Article

“Allocation of Tort Liability Between Companies and Directors: The Missing Link” International Company and Commercial Law Review, (2016), Issue 2, 37-47.

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Abstract

The law in England provides that a person who is wronged by an act of a corporate director has recourse directly and primarily against the tortfeasor director but not against the company for whom he/she works. As agents, directors lack the prerequisite authority to commit torts on behalf of their principal companies. The primary tort liability of a company can only exceptionally arise where the courts find that the act complained of constitutes a corporate tort; i. e. a tort that is committed by the company as a separate legal person, though materialized through the actions of its human organs. However, the law’s arrangement is associated with difficulties. The personal liability of a corporate director continues even when the tort complained of is found to be a corporate one. This falls inconsistent with the corporate personhood, which is a fundamental principle of company law and recognizes separate personality for companies. It also generates uncertainty, as it is not very clear under what circumstances an agent’s tort is recognized as corporate. This paper suggests that where a case involves corporate tort adoption by the courts of an organic approach to explain director/company relationship, in substitute of the traditional agency analysis, can resolve the above mentioned difficulties largely.

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The Corporations Law, section 588G imposes a duty on company directors to prevent insolvent trading. To this extent directors can be subjected to personal liability for corporate debts. This is the result of a long and complex statutory development. Even more complex is the question under the caselaw of when directors can be made personally liable for damages for corporate torts, including breach of statutory duty. Recently there has been a number of Australian cases dealing with such matters but unfortunately there has been a division of judicial opinion on the basic tests and a lack of clear analysis of the fundamental questions of principle and policy underlying them. The purpose of this article will be to attempt a preliminary analysis.
Article
A company is a legal person but it must act through natural persons, hence the need for rules governing the attribution to companies of the acts and states of mind of individuals. Meridian Global Funds Management Asia Ltd v. Securities Commission (1995), a Privy Council decision in which judgment was delivered by Lord Hoffmann, is generally understood to have established that contextualisation, rather than anthropomorphic inquiry into corporate personality, is the key to answering these questions. A connection has been made Lord Hoffmann’s reasoning in Meridian and Hart’s criticism of the metaphysical shadows that can obscure and complicate our understanding of corporate rights, obligations and liabilities. An echo of this view can be heard in remarks by Justice Sotomayor in Citizens United v. Federal Election Commission (2010) in which she noted the argument that the courts could have fallen into error by “[imbuing] a creature of state law with human characteristics.” In Meridian Lord Hoffmann did much to cast light into these shadows and to correct errors that can result from over-reliance on metaphysical concepts. However, sixteen years on, it is apparent that Meridian has not put an end to the habit of using metaphors that can appear to make corporate liabilities and rights turn on whether natural persons, who can be described as the “embodiment” of a company, are involved. Stone & Rolls Ltd v. Moore Stephens (2009), a recent House of Lords ruling on auditors’ civil liability, illustrates the point. In that case, considerable emphasis was placed on the status of the key individual as the “embodiment of … [the company] for all purposes.” That old, anthropomorphically tinged, ways of analysing corporate rights and liabilities persist suggests that the impact of Meridian may be more muted than some commentary has suggested. With the rights and liabilities that flow from corporate “personhood” now highly topical, this is a good time to take a fresh look at the decision in Meridian and its legacy thus far.
Article
This article proposes a benefit test to form part of the organic theory of attribution, which is used by the courts to determine when a natural person acts “as” the company. The concept of “scope of authority” is marred by considerations of subjectivity and relativism such that rules of attribution are applied inconsistently because the exact limits of corporate actions are subject to flexible interpretation of rules the application of which can be manipulated, permitting the corporate vehicle to be engineered for the successful pursuit of corporate dishonesty. The struggles of the law to deal with this issue were demonstrated by the five judgments and split decision of the House of Lords in Moore Stephens v Stone Rolls Ltd [2009] UKHL 39. The benefit test relies on the actual or intended receipt of benefits derived from a particular act rather than applying formalist legal rules to determine whether an act is intra vires; an unproductive exercise given the willingness of the courts to attribute to the company acts of dishonesty outside actual authority such as fraud under both the organic and agency theory. Thus, the company can be attributed with an act where it is the destination of and not the medium for benefits derived from the act performed by its “mind and will”. Insolvency alters the application of organic attribution because the fiduciary duties of directors owed to the company become creditor regarding, and thus an act causing a benefit in solvency may be against the interests of creditors in insolvency thus breaching fiduciary duties to the company and altering the perception of whether an act benefits the company.
Article
This article aims to address some of the more conceptual questions about companies sitting behind two recent cases. Lord Scott in the House of Lords described Stone & Rolls as difficult but the facts in Stone & Rolls and Safeway could hardly be simpler. Stone & Rolls involved a claim by a fraudulent one-man company against its auditors for negligence for failing to detect its fraud. In Safeway a company was convicted of competition law breaches due to the actions of some of its employees and directors. The company was unsuccessful in an action against those directors and employees on the basis that the wrongdoing employees and directors were identified as the mind of the company and therefore exempt from liability. It is argued that the apparent complexities (and the occasional counter-intuitive outcomes) expose a fundamental misconception about the structure of companies. The first misapplication was brought about by the unwillingness in U.K. company law to acknowledge the place of the board in the company. The rules of attribution as set down by Lord Hoffmann in Meridian Global Funds and applied correctly necessarily mean that the board collectively and the shareholders collectively sit at the core of the company. When directors are acting collectively as part of the board, they are not the agents of the company. Their knowledge as part of the board is attributed to the company by the primary rules of attribution. Absent statutory provisions that override company law principles, or breach of duty, the board of directors collectively should therefore be immune from liability when they act in that role. But when accepting that the members of a board that acts collectively are, as a general principle, immune from liability, it is crucial to accept also that individuals who are directors are likely to have many different legal relationships with a company that in a temporal sense occur concurrently or sequentially. The second misapplication was of the special rules of attribution. For the purposes of a rule, usually statutory, the special rules of attribution can override the principles of company law meaning that the company can be primarily liable for the knowledge and actions of a corporate agent. Crucially though, and unlike, the doctrine of identification, the primary liability brought about by the special rules of attribution is only for the purposes of that statutory rule; it does not change the underlying structure of the company.
Article
Introduction: Taken together, the English and Scottish Law Commissions, the DTI and the Company Law Review Steering Group (‘CLRSG’) have produced hundreds of pages on the subject of directors’ duties during the last three years. All of this work is just a small part of the DTI’s current review of the whole system of core company law, a review billed as the most comprehensive ever undertaken in the UK. This note cannot do justice to the detailed work of all these bodies, but aims simply to summarise the principal directions of the work so far produced – and only so far as it relates to directors’ duties – and to highlight some aspects which give cause for concern. In doing that, it is consciously biased towards consideration of the perceived problems, rather than praise for noteworthy advances. The reason is simple. This mammoth review process is not yet completed. The CLRSG is due to produce its final report in Spring 2001. Before that date, it seems important to cast a critical eye over the work completed so far. That said, it would be surprising if the CLRSG did not already intend to address some of the issues raised here. Its work to date has always been presented as part of a consultation process aimed at discovering the optimum solution. The need for a comprehensive reform of UK company law is not doubted. The UK rules have long ceased to provide an enviable model for other countries to adopt. The current companies legislation is widely regarded as being too complex and detailed, and as containing rules which are now either obsolete or unwarranted. The DTI’s stated aim is to produce a simple, rational framework which is modern and competitive, and which facilitates enterprise and promotes transparency and fair dealing. It is against this that its efforts need to be judged.
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