Liability of Company to its Own Shareholders-Samples for Students

Questions: 1.What happens if a company employee who is also a shareholder and/or a director is negligent at work? Can a company be liable to its own shareholders under tort law? Explain with reference to relevant cases. 2.Can a company be guilty of a crime? If so, what principles will the court take into account as to whether it is the Company or individual actors within the company who are guilty? Answers: 1.It is a well-known principle of law that reads a company is a separate entity distinct from its members and shareholders. This principle has been established in the famous case of Salomon v Salomon Company Ltd[1], the court has observed that the solicitor can only represent a company only. Therefore, it can be stated that an invisible veil is present in between the company and the stakeholders. However, if the company has been incorporated for fraudulent purpose, the veil can be pierced. This principle has been established in Re a Company[2]. In Australia, there are several incidents regarding the negligent acts of directors are occurring. There are many judicial formulations there to define the liabilities of directors for performing negligent act. The Corporation Act 2001 prescribes certain provisions regarding the duties of the directors[3]. According to section 180 of Corporation Act, every director should have to work diligently and should perform their acts in good faith. In Charitable Corporations v Sutton[4], it has been observed by the court that in case the directors have failed to perform their duties with due diligence, they will be held responsible for that and face penalties under section 1317E of the Corporation Act 2001. In ASIC v Cassimetis[5], the director of the company who is also one of the shareholders in it had failed to perform his duty with due care and he has faced penalties due to this. In Ouerend 1 Gurney Co. v. Gibb[6], it has been observed by the court that the director should have to act like a prudent man and in case of any failure to this, he shall have to get penalties. The directors of a company have certain duties towards the shareholders and in case any failure regarding the same, the directors should have to face penalties. However, in certain case, it has been found that the directors are also shareholders to the company. In the case of Cassimetis, the directors of the alleged company have stated that they also incur the losses and therefore, they should not be held liable. In this case, court has observed that the law has not mentioned that directors who are also the shareholders in a company could not be held liable for negligent act. Therefore, it can be stated that if the directors will face penalties under the Corporation Act in case of negligent act. The general principle of law is that company is a separate entity. The directors are treated as the mind of the company and therefore, the acts of the directors are sometimes regarded as the acts of the company. The Tort law of Australia is derived its origin from English law. Under the Tort law, it has been prescribed that all the person has certain duties that should be performed with care and in case of any failure to this, the wrongdoer might have to face the penalties. In the case of Salomon v Salomon, the court has held that company is a separate person and therefore, if the company has failed to protect the interest of the shareholders by conducting fraud, the company will liable to the shareholders. Duty of care is certain legal obligations that are imposed on every individual. A person is restricted to do anything that causes harm to others and the act should be foreseeable in nature. In a case where a company has been incorporated with certain fraudulent purpose, the veil b etween the company and the directors will be lifted and the company will be held liable for any negligence under the Tort law of Australia. In Rainham Chemical Works Ltd (in liq.) v Belvedere Fish Guano Co. Ltd[7], it has been held by the court that where certain wrongful acts have been performed in a company, the company will be responsible for the consequence. If a director has committed a tort that is not distinct from the acts of the company, the company will be held liable. 2.It is a well-known principle of Company law that a company is a separate person and it will not be held liable for any of its stakeholders. This principle has been established for the first time in the case of Salomon v Salomon. However, there are certain situations where this principle has not been followed. In certain cases, where the corporation or the company has been incorporated for encompassing any fraudulent works, it has been stated by the law that if any member of the company will act in negligent way and earns profit for the company, it will be treated as the company is guilty for the crime[8]. Further, it is to be stated that company itself cannot perform an act by itself; the directors of the company are the mind. Therefore, if the directors are involved in certain fraudulent act and they are doing certain task or commit a crime for gaining illegal profit for the company, the whole company will be held liable for the crime and not the individual director. Now the question is when a company will be held liable for committing a crime. There are certain elements that are required to be fulfilled in case of committing a crime. These elements can be divided into two ways such as criminal intention and criminal act or omission. When any member of a company will meet all these requirements and they do this for the interest if the company, the company will be held liable for crime. As an example it can be stated a company that allows the employees to dump the hazardous substances in an illegal way, it can be assumed that the company is doing so for saving money from the aspects of disposal ground. Further, in na case where the agents of a company involve in certain acts, the company will be held liable and it is not required that the owners of the company are not involve in such act. In New York Central and Hudson River Railroad Co. v. United States[9], it has been observed that a company can be liable for the bad conduct of the employees and in such case, the company has to be faced both the civil and criminal liabilities. The court can follow the principle of corporate liabilities or vicarious liability in case to held a company liable for any criminal acts. The concept of corporate liability has derived its origin from the provisions of Common law and the Criminal Code Act 1995 (Cth.) makes a statutory model for corporate liability that is criminal in nature. It is noted that the company can be held liable for both civil and criminal way. In Australia, there are certain cases where a company held liable for crime. White-collar crime and bribery are some of it. In Australia, many companies are involved in certain crimes that are committed by the business professionals during the course of their business. These crimes include fraud, bribery, ponzi schemes, money embezzlement, money laundering and forgery. According to section 12.3 of the Criminal Code of Australia, if the directors of a company have committed a criminal conduct during their occupation and they have prior knowledge regarding the same, company will be held liable for crime if the act has done for the interest of the company. Further, if any member of the company held liable for conducting any negligent work during the course of their business and if it has been proved that, the work has been committed for the interest of the company, the court can held the company liable for the acts. In Tesco Supermarkets Ltd v Nattrass[10], it has been observed that the directors are regarded as the mind of the company and in case they are committing a crime, it will be treated as the mind of the directors reflect the mind of the company. In this case, the term corporate manslaughter has been used. In United States v Bank of New England[11], it has been observed by the court that aggregating knowledge of the members of the company regarding any criminal acts will held the whole company be responsible for a crime and this principle is known as aggregation principle. According to Gobert (2002), if a company has failed to report before appropriate authority regarding the fraud or failed to take any precautions regarding the same, it will be held liable for criminal offence[12]. However, the theory of corporate liability will help the court to find out the guilty of company and the members in case of any criminal offence. References: ASIC v Cassimetis (2016) FCA 1023 Charitable Corporations v Sutton (1742) 2 Atk 400 Corkery, Jim, Maiken Mikalsen, and Katie Allan.Corporate social responsibility: The good corporation. Centre for Commercial Law, 2017. New York Central and Hudson River Railroad Co. v. United States (1909) 212 U.S. 481 Ouerend 1 Gurney Co. v. Gibb (1872) L.R. 5 H.L. 480 Paternoster, Ray. "Deterring Corporate Crime."Criminology Public Policy15.2 (2016): 383-386. Rainham Chemical Works Ltd (in liq.) v Belvedere Fish Guano Co. Ltd [1921] 2 AC 465 Re a Company (1985) [1985] BCLC 333 Reeves-Latour, Maxime, and Carlo Morselli. "Bid-rigging networks and state-corporate crime in the construction industry."Social Networks51 (2017): 158-170. Salomon v Salomon Company Ltd [1897] AC 2. In Battle v Irish Art Promotion Centre Limited [1968] IR 252 Tesco Supermarkets Ltd v Nattrass[1972] AC 153 United States v Bank of New England(1987) 821 F2d 1897 AC 2. In Battle v Irish Art Promotion Centre Limited [1968] IR 252 (1985) [1985] BCLC 333 Reeves-Latour, Maxime, and Carlo Morselli. "Bid-rigging networks and state-corporate crime in the construction industry."Social Networks51 (2017): 158-170. (1742) 2 Atk 400 (2016) FCA 1023 (1872) L.R. 5 H.L. 480 [1921] 2 AC 465 Corkery, Jim, Maiken Mikalsen, and Katie Allan.Corporate social responsibility: The good corporation. Centre for Commercial Law, 2017. (1909) 212 U.S. 481 [1972] AC 153 (1987) 821 F2d 844 Paternoster, Ray. "Deterring Corporate Crime."Criminology Public Policy15.2 (2016): 383-386.