Separate Legal Entity, Limited Liability and Criminal Responsibility of Company - Case Study Example

Company Law Separate legal entity, limited liability and criminal responsibility of Company- An over view 1 Introduction Company law includes the body of legal rules relating to the creation, management, financing and operation of companies. These rules have developed to protect investors, maintain confidence in the market and attempt to ensure that fairness is achieved for the various stakeholders connected to a company. Britain was amongst the first nations to develop rules to regulate how companies operate and introduced a company registration scheme in 1844. Company Law has developed over the years both in common law and through various Acts of Parliament, most recently the Companies Act 2006 which is the first major overhaul of company law in the U.K. for over 20 years. Generally the company law recognizes two types of persons, namely natural which id confined to human beings and secondly artificial persons which refers anything other than the human being which the law recognizes as having duties and rights. Scholars have constantly explored the issue on the recognition of corporation/company as a “legal person” (Farrar, (1991) (1) A company, when legally speaking, is an association of a number of individuals for the purpose of carrying on some legitimate business i.e. entity for profit which may be a corporation, a partnership, association or individual proprietorship. It is the name given to the body of legal rules relating to the creation, management, financing and operation of companies. The various status of companies, like separate legal entity, limited liability etc has been contributed a number of recognition for English law, by which a company as well as its members possess some rights and liabilities. Company as a separate legal personal/entity In the beginning it was considered as the legal personality of a company, which is commonly known as “the lifting the veil of incorporation", arose from the activities of ------------------------------------------------------------------------------------------------------------1. Farrar JH.(1991) Company Law( 3rd ed). London: Butterworths, 2 organizations such as religious orders and local authorities which were granted rights by the government to hold property and sue and be sued in their own right and not to have to rely on the rights of the members behind the organization. Later on this concept began to apply to commercial ventures with a public interest element such as rail building ventures and colonial trading businesses. In recent periods, corporate personality refers to the fact that as far as the law is concerned a company really exists. ( Dignam and Lowry,2006)(2) Farrar (Company law, 1991) (3) has described the concept of separate legal personality as a metaphorical use of language, clothing the formal group with a single separate legal entity by analogy with a natural person. The decision of the House of Lords in Salomon v Salomon & Co Ltd (4) rightly molded the concept of legal entity nature of a company and it provided new principles to the Company law. It firmly established that upon incorporation, a new and separate artificial entity comes into existence. Hence corporation/company is a distinct person with its own personality separate from and independent of the persons who formed it, who invest money in it, and who direct and manage its operations. (Ford, Austin, and Ramsay, 1997)(5) The decision uprooted in the law by the later decision in Lee v Lee’s Air Farming (6). Because of this nature of separate legal personality of a corporation it is favored for the conduct of commercial enterprise or social organization under Company law.(Ford, Austin, and Ramsay 1997) (7). An incorporation achieves the interposition of a legal person between the natural persons who own and control it, and the business activity to be undertaken (Gillies, 1992), (8) Any difficulties this implies are overcome by virtue of subsection 124(1) of the Corporations Act which states that a corporation has ------------------------------------------------------------------------------------------------------------------------------- 2. Dignam and Lowry, Chapter 2: ‘Corporate personality and limited liability’, 2006 3. ibid 1 4. Salomon v Salomon & Co Ltd [1897] AC 22. 5. Ford, HAJ, Austin, RP, and Ramsay, IM, Fords Principles of Corporations Law (8th ed, Butterworth’s, Sydney, 1997), p 101. 6. Lee v Lee’s Air Farming [1961] AC 12 7. ibid 6 8. Gillies, Peter (1992) The New Corporations Law, 2nd ed, The Federation Press, Sydney, , p 2. 3 the legal capacity of a natural person (Corporations Act) (9) So it is obvious from this discussion that a law can let the company to act in legal capacity. Moreover other features of separate legal entity status of accompany enables the law to extend its power in devoid of any hindrance. The major value of holding the legal entity nature is firstly, as a separate legal person, a registered company is capable of suing and being sued. This was explained in Foss Foss v Harbottle(10) Secondly, a corporation has perpetual succession as stated in Regal (Hastings) Ltd v Gulliver.(11) Thirdly, a corporation can enter into contracts in its own name. Lastly a corporation has power to acquire, hold and dispose of property by the virtue of being a separate legal entity. This was clearly given in the case Macaura v Northern Assurance Co Ltd. (12) Limited liability of the company Now we shall discuss how the nature of the limited liability of a company plays an important role in English Company law. Even though the separate legal personality and limited liability goes with hand in hand these do not share similar characteristics. In Salomon’s case Mr. Salomon’s (13) personal liability for the debts of the business had changed completely from unlimited liability as a sole trader to limited liability as a shareholder in the company. Not only was Mr. Salomon not liable for the debts of the company but he had also as Managing Director of the company granted himself a secured charge over all the company’s assets. As a result if the company failed not only would Mr. Salomon have no liability for the debts of the company but whatever assets were left would be claimed by him to pay off the company’s debt to him. This shows that once the technicalities of the Companies Act are complied with, a one person ----------------------------------------------------------------------------------------------------------- 9. Corporations Act 2001 10. Foss v Harbottle (1843) 67 ER 189. 11. Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. 12. Macaura v Northern Assurance Co Ltd. [1925] AC 619 13. ibid 4 4 Company can have the benefits of corporate legal personality and limited liability, the shareholders generally benefit from this because it facilitates limited liability as the company also owns its own debts. This explanation was rightly given in the case of Woolfson v Strathclyde Regional Council (14).So it can be outlined in this aspect that the status of the limited liabilities enables that company law to ensure some benefits to shareholders as the company takes over its own debts. The veil doctrine is invoked when shareholders haze the distinction between the corporation and the shareholders. Through the feature of limited liability of a company the law can ensure in giving investors minimum insurance in their business over their own private lives. Hence, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment.( Hawke,2000)(15) Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors risk whilst, consequently, their potential for gain is unlimited manifestly, corporations exist in part, in the first place to shield their shareholders from personal liabilities for the debts of that corporation. (Gower and Davies, 2003)(16) Another role of limited company in company law is that it protects the company and its members, as well as to facilitate commercial ventures in which the company may be interested. The principle further act to attract and encourage corporate investment, much needed in any society to speed up development. It is believed to be the springboard to raise managerial standards in a corporate organization. It goes without saying that it facilitates better investment strategies by the company question. . (Bainbridge, 2001)(17) ------------------------------------------------------------------------------------------------------------ 14. Woolfson v Strathclyde Regional Council [1978] SC 90).(E7992) 15. Hawke, Corporate Liability, London Sweet and Maxwell, 2000, p. 108. 16. Gower, Davies, Principles of Modern Company Law (7Ed) London Sweet and Maxwell (2003) at 176 17. Bainbridge’s Abolishing Veil Piercing, 26 J. Corp Journal of Corporate Law Spring 5 Limited liability discourages shareholders from monitoring and controlling their companys commercial ventures. The companys creditors bear the burden of the risks inherent in dealing with limited liability companies. Farrar (Company law, 1991)(18) points out Limited liability arguably reduce the costs involved in the separation of ownership and control. First, limited liability reduces the need to monitor management and other shareholders. Secondly, limited liability and free transfer of shares with which it is arguably linked facilitate the market for control. This acts as an incentive to management to perform efficiently. Thirdly, limited liability, in adding to the marketability of shares improves the information fed to the market place by the increased volume of transactions. Fourthly, limited liability allows shareholders to diversify their holdings. Fifthly, it facilitates optimal investment decisions since a positive attitude to risk taking will ensue. Now we shall analyze the criminal liability of the company in its “limited” status and also we shall scrutinize can a company criminally be held liable as distinct from its directors and managers. Should, limited companies be held criminally liable in their own right? (19) It is in criminal law that many of the difficult questions arise as to how a legal entity such as a corporation can be held responsible in their own right. The issue regarding the criminal liability of limited company set a pause whenever a company characterizes as a "person" capable of a crime as distinct from its directors and managers,basing fault on the same psychological processes as apply to people, as it raises problematic issues with respect to moral turpitude, the mens rea element of offences and defenses. --------------------------------------------------------------------------------------------------------- 18. ibid 1 19. Boisvert, Anne-Marie,(1999) Corporate Criminal Liability -- A Discussion Paper 6 A realistic approach to make the corporations accountable requires an exploration of the decision-making structure of companies and a degree of innovation in adapting the elements that define individual, human culpability. There a number of proposals enacted on this issue. The identification theory (Boisvert ,1999) (20)which is one of the famous theories in common law enumerates that it is a legal fiction in that it focuses on the actions of the "directing mind" of the corporation and merges individual and corporate persons in order to assign criminal liability to the latter. It requires that the corporation take responsibility for those with decision-making authority over matters of corporate policy. It is not sufficient merely to establish that any employee or agent acted criminally In 1915, the House of Lords, in a civil liability case entitled Lennard’s Carrying Co. Ltd.,(21) laid down a general principle for attributing fault to a corporation – the directing mind principle. Under this concept, the acts and state of mind of certain senior officers of the corporation - the directing minds - are deemed to be the acts and state of mind of the corporation. That means the directing minds are identified as the corporation, and thus the corporation is directly liable, rather than vicariously liable The identification principle meant that a company would be liable for a serious criminal offence where one of its most senior officers had acted with the requisite fault. This aspect is expanded in the leading case of Tesco v Nattrass (22) as in this limited the relevant personnel to those at the centre of corporate power. The identification theory developed from a series of fraud cases and it marked the recognition of corporations as capable of committing offences which required proof of a mental element. R v ICR Haulage Ltd (23) Another argument with regard to the criminal liability of the company is vicarious liability in the context of criminal law. It specifies that it must be found that ------------------------------------------------------------------------------------------------------------ 20. ibid 21 21. Lennard’s Carrying Co. Ltd [1915] AC 705 22. Tesco v Nattrass (1972), [1971] 2 All E.R. 127 23. R v ICR Haulage Ltd (1944) 30 Criminal Appeal Reports 31(cr.L) 7 Another argument with regard to the criminal liability of the company is vicarious liability in the context of criminal law. It specifies that it must be found that an individual employee committed the crime with the requisite state of mind and, if that mens rea element is established, it is imputed to the corporation itself. Reforming the Law on Involuntary Manslaughter: The Governments Proposals (24) enumerates that "corporate killing" offence is a specific offence, a form of manslaughter that can only be committed by a corporation: The special offence of corporate killing broadly corresponds to other offences proposed by the Home Office of killing by gross carelessness; like the offence is based on corporate conduct falling far below what could reasonably be expected; the offence does not require that the risk be obvious or that the defendant be capable of appreciating the risk; a death should be regarded as having been caused by the conduct of the corporation if it is caused by a "management failure", so that the way in which its activities are managed or organized fails to ensure the health and safety of persons employed in or affected by its activities; Such a failure will be regarded as a cause of a persons death even if the immediate cause is the act or omission of an individual. Here the term “management failure” used to indicate that concept is a refinement of the "directing mind" idea, i.e. the law is still looking for decisions made by certain managers, or groups of managers, in order to find the corporation primarily liable. Liabilities of directors and managers There is some implication that it is not necessary to prosecute a director or officer in order to find the company itself liable. It should be sufficient that there is evidence against the director or officer. Directors and officers can also be criminally liable as aides and abettors of the company’s crimes or of the crimes of their fellow directors. But in -----------------------------------------------------------------------------------------------------------24. Clause 4, draft Involuntary Homicide Bill, Law Commission Report 239 (1996) 8 against the director or officer. Directors and officers can also be criminally liable as aides and abettors of the company’s crimes or of the crimes of their fellow directors. But in reality, it is difficult to bring about this principle. (Wells, 1993)(25) It is a irrefutable rule that where a corporation commits an offence under this Act, any officer, director or agent of the corporation who directed, authorized, assented to, complied with or participated in the commission of the offence is a party to and guilty of the offence, and is liable to the punishment provided for the offence, whether or not the corporation has been prosecuted or convicted. As individuals, directors, officers and agents of a corporation are personally liable for Criminal Code offences they commit. Under these provisions, a corporate executive or board member could be liable if he or she aided or abetted a person to commit an offence counseled a person to be a party to an offence, or is an accessory after the fact to an offence. So we can summarize that a company acquires a status of legal person soon after the incorporation and it is bound to follow those rules and regulations which are laid down by the law as any human being, because the law recognizes two types of persons-natural and artificial persons. It opened up the possibility of corporations being liable for the whole range of mainstream offences, including fraud and manslaughter. The notion of identification was brought into play under which the wrongdoing of certain senior officers - natural persons - in the corporation was identified with the corporation itself - the unnatural person. Their acts and accompanying guilty minds, on this version of liability, were those of the company - they acted as the company. Thus, as a juristic person, a corporation itself is capable of committing almost any criminal offence. Therefore one can say that a company can be held for its criminal liability but along with the natural wrongdoers. ------------------------------------------------------------------------------------------------------------ 25. Wells.C, (1993) Corporations and Criminal Responsibility, Clarendon Press Conclusion It can be summarized that the above said characteristics of the companies brings various advantages to the companies in various manner. However, as we move from jurisdiction to jurisdiction across the globe, the application narrows down to how that system of the law appreciates the subject- whether it is of separate legal entity, limited liability or it is related to the criminal liability of the company. Whatever it is, there is a need for organizations to observe some of the dynamics in the legal process to tremble some effects in the company law. *************************** BIBILIOGRAPHY Books and Authors 1. Bainbridge, (2001) Abolishing Veil Piercing, 26 J. Corp Journal of Corporate Law Spring 2001, 479 2. Dignam and Lowry, ‘Corporate personality and limited liability’,(2006) Chapter 2 3. Dine, Janet Criminal Law in the Company Context,(1995) Dartmouth, 1995, 218pp, ISBN 1-85521-342-7 4. Farrar JH.(1991) Company Law( 3rd ed). London: Butterworths, 5. Ford, HAJ, Austin, RP, and Ramsay, IM, (1997) Fords Principles of Corporations Law (8th ed, Butterworth’s, Sydney, , p 101 6. Gillies, Peter (1992) The New Corporations Law, 2nd ed, The Federation Press, Sydney, p 2. 7. Gower, Davies, (2003) Principles of Modern Company Law (7Ed) London Sweet and Maxwell at 176 8. Hawke, (2000) Corporate Liability, London Sweet and Maxwell, p. 108. 9. Wells, C, (1993) Corporations and Criminal Responsibility, Clarendon Press Statutes 10. Companies Act 1985 11. Companies Act 1991 12. Companies Act 2006 13. Corporations Act 2001 14. Draft Involuntary Homicide Bill, Law Commission Report 239 , Clause 4, (1996) Table of Cases 1. Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769. 2. Foss v Harbottle (1843) 67 ER 189. 3. Lee v Lee’s Air Farming [1961] AC 12 4. Lennard’s Carrying Co. Ltd [1915] AC 705 5. Macaura v Northern Assurance Co Ltd. [1925] AC 619 6. Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. 7. R v ICR Haulage Ltd 8. Salomon v Salomon & Co Ltd [1897] AC 22. 9. Tesco v Nattrass [1972] A.C. 153, 10. Woolf son v Strathclyde Regional Council [1978] SC 90).(E7992) Read More