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What Is The Ambit Of Civil Liabilities In The World Of Company: Exploring In The Context Of Rules Of Attribution?

There is often a perplexity in the meaning of words such as "Corporate" or "Corporation" and "Company" that confuse the fact that these words mean the same or are different. This can be simplified by attempts made by various commentators and courts, such as a corporation which is an artificial legal entity which does not have any physical existence but exists in the context of the law.[1]

It may be inferred from this that it may include the State Bank of India, a university, a metropolitan council or a company.[2] Therefore, a corporation is a wider term than a company because these corporations have different types of business formed under the statue by an act of the legislature. Whereas a company is a part of that corporation which is governed by the Companies constitution and is subject only to those liabilities which are conferred upon it.

In the broader concept of the term Corporate there are various type of civil liabilities of the companies (includes breach of contract, assault, false imprisonment, trespass, negligence, libel, infringement of copyright, property damage or any statutory wrongs) and these are resolved when there is an attribution of liabilities to the company or its agents or directors or managers.

In lieu of the concept of separate legal entity of a company, this paper specifically deals with civil liabilities of the companies, attempts to identify the existence of the dispute on civil liability and attempts to resolve the dispute by rules of an attribution of liabilities to the company or its agents or directors or managers. It aims to resolve the dispute through various approaches adopted by the courts and commentators in determining the civil liability of the companies and their members.
  1. Companies' civil liability

    This paper attempts to identify the existence of the dispute on liability which is mainly because of the initiation of the system of limited liability companies, referred as the liability of the members of the company which is payable only to the extent of their unpaid-up share capital and no personal liability towards the companies' balance sheet liabilities. It is also supported by a well-known concept which is also the main feature of the company called separate legal entity.

    This concept brought in an artificial entity called company which is different from the natural person who had incorporated, and its affairs are managed by the members called "directors" or "managers" and who owns it are called "shareholders". In the significance of a corporate personality as a legal person, it owns its property, a right and capacity to make its directors and shareholders liable for the acts committed against it[3], and it can sue and be sued which gave rise "lifting of the corporate veil" which interposed the separation of the company and its members.

    In the case of Standard Chartered Bank v. Pakistan Shipping Company, the director on behalf of the company had made fraudulent misrepresentations and the English court of appeal had opined that the deceitful representations were made by the company however the letters were signed by the director. This is because he acted on behalf of the company. Notwithstanding of the fact that the director had the requisite knowledge of such representation, such act will be regarded as that of the company, and he cannot be held personally liable because, for the purpose of civil liability, the act is attributed to the company.[4]

    Thus, with the whole new evolution of the liability of the companies which are governed by several rules of attribution there always has been a struggle by the scholars and commentators of their inability to identify the liability of the company and its members which give rise to questions like Why should a company be held liable for the misconduct of its members?

    Why is a member of the company held liable as his actions are for the going concern of the company? This paper comes towards the solution by identifying the problem that exists because of the doctrine of vicarious liability and principle of an agency which arose because of the new evolution of the liability.
     
  2. Company's agents' civil liability

    Commentators and Scholars have strongly emphasized that a company agent should be liable for civil wrongs committed in the course of the company's business only if the plaintiff proves the elements of such wrong against the agent.[5]This implies that whenever the civil liability of the agent is called in question, the only relevant inquiry is whether the elements of the civil wrong are proved against the agent, in spite of, proving whether the defendant is the agent of the company or not. Such inquiry of proving the element of the civil wrong committed by the agent can be initiated by proving an approach that whether the agent has assumed personal responsibility to the plaintiff.[6]
     
  3. Vicarious liability and principles of agency

    In general, it is inferred that the person who has done the wrongful acts incurs the liability, and one does not incur any liability for the acts done by others. [7] However, the concept of vicarious liability is related to the liability of one person in existence of a legal relationship with another person, referred as the liability of one person for the act done by another person.

    This paper deals with the company law, therefore, in the light of this concept there exists a legal relationship between the company and its members as the principal and agent in which the company delegates its authority by means of Articles of Association and Memorandum of Association. Thus, when a wrongful act is committed by the agent in the course of his employment in the company, the liability of the principal i.e. company arises for such wrongful act. [8]

    This principle is well summarised by the authors of Gower's Principles of Modern Company Law:
    1. A principal is bound by the transaction acted by his agents on his behalf if:
      1. prior to the transaction the actual scope of the authority was conferred upon them by their principal or
      2. the apparent (or ostensible) scope of their authority.
    2. A principal may also be vicariously liable in tort for acts of his agents which, though not authorized, are nevertheless within the scope of their employment.[9]

     
  4. Rules of attribution

    This principle of vicarious liability in the form of principal and agent relationship contributes to determining the rights, liabilities, and duties of the companies by the rules of attribution and defined the maxim respondent superior. These rules of attribution are considered as the primary rules of attribution which cannot be applied without invoking principles of agency because it allocates the liability to the company when the wrongful acts are conducted by its agents.[10]

    One of the famous rules of attribution for civil immunity of the agent was laid down in the case of Said v. Butt, that if an agent has acted bona fide within the scope of his authority with the principal and causes the breach of contract between the third party and the principal, the liability of such agent is not in existence for such breach of contract.[11] Therefore, this rule protects the agents from the tort of inducing the breach of contract.

    However, this principle does not take into consideration the knowledge of the agent about a fraudulent transaction between the company or principal and a third party, which the agent has taken within the scope of employment.[12] Thus, the problem arises here is whether such an act should be attributed to the company where the transaction has been assisted by the agent?

    In consequence of this, the rules of attribution which is mainly the acts of the agents' i.e., those natural persons, are attributed to the company and legally said that such acts are of the company itself. These rules have been applied by various doctrine named "identification", "alter ego", "directing mind and will" or all the three approaches can be identified in the development of the "organic approach" and the three step-liability approach held in the case of Meridian Global Funds which are discussed in detail below.
    1. Assumption of Responsibility

      This approach has been prevalently taken in the New Zealand Court of Appeal in the case Trevor Ivory Limited v. Anderson, in which it was held that an assumption of responsibility by the agent is a prerequisite of liability for any civil wrong for which the agent was sued.[13]

      In was also strongly emphasized in the case of Anderson v. Chilton, where a company director had sold a ship on Anderson's behalf. The director instructed to proceed with the sale paid through the overdrawn bank account of the company. This led in an infringement of Anderson's fiduciary duty, and thus Chilton was sued for knowingly violating a fiduciary duty.

      The court's decision was relied on Trevor's reasoning and held that the director had not assumed any responsibility towards Anderson and therefore could not be made personally liable.[14] Another important case on the same approach was Williams v. Natural Life Health Foods Ltd., in which the court did not hold the agent liable for the accuracy of the statement made to the plaintiff because he did not assume the responsibility on the same.[15]

      It restated that in order to succeed the claimant has to demonstrate that:
      1. The defendant personally assumed liability for the claimant and
      2. The claimant reasonably depended on that assumption of such accountability.

      However, neither of such conditions was proved therefore cannot be held personally liable.[16]

      This was again made clear in the case of Standard Chartered Bank case, that the director is liable to a third party for the purpose of civil liability. The court reiterated that an inquiry into the assumption of responsibility is required when there is an element of the cause of action against the company's agent.[17] It has also made some observations that the obligations through civil liabilities have relied on actions performed willingly by the defendant.

      These obligations are on legal persons who have committed such wrongful acts and therefore the status of defendants as an agent is irrelevant. It was also explained that it is sufficient for the claimant in the case of liability for dishonest assistance, to prove that the defendant had dishonestly assisted another in violation of the claimant's trust responsibilities. Therefore, this will never give a chance to the defendant to take a defense that he was acting as an agent of the company in trespass or breach of copyright or deceit or any statutory wrongs.

      However, the liability of the agent depends on the nature of the cause of action because when the defendant is acting on behalf of the company then it is hard to prove the prerequisites of assumption of responsibility and reasonable reliance of such responsibility by him. For example, in the case of contractual civil liability, the plaintiff through an agent's medium entered into a contract with the company, in such cases, it is difficult to prove that the agent is contractually liable for the breach because he has taken such obligation on behalf of the company.

      Therefore, the rules of attribution constitute in the company's constitution plays a role in identifying the liability of the company for the wrongful acts done in the course of the employment by the agents through various techniques developed in the doctrine of Organic approach. These rules along with identification of the liability also promote the better supervision of the agents by the companies.
       
    2. Identification Doctrine or the Organic theory

      This doctrine is aligned with the artificial nature of corporate personality and provides rise to the metaphysical concept that an individual or agent is recognizable with a corporation, not on the grounds of being an agent or delegate, but with a corporate person embodied in the company.[18] This doctrine was applied in the cases were vicarious liability or principles of the agency were not applicable.

      It was a technique of attributing the acts of the senior management namely the board of directors and who are members of the general meeting to a company or who is high up in the company management ladder because these are those agents who act as the company itself which was also called by Lord Hoffmann as a special rule of attribution.[19]These agents are the organs of the company and each of this individual is an embodiment of the company.

      The most prominent case in which this identification doctrine or organic approach was applied is Lennard's carrying case, the claimant bought a ship and a cargo owned by the company and were lost because of the vessel being unseaworthy. It sued the company, however u/s 502 of the Merchant Shipping Act 1894, the owner of a ship was not liable for the loss or damage happening without his actual fault or if he was not privy to the fault.

      Mr. Lennard, the director of the company under who the ship was registered and was designated as an entrusted person for the vessel, and he knew the seaworthiness of the ship. The issue before the court was whether the company was responsible for the loss of the ship or whether Mr. Lennard's knowledge of the seaworthiness of the ship could be regarded as the knowledge of the company.

      The court held that it is not sufficient to decide on the basis that the agent was at the fault. There should also be a situation that the principal was privy to such fault. In the present case, the director failed to provide much evidence that he was the senior management of the company or the life and soul, therefore his acts should not be attributed to the company. Thus, the court opined that the director was not the main organ of the company and thus his actions are not of the company itself. Therefore, the company is not liable.

      This doctrine also follows the rules of attribution by also dis attributing the acts of the agents', which means that once the acts of the agents are attributed to the company using an identification doctrine, those acts are, at the same time, dis attributed or not legally attributed to the agent. This theory is known as dis attribution heresy which is emphasized by the commentators and scholars to provide immunity from liability to the agents. [20]

      In the case of Trevor Ivory Ltd. v. Anderson, the director gave negligent advice to the client which resultant in losses. The claimant sued the company and the director for the negligent misstatement and sought damages for such losses. The court, in this case, applied the disattribution heresy, opined that in some circumstances the directors are to be identified on the evidence that he is not acting as the company but as the company's agent which will render him to the liability.[21]
       
    3. Alter ego status or Directing mind and will

      This doctrine is narrower to the previous identification doctrine, it takes into the consideration that what all agents are directing mind and will of the company so that they can be embodied in the company. This doctrine was introduced in the case of El Ajou v. Dollar Land Holdings plc, which attempts to answer 'directing mind and will ' can be of distinct people concerning distinct operations, not necessarily that of individuals with general management or control over the business.[22]

      In this case, the cause of the action arose because the claimant's manager was bribed by the defendant to invest the funds in his business without the claimant's authority. The investment was part of the fraudulent share sales scheme, and only one member of the defendant company was aware of this who was a nominee director of the company.

      The sole obligation of this member was to arrange the receipt and disbursement of the cash obtained from such sales. Therefore, the issue before the bench was whether an act of representing the money fraudulently by the defendant is attributed to the company. The court decided, in relation to this transaction, he was the directing mind and will, who had tainted the assets and therefore his actions will be attributed to the company and not of others who have made the decisions.[23]
       
    4. Three-step liability attribution

      It is not a doctrine per se, but it has been an approach formulated in the case of Meridian Global Funds Management Asia Ltd. v. Securities Commission, which attempts to eliminate the approach of attributing the act by the approach of directing mind and will for a liability.[24]

      In this case, two managers of the company were part of the scheme of misappropriation of money and the issue before the bench was that whether the company is held liable for the manager's knowledge about the misappropriation.

      The court held the decision by formulating the three-step liability attribution which involves the set of three rules:

      1. Primary Rules: These are those rules which are constituted in the company's constitution. It lies down that the rule of decisions taken up by the board of directors is the decision of the company.
         
      2. General Rules:
        The dispute of liability attribution is solved by applying the general rule of the principle of agency in consonance with the company law rules.
         
      3. Special Rules:
        It specifies those cases where the act or knowledge of the person is required irrespective of being an agent is attributed to the company.[25]

      Therefore, the interpretation of the organic approach, in this case, provides the determination of a company's civil liability when the general rule and organic approach does not give the solution.[26]

Conclusion

Where is this going to leave us? We come back to the statement made at the beginning of this paper: why is the company held liable for the misconduct of the agent? The problem here arises to always answer this question is because the tort and other liabilities rules stated in the statue are legislated by keeping in mind the natural person i.e., human beings and are applied according to the facts and circumstances.

Whereas the principles of law stated in the company law regime are to ensure that the company should bear the liability and not its shareholders because of the concept of a separate legal entity. Therefore, the rules are legislated by keeping in mind the company as a legal entity which though does not have physical existence to conduct an act but is given an existence through its agents.

The end to this question is that when it comes to the liability of the agents of the company there is no immunity to them by the company law regime. These agents are made liable for their actions when it is not acting on behalf of the principal. Therefore, the identification of civil liability between the company and its agents can be made distinct by applying the doctrine of rules of attribution developed and implemented by the courts and commentators.

End-Notes:
  1. Daimler Company Limited. v. Continental Tyre and Rubber Company (G.B.), Limited (1916) 2 A.C. 307.
  2. Ratanlal and Dhirajlal, Akshay sapre, The law of torts, 27th edition, 2016.
  3. National telephone Co v. Constable of St. peter port (1900) A.C. 317.
  4. Standard Chartered Bank v. Pakistan Shipping Company (2000) 1 Lloyd's Rep 218.
  5. Neil Campbell; John Armour, Demystifying the Civil Liability of Corporate Agents, 62 CAMBRIDGE L.J. 290, 304 (2003).
  6. Ibid.
  7. Dr. R.K. Bangia, Law of torts, 24th edition, 2017.
  8. Winfield & Jolowicz, Tort, 19th edition, 2015.
  9. Paul Davies, Gower's Principles of Modern Company Law (1997).
  10. Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 2 A.C. 500
  11. Said v. Butt (1920) 3 K.B. 497, 506.
  12. Charles Zhen Qu, How Statutory Civil Liability Is Attributed to a Company: An Australian Perspective Focusing on Civil Liability for Insider Trading by Companies, 32 MONASH U. L. REV. 177, 199 (2006).
  13. Trevor Ivory Ltd. v. Anderson [1992] 2 N.Z.L.R. 517, 520 per Cooke P.
  14. Anderson v. Chilton (1993) 4N.Z.B.L.C. 103, 375. Cf. Xerox Canada Finance Inc. v. Wilson's Industrial Auctioneers Ltd. (1997) 34 B.L.R. (2d).
  15. Williams v. Natural Life Health Foods Ltd., (1998) 1 W.L.R. 830.
  16. Ibid.
  17. Standard Chartered Bank v. Pakistan Shipping Company (2000) 1 Lloyd's Rep 218.
  18. Trevor Ivory Ltd. v. Anderson [1992] 2 N.Z.L.R. 517, 520 per Cooke P.
  19. Meridian Global Funds Management Asia Ltd. v. Securities Commission (1995) 2 A.C. 500, 507 (P.C.).
  20. Said v. Butt (1920) 3 K.B. 497, 506.
  21. Supra note 18.
  22. El Ajou v. Dollar Land Holdings Plc (1994) 2 All E.R. 685.
  23. Ibid.
  24. Meridian Global Funds Management Asia Ltd. v. Securities Commission (1995) 2 A.C. 500, 507 (P.C.).
  25. Ibid.
  26. Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 2 A.C. 500.

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