s directing mind and will could still be attributed to the company Courts recognized the need to, in exceptional case, to adopt ‘special rules’ of attribution in criminal cases where failure to do so would frustrate the policy of the statute under consideration

 Meridian applied to ABC case

ABC Development Learning Centres Pty Ltd v Wallace [2006] VSC 171 

ABC one of the largest child care providers

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        

3 year old child escape child care and wandered into the streets – but unharmed Children’s Services act s. 26 – ensure every reasonable precaution was taken to protect the child from hazardous injury, s 26 – adequate supervision Staff was under staffed with one missing – 2 staff taking care of 12 children Staff failed to observe and prevent child from escaping Failure of the staff was failure of the company HELD: ABC guilty due to failure of staff Adopting Meridian framework – in the case of junior staff, the company can still be identified with their actions if this is required by the terms of the offence and the achievement of the policy objectives of the enabling statute Protection, supervision and care of children was paramount considerations in the legislation ABC charged

Accessorial Liability  Acts and intentions of those who are the directing mind and will of the company are to be attributed to the company, does not apply where those who are the directing mind and will have themselves committed a crime against the company  Where a corporation is found to have committed a crime, the natural person who performed the prohibited physical conduct may also be charged as an accessory to the company’s crime Accessorial liability  within the context of this section, refers to a director being liable for dishonestly assisting the company to commit a breach of the law

R v Goodall (1975) 11 SASR 94 

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A company being a legal entity (according to Salomon) apart from its members, is also a legal person apart from the legal personality of the individual controller of the company, and that he in his personal capacity can aid and abet what the company speaking through his mouth or acting through his mind may have done While the company and those controlling it are complete separate, at the same time, the court states that, in examining the company’s criminal conduct and will, one must turn to the acts and will of those persons in control of the company

 Company directly liable for criminal offences where senior persons acting as the company performs the prohibited physical act  This is not vicarious liability, the person is not charged or taken to have committed the crime BUT that the crime is solely the company’s

Distinction between company’s criminal acts and the accessorial liability of corporate officers

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Hamilton v Whitehead (1988)      

W managing director of company charged with criminal offence W charged with being knowingly in, that is, an accessory to the company’s commission of these offences Argued, W committed offences on behalf of the company, therefore could not be an accessory to his own acts Applicant argued, criminal acts were committed by the company, therefore, W could be an accessory W criminally liable, his mind was the mind of the company The liability was direct, not vicarious

Miscellaneous Acts Amendment (Directors’ Liability) Act 2012(NSW)  Amended over 40 statutes so that directors and offices are no longer automatically liable for offences committed by companies unless they acted as an accessory  Instead of director having to prove innocence, the prosecution has to establish guilt of the director  Exception being certain environmental offences- on public policy grounds and based on a serious risk of significant damage to the environment, NSW government chosen to reserve the onus of proof approach

Corporate Criminal Liability under the criminal code  Considers terms of ‘physical’ and ‘mental’ elements that constitute an offence  Actus reas and Mens rea General principles of Criminal Responsibility  Section 1308A – Criminal Code applies to all offences against the Corporations Act  Pt 2.5 of the Criminal Code imposes direct liability on corporations for the criminal acts of its employees, agents or officers committed within the course of their employment.  In Tesco v Nattrass, it excluded direct corporate liability where the person was a servant, representative, agent or delegate o Rather the test in Tesco was whether the natural person was ‘an embodiment of the company’  The Criminal Code therefore goes further than the common law, which only found the company directly liable for the criminal acts of those people in a sufficiently senior position to be considered the embodiment of the company  At COMMON LAW, corporation can be held liable for criminal acts of senior staff  STATUTE, direct liability of criminal acts of all employees provided they are acting within the scope of their employment o Therefore, criminal code combines civil law with criminal law for a broad test for direct liability

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 Criminal Code expends on the common law when establishing a guilty mind, going beyond just looking at the mind of the board and seniors by looking at whether the corporation had a corporate culture of directed, encouraged, tolerated or led to the commission of the offence  Corporation will be guilty if it failed to create and maintain a corporate culture that required compliance with relevant provisions

Remedies for Corporate misconduct  Under the Corporations Act, there are three types of remedies:  Civil (ss 1318–1327)  Criminal (s 1311)  A hybrid of these two, civil penalties  They overlap and do not derogate from common law or equitable remedies  EX: person can be guilty under Corporations Act and be liable in more than one of civil, criminal and civil penalty proceedings o Insider trading – person can commit a criminal offence s. 1043A(1) and be in breach of civil penalty under s. 1043A(2) ASIC v Adler  Criminally breached the market manipulation and misleading and Corporations Act for deceptive conduct  This is not double jeopardy or abuse of process because, although the proceedings relate to the same factual circumstances, the civil and criminal have different elements and are directed towards achieving different ends Civil Remedies under Corporations Act  Sections 1318-1327 contain statutory powers of courts in relation to proceedings involving a contravention or anticipated contravention of the Act  Sections 1318 Gives the courts a broad power to grant person relief from liability for contravention of the Corporations Act where the person has acted honestly Gives courts the power to forgive procedural irregularities, which  Sections 1322 are technically infringements of the Corporations Act but which will result in no substantial injustice to any person EX: failure to lodge a form with ASX Permits courts to grant injunctions restraining a person fr...