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LAW205 Commercial And Corporate Law For Accountants
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LAW205 Commercial And Corporate Law For Accountants
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Course Code: LAW205
University: Charles Darwin University
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Country: Australia
Questions:
1.Can a Company be liable to its Own Shareholders under tort law? What happens if an Employee is also a Shareholder and/or a director? Explain with reference to relevant cases.2.What are the Principles the Court will apply in determining whether a Company is guilty?
Answers:
1.Company’s liability in tort:
Limited liability is one of the biggest advantages of corporate entities because it permits the investors who invest in corporate entities to limit their losses. Doctrine of limited liability allowed the company to share risk between the company owners and other outside parties who interact with the company. The main aim of this doctrine is to partly externalize the losses so that external creditors also bear the losses. Usually, in the ordinary course of commerce it is acceptable in which corporate provide benefits by transferring risk, but this concept is less acceptable when cost of failure in business fall upon the claimants of Tort. Tort claimants receive very less opportunity to deal with the entity which causes injury to them, and because of this it is necessary that law provides them special protection. However, it is necessary that law gives preference to the problems faced by tort claimants by upholding the concept of limited liability at the cost of both tort doctrines related to ordinary nature and the principles which provide full compensation for any wrong doing (Witting, 2009).
Tort claimants include both insiders and outsiders such as employees, independent contractor, consumers, and third parties which also include those persons who get injured because of product fail. There are number of principles which are equally applicable in case of innocent employees for making the claims related to personal injury against the company. In case Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841, 863-4, employees are considered as involuntary creditors in which they cannot bargain with the company in which they work because of lack of right.
Claimants of tort are recognized as a vulnerable group, and this become a problem because of judgment proofing within the groups. After analyzing this practice LoPucki stated that system of tort liability does not succeeded.
Claimants who deserved to be compensated are not compensated in such way, and this process is considered as inevitable and accelerating because companies which are not able to proof themselves will suffer competitive disadvantage. The advantage of externalize the liability would reduce the responsibility of company to take care while conducting their activities which results in injury cause to more persons. Therefore, it is necessary that law provide special care to tort claimants against the company (Anderson, 2009).
Employee is shareholder or director:
It might be possible that shareholder of the company also enjoy employment rights in the company which also includes right to be paid in case shareholder carried out the services for the company. In case Stack v Ajar-Tec Ltd, Court of Appeal confirmed this statement in their judgment given on 5th February 2015. This case is the landmark case for resolving the issue of employment status. Employment judge in this case stated that in case of limited company, shareholders of the company does not participates maximum in operations of the company but in some cases especially in small businesses shareholders actively participates in the operations of the company. Therefore, such shareholders of the company are also the employees of the company.
In case of directors, they are not considered as employees of the company but they can become the employees if there is a express or implied contract of employment. There are some case laws which state the essential elements of employment contract, and these elements are stated below:
Degree of control exercised by the employee on the worker of the company, and relationship between employee and worker.
Obligation imposed on worker to carry out the work related to company personally.
There must be mutual obligation in case of employer to provide work to the employee and in case of employee to perform the work offered by employer.
There is one more case law Ready-Mixed Concrete v Minister of Pensions of 1968 in which judge stated the test in which wage or other remuneration is considered. If there is no consideration then there is no contract because without consideration contract is not valid (Scott, 2015).
2.Principles applied by the court in case of criminal liability:
Unless provisions of the Corporation Act 2001 specifically imposed the criminal liability, the criminal obligation of company or corporation is determined by the principles of common law because company has distinct identity from its members and officers. Under the original provisions of common law, it is not possible to convict the company for any criminal offence. There is one more concept in common law which states that there would be no vicarious liability responsibility. In other words, a person is not liable for the criminal offence committed by other person. In 19th century exception related to vicarious liability principle was introduced and it also stated some statutory exceptions which directly relates with the principle against the criminal responsibility of the companies, and also state common law exception in case when the corporation does not carry out its statutory duty which result in common law nuisance. There are number of reasons which state that there is confusion related to principles which govern the primary corporate criminal liability, and principles of common criminal law does not relate with these foundations (Welsh, 1946).
There is one principle of common law which becomes the hurdle to the imposition of primary corporate criminal liability other than the case of vicarious was that criminal law offences need evidence related to criminal fault and courts does not have any clear way to state that. In case of vicarious liability this is not the problem because this liability does not depend on fault. This problem was solved by the case Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd [1915] AC 705 with the opinion of Viscount Haldane. In this he identified the theory related to primary criminal liability for offence involves fault and this theory was known as the identification theory or alter ego theory of responsibility. As per Judge in this case, companies are just abstraction because they did not have their own mind, and it is directed by the person who for some reasons called agent but that agent is actually the directing mind of the corporation. That agent was actually important personality of the corporation.
The main essence of this principle was that the company can be convicted under the criminal offence if there was proof of fault by attributing to the company the fault of an office, agent or employee of the company and they are standing in such relation with that company under which that person can be consider as the company for that purpose. This can be understand with the case laws DPP v. Kent and Sussex Contractors [1944] KB 146, ICR Haulage Ltd [1944] KB 551, and Moore v. I. Bresler [1944] 2 All ER 515. Statement made by judge for this doctrine is as follows:
Company directly or indirectly linked with the human body. Company has brain and nerve centre which control the operations of the company, and it also have hands for the purpose of holding tools and it act as per the directions of its centre. There are number of peoples named as agent and servant in the company, and they only act as the hands in the company who just performed the work and they are not the mind and will of the company. Others peoples are directors and mangers of the company who are considered as mind and will of the company and they control the operations of the company. The state of mind of these mangers is considered as state of mind of the company also and law treats them in similar manner. His statement was given under case law HL Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. [1957] 1QB 159 at 172.
There are some acts which directly impose the criminal liability on corporation and their agents such as The New South Wales Environmental Offences and Penalties Act 1989 in which government put code of environmental criminal and quasi criminal regulations on corporations (Goode, n.d.).
Reference:
Anderson, H. (2009). Piercing the Veil on Corporate Groups in Australia: The Case for Reform. Melbourne University Law Review, Volume 33, Pp- 337-340.
Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841, 863-4.
DPP v. Kent and Sussex Contractors [1944] KB 146.
Goode, M. CORPORATE CRIMINAL LIABILITY. Available at: https://www.aic.gov.au/media_library/publications/proceedings/26/goode.pdf. Accessed on 30th March 2017.
HL Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. [1957] 1QB 159 at 172.
ICR Haulage Ltd [1944] KB 55.
Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd [1915] AC 705.
Moore v. I. Bresler [1944] 2 All ER 515.
Ready-Mixed Concrete v Minister of Pensions of 1968.
Scott, C. (2015). When is a shareholder also an employee and entitled to pay. Available at: https://gdknowledge.co.uk/when-is-a-shareholder-also-an-employee-and-entitled-to-pay/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original. Accessed on 30th March 2017.
Stack v Ajar-Tec Ltd [2015] EWCA Civ 46.
Welsh, R. (1946) .The criminal liability of corporations. Law Quarterly Review, volume 62, Pp- 345.
Witting, C. (2009). Liability for Corporate Wrongs. The University of Queensland Law Journal, Volume 28(1), Pp- 114-121.
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