Liability Of Company And Directors For Acts Of Negligence And Wrongful Acts

Separate Legal Personality of Company

Discuss about the Company Illegal Acts and Negligence.

There are various cases where the members of a company held liable for certain illegal acts including negligence. The dispute arise when it becomes hard to proof whether the offender himself will be liable for the wrongful acts or whether the whole company will held liable for that. The court has, for the first time, in the case of Salomon v Salomon decided that the company is a separate legal personality and it will not held liable for the negligent or wrongful acts of the members. In Australia, offence relating to negligence is fall within the scope of Tort law and in case where the members of a company are engaged in any negligent act, it will fall under the provisions of the Corporate Tort. An act can be called as negligent act if the wrongdoer has failed to show reasonable care during the course of their employment. The Corporation Act has imposed certain duties on the directors so that they can perform their acts carefully. According to section 180 of the Act, the directors are required to act in good faith while doing their business. It is not required to involve in any wrongful gain during the course of their business. In case of ASIC v Adler (2002) 168 FLR 253 the court has observed that if the directors are negligently using their position and act for certain illegal way, they will be held liable for that.

In Australia, many cases are pending before the Court regarding the wrongful acts of the directors and many times, it can be observed that certain directors are also the shareholders of the company. The case of the Cassimetes (2012) is an ideal example regarding the same. In this case, it has been observed that the directors of the company had failed to show sufficient care to the investors and the investors had to face lots of trouble for that. When they are interrogated by the court, they took the plea that they are also the shareholders of the business and they had to face troubles too. The court has rightly observed in that case that it is the duty of the director to take all the reasonable care for securing the interest of the shareholders and in this case, they have failed to comply with the same. Therefore, the directors could not take the plea that they have shares in this case. According to the provisions of the Corporation Act, the provisions of the section 180 to section 183 are applicable to all the directors. It has further been stated that in case the directors could not meet the requirements and even unable to satisfy the provision mentioned under section 180(2) of the Act, they have to face civil and criminal penalties. The civil penalty provision has been comprised in section 1317E of the Corporation Act. Criminal penalty provision has been engraved under section 183 of the Corporation Act.

Corporate Tort and Negligence in Australia

In the case of Kramer v Kramer (1979), it has been held that the directors have certain fiduciary duties and they have to perform it diligently. In case they have failed to do so, they will be held guilty for it. The acts and duties of the directors are governed by the Corporation Act and according to section 1317E of the Act, if the directors have failed to perform their duties, they will have to face penalties for that. However, it is to be noted that the act of negligence is civil in nature and therefore, if the directors are held liable for any negligent act, they will have to face civil penalties that are laid down in section 1317E of the Act.

In the case of Turquand v Marshall (1869) LR 4, it has been observed, being a director of a company, they play important role and considering the potentialities of the directors, it has been observed that the directors must not misuse their position. If they held liable for misusing their position, they will make a breach of their duty. According to the Tort Law of Australia, breach of duty comes under the provisions of the negligence. However, according to the law of Australia, the negligent must be gross in nature and mere negligence will not attract the provision of the Tort Law. By gross negligence it can be stated certain situation where the company or any shareholders has to suffer lot of problem. There are certain cases where the acts of the directors are  directly linked with the company and if the acts of the directors are performed for the benefits of the company, the whole company will be held liable for that.

The concept of separate identity of a company has separated its liabilities from its members. However, a company can vicariously be liable for the wrongful acts of its employees. According to the law, directors are the minds of the company and without them; companies could not perform its job officially. Therefore, where the directors are involving in any wrongful acts for securing the interest of the company, the company will be held liable for such crime. This principle is known as corporate liability. The term vicarious liability is depended on the master servant principle where it has been observed that the master will be liable for the wrongful acts of the servant if the wrong has been done due the course of their employment. This term has been applied in case of Tort Law. Crime means where the intention and act of the accused are illegal. It has been observed in Tesco Supermarket Ltd v Nattrass [1972] AC 153 that both the knowledge and state of mind are essential for proving the criminal activities of a company. In Ferguson v Wilson (1866) LR 2 Ch App 77, the court states that a company can be held liable for criminal breach of contract.

Duties of Directors under the Corporation Act

Every company is required to perform their work safely and the company should follow the provisions of the Occupational Health and Safety Act. If a company has to make profit and incorporate for certain illegal acts, the company will be held liable for the same. The liability of a company can be divided into two parts: primary and secondary. When the company itself does a wrong act, it will be regarded as primary liability and when the agent or an employee does a wrongful act, it will be regarded as secondary liability. The primary liability of the company has been established in the case of Lennard’s Carrying Co. Ltd v Asiatic Petroleum Co Ltd [1915] AC 705. The directors are regarded as the mind of the company and therefore, if they act to gain illegal profit for the company, the company will be held liable. In the case of Bolton Engineering Co, Ltd v T J Graham & Sons Ltd [1957] 1 QB 159, it has been held that if an agent of a company held liable for any criminal activities and if outcome of the act is attached with the interest of the company; the company will be held liable for such criminal acts under the principle of vicarious liability.  

In Hollis v Vabu Pty Ltd (2001) 207 CLR 21, it has been observed by the court that the agent of the company was held liable for the negligent act and that causes injury to the plaintiff. According to the court, as the injury has been made during the course of work and the alleged agent was served for the company, the company will be held liable under the principle of vicarious liability. In case of Securities of Australia Pty Ltd v Clinton Joseph Brilly [2008] NSWCA 204, it has been observed by the court that if a company has been incorporated with certain fraudulent purpose, the corporation will be held liable and the veil will be pierced automatically. In S & Y Pty Ltd v Commercial Union Assurance Co. (1986) 82 FLR 130, the court has observed that if the directing mind of a company is accused of murder during the course of his employment, the company will be held liable for the same. However, a company will not held liable if the directing minds of the company has done certain illegal acts against the interest of the company and it has been observed in the case of R v Gomez [1993] AC 442. The direct liability of a company has been established in Hamilton v Whitehead (1988) 166 CLR 121.  

It has been held in R v Australasian Films Ltd (1921) 29 CLR 195 that if an agent of a company attempted to defraud the revenue at the time of his work or employment, the company will be held liable for the crime until the fraud has been made for the interest of the company. If the fraud has been made for any personal interest of the agent, company will not be liable for the offence. The company can be held liable under the Criminal Code Act 1995 if any act of the company come under the provision of chapter 2 of the Code.

Reference:

ASIC v Adler (2002) 168 FLR 253

Australia Pty Ltd v Clinton Joseph Brilly [2008] NSWCA 204

Bolton Engineering Co, Ltd v T J Graham & Sons Ltd [1957] 1 QB 159

Ferguson v Wilson (1866) LR 2 Ch App 77

Hamilton v Whitehead (1988) 166 CLR 121

Hollis v Vabu Pty Ltd (2001) 207 CLR 21

Lennard’s Carrying Co. Ltd v Asiatic Petroleum Co Ltd [1915] AC 705

R v Australasian Films Ltd (1921) 29 CLR 195

R v Gomez [1993] AC 442

S & Y Pty Ltd v Commercial Union Assurance Co. (1986) 82 FLR 130

Tesco Supermarket Ltd v Nattrass [1972] AC 153

Turquand v Marshall (1869) LR 4