Abstract
This Article is written by Anshumi Maloo, a student of Karnavati University, Gandhinagar. It includes all the liabilities which is faced by a company considered as an artificial person.
Tortious Liability of Companies
‘Tort’ is an illegal act or violation of a right leading to legal liability for which compensation is awarded by civil courts. Torts’ law is an uncodified law founded on justice, honesty, and good faith.
In most cases, a company will both commit offenses and have offenses committed against it. As a company is an artificial being, there is also both the need for humanitarian aid and that of an entity in order for businesses to be held personally liable. Liability occurs either from a person committing an act or from his or her unlawful omission. But in such situations, as he allowed the wrongful act or omission, managers can also be simultaneously responsible.[1]
Only certain activities that are incidental to the fulfillment of the purposes for which it was set up under the legislation can be performed by a company. All of its activities must be guided towards its ultimate objective of establishing the company. In its Memorandum of Association, the intent and objects of a company registered under the Companies Act, 2013 are contained and the company cannot go beyond the limits set for it. Anytime beyond that will be considered to be ultra-virus.[2]
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Liability in Tort
It is difficult to describe precisely the circumstances under which this can arise. The courts have therefore attempted to strike a balance between legal concepts, such as
1] An incorporated corporation should be treated as separate from its owners, directors, and officers and as distinct from its shareholders.
2] For their tortious acts, anyone must be held responsible.
As far as a tort is concerned, a company usually has a degree of responsibility that must be met, depending on the extent and consequence of the tort, for the tort committed by its directors and/or workers during the course of their employment.
In the case of Williams and another v Natural Life Health Foods Ltd[3] it considered whether a business director should be personally held responsible for a reckless misrepresentation. The House of Lords held that a director would be held liable in compliance with the rules of common tortuous principles only if the presumed personal responsibility for the representation had been assumed and the other party fairly depended on that presumption of liability.
The Williams decision reflects the protective approach adopted by common law to restrict the situations in which the limited liability corporate shield can be withdrawn. In order to ensure that the legislation operates in such a way as to promote business, the House of Lords added more importance to the enterprise objective and less importance to the personal responsibility objective. If a director was an essential part of the driving mind or will of the organization, whether he directly or implicitly confirmed the presumption of personal responsibility, it will not be presumed to have accepted responsibility that is objectively decided.
In the case of Context Drouzhba v Wiseman[4] that a director who has threatened to make dishonest misrepresentations would not be able to increase the company’s limited liability and separate legal personality as a shield when fraud is involved. While it requires a lesser degree of misfeasance than others, as noted above, in the sense of tortious liability.
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Liability of a Company: Tortious, Civil, Vicarious and Criminal
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Companies Act- Civil Liability
A civil liability was levied pursuant to Section 35[5] for the misstatements in the prospectus. If any person has subscribed to the company’s securities for the issuance of a prospectus containing mistakes and therefore has sustained any harm or loss, at the time of the issuance of the prospectus, the director of the company, the promoter of the company and any person referred to in the prospectus will be liable for reimbursement to individuals who have suffered any loss due to the loss.
Liability of Director and Shareholders
If the director knowingly engages in the act or authorizes or instructs others to conduct such an act, a director would be liable for tortious liability. However, it may not happen that the exact degree of responsibility is apparent. It is usually held that the company would be held responsible for inflicting damage/loss on the third party with ordinary expertise and care due to the violation of its general duty.[6]
Attaching personal responsibility for the actions of the company to directors and shareholders will challenge the corporate veil bestowed on a corporation. However, by arguing that the actions were performed on behalf of the company, directors and shareholders will not be covered from tort liability.[7]
Shareholders’ responsibility is much more limited than that of directors and officers. This is the inevitable consequence of the partnership between shareholders and managers in which shareholders have selected executives as their agents to maximize or at least protect their investment.
When a business operates by natural persons, when deciding whether or not a business violated a duty of care that it owed to someone else, it causes an issue. In order to decide whether an individual act, such as an agent or employee, is regarded as an act of the organization, the law has established attribution laws. For most civil liability purposes, an individual’s activities can be traced to a corporation.[8]
In explaining the director’s tortious liability, there are two main approaches: The Agency Approach and the Identification Approach.[9]
Identification Approach: The Identity Approach implies that, based on the concept of limited liability and independent legal entities, when operating in the course of the operation of the company, the director should be regarded as acting like the company itself.
Based on this approach, as it is the company that has committed the tort, not the director, some courts have therefore ruled that such identification would usually exclude the director from personal responsibility and the company should be responsible for tortious actions committed by the director instead of the director himself.[10]
In the most relevant case of Trevor Ivory Ltd v Anderson[11], decided by the Court of Appeal of New Zealand, the identification approach was adopted. Hardie Boys J. stated that “…in appropriate circumstances the directors are to be identified as the company itself so that their acts are taken in truth the company’s acts. Indeed, it is considered that the nature of corporate personality requires that identification should be the basic premise…”
While the Hon’ble Judge acknowledged that, based on the “assumption of personal liability test,” personal liability can still be placed on a director. However, it can rightly be said that under this test, directors can most of the time avoid their obligation in most circumstances.[12]
Agency Approach: According to the Agency Approach, the director is merely an employee of a corporation which is a different body and cannot be personally responsible for his or her own misconduct. Since the director is seen as an employee of the organization, the director would usually be responsible for all the tortious actions performed by him or her in compliance with the rules of agency law.
In essence, the Agency Approach means that the court should strictly adopt the well-developed tort law concept for persons to the companies and their directors in determining the responsibility of the director in tort without any change made by the rules of company law.[13]
This approach is generally taken to be a creature of the theory of tort law. In essence, the Corporation Solution involves the direct responsibility of the director in tort without any change rendered by the rules of company law. Nowadays, the approach of agencies appears to be more preferable than the approach of identification.
Vicarious Liability
The corporation is an artificial entity with no brain or body of its own, but it will be held responsible during the course of its employment for the unlawful actions committed by its agents or servants. This liability is founded on the vicarious liability principle. n Therefore, the company is responsible for the wrongs of its workers and agents just like a master is held liable for the wrongful and negligence of his servants.
In the case of Citizen’s Life Assurance Company v. Brown[14], Lord Lindley noted that a corporation may be held accountable for fraudulent acts such as defamation. In this situation, a letter containing some claims against a former employee of the company was sent by the superintendent of the business to its policyholders. For defamation, the ex-employee sued the firm. Because of the theory of agency, Lord Lindley held the corporation liable and liable for slander, and because of the alleged tort committed in the course of the company’s employment, it does not claim immunity.
Criminal Liability
A corporate entity can be held vicariously responsible for the wrongs committed by its employee, just as the principal’s responsibility applies to his agent’s unlawful actions.
Even if a corporation is believed to have an imaginary will, just as legal fiction assigns an imaginary life, the only actions that can emanate from the so-called will are those that the Memorandum of Association requires it to do, i.e., which are intra-vires of the company. Therefore, since a criminal act or unlawful act would obviously be ultra vires its Memorandum of Association, a company should not commit a crime. However, this common view has now been abandoned and a company can be found criminally responsible for its members’ illegal actions.[15]
In D.P.P. v. Kant & Sussex Contractors Ltd[16], in order to receive fuel coupons, the manager of a transport firm submitted fake returns. The Division Court held that, through its manager, the corporation had committed fraud and was thus responsible for that crime.
Companies Act- Criminal Liability
Under Section 34[17], if a prospectus has been issued by a corporation and is circulated and distributed among the general public or creditors and contains such omissions or false statements, in such a case, any person who has approved the issuance of the prospectus shall be liable for fraud in accordance with Section 447.
Section 447[18] specifies that any person found guilty of fraud within the management of the company shall face imprisonment for up to 10 years and be liable for a fine that may be three times the amount involved.
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Conclusion
In the last few years, corporate liability has developed a profound foothold. Corporations, while not actual people, have been given legal personality and must thus be accountable for their actions. Because of the growing scope of corporations in daily life, corporations must also be kept accountable.
If foreseeable by the corporate directors or by the firms, the malicious tort would then be held liable according to the theories. In general, however, companies may not be held responsible for punitive damages on the grounds of a tort committed by workers.
In general, companies will be held responsible for an offense committed by a company. However, whether the deliberate tort was inevitable to the corporate directors or whether the company acknowledged the benefits of the tort tribunal, the company would usually be found liable except for a deliberately committed tort by an employee.
References:
[1] https://blog.ipleaders.in/tortious-liabilities-of-companies
[2] http://lawtimesjournal.in/legal-liabilities-of-company/
[3] ([1998] 2 All ER 577)
[4] ([2007] EWCA Civ 1201)
[5] Section 35- Civil liability for Mis-statements in prospectus.
[6] https://lexauxilium.com/2020/12/17/tortious-liability-of-companies-jurisprudential-issues/
[7] Heronemous v. Ulrick, 1997 WL 524127.
[8] ‘Companies Liability for Negligent Actions’ (Lawteacher.net, February 2021)
[9] https://www.researchgate.net/publication/314252295_Directors’_Tortious_Liability.
[10] Chris Noonan and Susan Watson (2004), Directors’ Tortious Liability – Standard Chartered Bank and the Restoration of Sanity, Journal of Business Law, 5: 539-548, 542
[11] [1992] 2. NZLR 517
[12] Supra 1
[13] Supra 10
[14] (1904) AC 423.
[15] Supra 2.
[16] (1944) K B 146.
[17] Section-34 Criminal Liability for Mis-statements in prospectus
[18] Section 447- Punishment for fraud.