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Area of Company Law - Legal Personality

Info: 4668 words (19 pages) Law Essay
Published: 7th Aug 2019

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Jurisdiction(s): UK Law


This paper is written on the area of company law, specifically with regards to the corporate nature of a company which allows itself to have its own legal personality in order to conduct its own business under its own capacity without the need to be dependent on the legal personality of its owners.

The first part of this paper discusses two statements with regards to the corporate liability of a company, and how the liabilities of the owners of the company are limited to ensure that the corporate personality are able to its business without intervention from the owners and their interests. It then focuses on aspects which may make the owners nevertheless liable – specifically with regards to criminal offences.

The second part of this paper discusses the enactment of the Corporate Manslaughter and Homicide Act 2007 in light of the statements which was previously discussed in the first part of the paper. One of the substantive case laws in focus under this part is the case of Transco Plc v Her Majesty’s Advocate [2004] SLT 41, which concerns a company involved in the transmission and distribution of gas, where the company itself was prosecuted as a result of a gas explosion resulting in the deaths of four people. Although the case is that under the Scottish law, for the offence of culpable homicide, we will nevertheless take into account this case as the offence of culpable homicide under Scottish law is broadly similar to the English law offence of gross negligence manslaughter.

Part A

The two statements specifically refers to the issue of a separate corporate personality of the company, with the first statement focusing on the aspects of businesses of which the company is able to function independently according to the doctrine, and the second statement focusing on the breakdown of such corporate personality with respect to attaching criminal responsibility to artificial persons.

The most authoritative legal reference for the basis of the doctrine of separate corporate personality of a company can be attributed to the landmark case of Salomon v A Salomon & Co Ltd [1897] AC 22, where the court upheld the doctrine as was also entrenched in the Companies Act 1862.

In the case, Mr. Aron Salomon turned his sole proprietor business into a company by selling his business to the company he set up, giving shares to his wife and five eldest children, and making two of his eldest sons as directors. He however retained 20, 001 of the 20, 007 shares of the company, and as he sold his business to the company, also acted as a debenture holder. When economic trouble ensues, the company later went into liquidation and the liquidator sought for Mr. Salomon to pay all the creditors as the owner of the company. The House of Lords however held that there is nothing fraudulent in the way the company was incorporated, and Mr. Salomon was entitled to sell his business to the company. Mr. Salomon is not liable for the debts of the company as the company is a separate legal entity distinct from the shareholders of the company.

There are several effects of the concept of separate legal personality with regards to the proper functioning of the company, of which the courts have easily devised a set of rules allowing such actions to be performed.

The main importance of a separate legal personality is the ability to contract on its own capacity. The importance of this can specifically be seen in the case of Lee v Lee’s Air Farming Ltd [1961] AC 12, where the court allowed Lee’s claim against its own company where he entered into a contract with the company despite him owning the company.

The second effect of a separate legal personality is the ability to sue on its own and be sued without due regards for the owners of the company. This includes the ability to sue the owners, and respectively, the ability for the owners to sue the company. In this area, we can look again at the case of Lee v Lee’s Air Farming Ltd [1961] AC 12 which allowed the owner to sue his own company. It must be noted that as the corporate personality of a company stands throughout its lifetime, the owner of a company could not set aside the corporate personality as he so wishes and must at all time regard the company as a completely separate entity from himself. This prohibition can be seen in Macaura v Northern Assurance Co Ltd [1925] AC 619, where Macaura, the owner of a company tried to rely on his own personal insurance in claiming insurance compensation for the destruction of timbers caused by a fire. In the case, the court prevented such reliance, invoking the doctrine of separate legal personality and establishing that Macaura and his company are two separate and distinct legal personality.

The courts have also generally taken into consideration the possibility that the corporate personality might be manipulated in order to limit the liability of its owners through fraudulent means. Hence, the courts have also established the doctrine of piercing the corporate veil in order to put liability on its owners. Some of the exceptions which will allow for this doctrine to apply are provided under statutory law, such as in cases of fraudulent as well as wrongful trading, as provided under section 213 and 214 of the Insolvency Act 1986. Case laws such as Jones v Lipman [1962] I All ER 442 are also authoritative in allowing the corporate veil to be pierced in the event where the court considers the company to be a mere facade to hide any fraudulent activities which the owners intend to carry out.

However, such clear rules of application are only available and sufficiently coherent with respect to attributing civil liabilities and capacities. With regards to the criminal liability of the company, the rules are much more obscure and indefinite. This is because the doctrine of criminal liability comes from the legal Latin maxim of actus non facit reum, nisi mens sit rea, which directly translates as, “to make a person liable, it must be shown that the act or omission was forbidden by law, and was done with a guilty mind.

This is where the essence of the problem lies, as it is a necessary component of criminal law to attribute liability through the ascertainment of a guilty mind and a guilty act (mens rea and actus reus) on the part of an accused, whether corporate or actual person. In this instance, how can the court be said to look into the guilty mind of a company, without necessarily looking behind the veil to see the minds of its owners or controllers? A company, in all practical manners, merely acts as a vehicle of its human employees and representatives, and so, how should mens rea be established in such situations?

We can see the failures of the court in attributing criminal liabilities in many cases such as the attempts at corporate persecution of the King’s Cross Fire (1987), the capsizing of the Zeebrugge, the accident of the Piper Alpha Oil as well as various other incidents in which no criminal liability has successfully caused the prosecution of a corporate body.

The failure of successful prosecutions of companies for criminal liability has caused wide academic debate as well as policy debates for reform in this area, and many rules attempted to be formulated to suit the prosecution of a company under criminal law.

In the case of Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, although this case involves a civil case involving a company, the dictum of Viscount Haldane nevertheless provided an alternative rule to the traditional doctrine of mens rea by suggesting that the mens rea can be inferred from attributing such mens rea from the state of mind of the senior representatives of the company. In the case, he stated that,

“A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

In the case of Wheeler v New Merton Board Mills Ltd [1933] 2 KB 669, this case was tested, although in a civil context. In the case, the issue was with regards to the liability of New Merton Board Mills for the negligence of the company in the operations of the factory, resulting in damages in the form of injuries to its employees. In the case, the court made use of the doctrine developed in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, deciding that a company can be made liable only if it can be shown if the negligence are attributed to what the court referred to as “its governing nucleus”, or persons having authority from the board in order to carry out company action, such as the directors of a company.

Let us look at the failure of the courts to attribute criminal liabilities onto a company. In the case of R v P&O European Ferries [1991] 93 Cr App Rep 72 which revolves around the earlier discussed issue of the capsizing of the Herald of Free Enterprise ferry, Turner J initially put the requirements of mens rea as inferable from the minds of its agents, stating that: “Where a corporation through the controlling mind of one of its agents, does an act which fulfils the prerequisites of the crime of manslaughter, it is properly indictable for the crime of manslaughter.” In another case related to the same incident, Lord Bingham similarly attributed liability to “those who were to be identified as the embodiment of the company itself” in the case of R v HM Coroner ex parte Spooner (1989) 88 CR App R10.

Nevertheless, despite attributing liabilities to persons in order to determine the mens rea of a company, prosecutions with regards to the Zeebrugge sinking failed on the basis that the negligence was in most of the instances of the incident attributed to many individual employees of the company, in all levels of jobs, and not within the senior officers of the company. Because of this, the findings for negligence failed to be attributed to the “agents of the company”, and all prosecutions related to this incident failed on this respect.

In R v P&O European Ferries [1991] 93 Cr App Rep 72, the prosecution attempted to use the principle and notion of aggregation in order to attribute responsibility to a company. In the case of the Zeebrugge sinking, hence, a successful conviction for the corporate would rely on the basis that the mens rea of the company is attributable through the collective fault of the senior individuals, putting different negligence together to form one mens rea where the guilt of P&O European Ferries could form its basis on. This argument was however rejected by Turner J, as well as Lord Bingham who both argued that the guilty mind of a company can only be attributed if one individual within the company can be attributed successfully to the mens rea of the crime.

Nevertheless, criminal liability for corporate manslaughter was successfully established for the first time in the case of R v Kite and OLL Ltd, where in the case, the court found the company as well as its managing directors to be guilty of manslaughter on the basis of gross negligence. In the case, four teenagers were found drowned on a canoeing trip which was operated by the accused company who operated an activity centre in Lyme Bay. In the case, it was found that the canoeing trip was supervised by unqualified and incompetent canoeists, who in some cases were unable to swim and were shown to have not made any thorough preparation for the trip. In the case, it was shown that the supervisors for the trip did not check the weather forecast, nor were there any first aid kits, spray decks, or distress flares available on the canoe. During the trial, it was also shown that former employees were also critical of the standards of care provided by the company, even before the accident occurred, evidenced by a letter by a former company which predicted a grievous accident should the issues not be fixed.

It must be noted however, that the success of the prosecution was mostly due to the fact that the company was a small operations and hence the negligence was easily attributed to the company. This was accurately commented by Andrew Dismore in the House of Commons, who stated that:

“[The fact that there was only two successful prosecutions showed] the absurdity of the law of corporate manslaughter as it presently stands. the bigger the company, the less chance of a successful prosecution. Safety awareness, and the great responsibility that it entails, should lie with those at the top – the chairman and the managing director – and not with the employees, such as train drivers or ship’s crews, who are always put up as the fall guys.”

This case had opened doors for other successful prosecutions, such as the case of R v Jackson Transport (Ossett) [1996], but nevertheless, it has caused room for arguments of reforms with respect to attributing criminal liability to corporations, since it has been clear that the court has failed to derive rules and principles from traditional doctrines of criminal responsibility where the criminal liability of a company is concerned with.

Part B

The Corporate Manslaughter and Corporate Homicide Act of 2007 was given the royal assent on the 26th of July 2007 and brought into force on the 6th of April 2008. The Act established and created a new offence of corporate manslaughter under the laws of England and Wales as well as Northern Ireland, while Scotland was provided with the offence of corporate homicide.

The case which will guide our analysis for this part of the paper is the case of Transco Plc v Her Majesty’s Advocate [2004] SLT 41 which was tried in the year 2005, although the incident itself occurred in 1999. The case represented the most successful prosecution of a corporate s well as the largest fine ever imposed to a company, although it occurred prior to the Corporate Manslaughter and Corporate Homicide Act of 2007. In the case, the court fined Transco the amount of £15 million, representing 1% of the annual turnover of the firm for having breached health and safety legislation resulting in a gas explosion and the death of four people.

In the case, Lord Osbourne discussed on the nature of an incorporated company under the Companies Act. Lord Osbourne in this case adhered to the idea propounded by Viscount Haldane in Leonard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd [1915] AC 705, arguing that as a legal fiction, it is impossible for an incorporated company to be “wicked”, and so “it cannot perform the actus reus of a crime, nor can it have the mens rea to commit such a crime in fact.”

Nevertheless, the court made use of the rules of attribution described by Lord Hoffman in the case of Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 and modified it for the purpose of a company by attributing fault towards “who in the company was responsible for the monitoring of the [business]”, said to be the “directing mind and will” of the company.

In looking at English cases to discover the traditional position of England with regards to the criminal liability of a person, the court took a look at the Zeebrugge Harbour incident, specifically with regards to the case of R. v Her Majesty’s Coroner for East Kent, ex parte Spooner (1989) 88 Cr App R 10 where the Divisional Court held that a corporate body could be guilty of manslaughter if the mens rea and actus reus of the company could be established against “those identified as the embodiment of the company itself”. In Transco, the court specifically made reference to Bingham LJ’s rejection of the aggregation theory, although the court made note of the statement of Turner J holding that an indictment might lie against P&O European Ferries, were Turner J stated that “Suffice it that where a corporation, through the controlling mind of one of its agents, does an act which fulfils the prerequisites of the crime of manslaughter, it is properly indictable for the crime of manslaughter.”

The main problems in sustaining a conviction against a company can be seen in the case of R. v Great Western Trains Company Ltd (unreported) (30 June 1999), where Scott-Baker J discussed the idea of liability for manslaughter against a corporation, holding that the doctrine of personal liability cannot be used in these instances, and as of such a conviction could not persist on the basis. Putting it as a fault in the law, Scott Baker J stated that,

“The law is, in my judgment, clear and well settled, a view which I believe is shared by the Law Commission. It is not for judges to change the law; that is a matter for Parliament. Were the law otherwise, and the Crown entitled to advance its case on the basis of personal liability of the company a conviction, assuming gross negligence to be proved, would mark public abhorrence of a slip-shod safety system leading to seven deaths and many injured victims…There are many who say that the present state of the law is unsatisfactory and that the present obstacle to prosecuting large corporations for manslaughter should be removed. However, if the law is to be changed it is up to Parliament to do so.”

In looking at these case laws, the court summed up the position of the law as follows (taking into note the similarity of legal application in Scotland and England),

“It is an obvious consequence of that state of affairs that no company can possess the necessary mens rea for the commission of a common law crime in Scotland; since a company has no mind, it cannot have a guilty mind. In England, the problem has been overcome by the attribution to the company of the necessary mens rea in certain circumstances. It appears to me that the clear rules concerning these matters, developed in England and now accepted in Scots law, demand that the person who is possessed of the guilty mind must occupy such a position in the control of the company that they are capable of being characterised as its directing mind and will, in relation to the subject-matter of the action in question, responsible to no superior in the company and charged with that responsibility himself, before the rules can operate.

It can hence be seen that the laws with regards to criminal liability on companies is in need of an overhaul, and for this purpose, this essay will hence focus on whether the Corporate Manslaughter and Homicide Act 2007 had successfully covered the flaws of the legal system with regards to attributing criminal liability to companies.

It must be kept in mind that the guidance provided under the Transco case have been utilized in deriving the guidelines under the Corporate Manslaughter and Homicide Act of 2007, and the case represented the only successful prosecution of homicide in Scotland. Hence, it must be agreed that the enactment has indeed improved the law by codifying the guidelines which was provided under the Transco case, and making it applicable within England and Wales as well as Northern Ireland, allowing the consistent application of the law regarding criminal liability of companies along with Scotland (where the Act seeks to further substantiate and expand on the doctrine propounded in the case).

The Act provided new guidelines for which a company can be made liable in a criminal action, and abolishes completely the common law offence of gross negligence manslaughter as was previously applicable under English law. It creates instead an indictable offence against a company where its activities which are managed or organized had caused the death of a person, where the activities had amounted to a gross breach of a duty of care owed between the company and the deceased victims.

In looking at attributing liability, the Act made particular mention of the management and organization of the senior management of the Company in order to infer negligence. The Act also made some guidelines of penalties against the company, which includes the publication of the companies’ failures, remedy of all breaches as well as a provision for an unlimited fine. The Sentencing Guideline of 2007 suggested a starting fine of 5% of the company’s annual turnover, which is much larger than the fine which was given in the case of Transco.

It is submitted that the new guideline under the Act is a much welcomed approach, as it abolishes the confusion caused by the different rules and principles established by the courts in trying to develop new principles while still adhering to the traditional rules of manslaughter. In particular, the Act had completely done away with the principles of necessity of attributing negligence to one member of the “governing nucleus” as the “directing mind and will” of the company, as well as the unsatisfactory approach of the principle of aggregation (which was rejected by the courts).

Instead, the Act made use of a new guideline which is to infer guilt from the negligence of the senior management of the company, evidenced from a failure in terms of organization and management of the company. Using this new guidelines, it would be seen that should the previous past cases which had seen failures in prosecuting companies made use of these guidelines as per the provisions of the Act, it would have been easier to attribute liability as there is no need to infer a guilty mind from the company through a guilty mind of one member of the senior management. For instance, prosecution in the Zeebrugges incident could have been successful by proving that the senior management of the company had failed in organizing and managing the company, a result of which sees negligence occurring from all parts of the ferry. In attributing such liability, the courts might have also seen successful prosecution by evidencing the existence of a fiduciary relationship between the victims and the company, another one of the new guidelines as set out under the Act.

Critical Evaluation

Although a substantive bulk of the essay had already been attributed towards a critical evaluation of the issues detailed on the paper, nevertheless in this section the writer wishes to summarize all the main issues which had been previously evaluated.

With regards to Part A of the paper, the overall perception which the writer had obtained was with regards to the statements, which can fairly be said to accurately reflect the principles of law pertaining the difference between invoking liabilities in civil cases and criminal cases. The absence of the requirements of mens rea in civil cases substantively simplifies the law, allowing a concrete and thorough principle with regards to corporate liability to be developed, with subsequent cases merely strengthening the principle of separate personal liability or otherwise. The development of the doctrine of piercing the veil of incorporation also allows for clear cut guidance on exceptions applicable to the rules of separate corporate personality.

On the contrary, invoking liabilities in criminal cases are much more complex, with the courts unable to decide which principles should be adopted and which should be left alone. The need for mens rea have consistently been the source of dilemma in this aspect, where the courts has in many instance refused to radically modify the principle to fit with a corporation, arguing that it is not within the power of the Courts to do as such.

The focus of criminal liabilities in Part A then continued in Part B, where the writer had summed up that the new Act had indeed improved substantially on the law. This is because the writer is in the opinion that the complete confusion which was caused by common law principles under the Act needs to be done away with altogether, giving room for the guidelines as established in the case of Transco, which allowed for attribution of liability to a company without the rigid and traditional rule of mens rea to addle the matter for the courts.

Research Diary

In undertaking the research, the writer had made its own independent research prior to writing the paper, and as of such, the list of references will make use of uncited references as well as those cited under the footnotes of this essay.

In the first day of the research, the writer had obtained various sources relating to the issue of separate corporate personality as well as criminal liability of a corporation in order to tackle Part A of this Paper. For Part B, the writer had only obtained the Act as well as looking at several cases which could be potentially used for the purpose of Part B.

On the second day, the writer began to read excerpts from the sources, and begin writing and detailing the issues for the essay in Part A, beginning the process of completing the paper. For Part B, the writer had successfully discovered the case of Transco, and began writing up on the issues of the case, relating it to the requirements of the question as well as the Act.

On the third day, the writer finished writing the essays for both Part A and Part B, and started with the process of proofreading and editing the paper.

List Of References

List Of Cases

Jones v Lipman [1962] I All ER 442

Lee v Lee’s Air Farming Ltd [1961] AC 12

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

Macaura v Northern Assurance Co Ltd [1925] AC 619

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500

R. v Great Western Trains Company Ltd (unreported) (30 June 1999)

R v HM Coroner ex parte Spooner (1989) 88 CR App R10

R v Jackson Transport (Ossett) [1996] Unreported

R v Kite and OLL Ltd (unreported) 19 December 1994

R v P&O European Ferries [1991] 93 Cr App Rep 72

Salomon v A Salomon & Co Ltd [1897] AC 22

Transco Plc v Her Majesty’s Advocate [2004] SLT 41

Wheeler v New Merton Board Mills Ltd [1933] 2 KB 669

List Of Legislations

Companies Act 1862

Companies Act 2006

Corporate Manslaughter and Homicide Act 2007

Insolvency Act 1986

List Of Academic Texts

Ministry of Home Office 2006, “Corporate Manslaughter and Corporate Homicide: A Regulatory Impact Assessment of the Government’s Bill”

Ministry of Justice 2007, “Guidance on the Act”

Cullen, Hon Lord W. Douglas (1990) The Public inquiry into the Piper Alpha disaster. London: HMSO.

Herring, J 2004, Criminal Law: Text, Cases and Materials. Oxford University Press, Oxford, Chapter 13.

Sheen, Barry, Sir, (1987) Herald of Free Enterprise: report of Court no. 8074 formal investigation London: H.M.S.O for Department of Transport.

Sentencing Advisory Panel 2007, Consultation Paper on The Sentencing Guidelines for Corporate Manslaughter

Winn, C.R.N., The Criminal Responsibility of Corporations, (1927-29) C.L.J 398

Uncited References

Gower 2003, Principles of Modern Company Law, 7th edn. Sweet & Maxwell, London

Matthews, R. (2008). Blackstone’s Guide to the Corporate Manslaughter and Corporate Homicide Act 2007. Oxford: Oxford University Press.

Online Sources

Anon, BBC News, “Calling Companies to Account” 23 March 2000, http://news.bbc.co.uk/2/hi/uk_news/743306.stm

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