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Published: Fri, 02 Feb 2018
The process of corporate manslaughter in court
It would seem that both of these transactions full outside the remit of Morris’s power. The first thing that should be considered is that Morris had no authority to (a) Borrow the £100,000 that was required to fund his activities, as the articles limit borrowing, without authorisation to £50,000 and (b) the object of the company provides that “The business of the company shall be the manufacture and supply of agricultural machinery, equipment and apparatus”, whereas Morris has expended the business into arranging activities holidays, which is clearer not within the realm of the object and or articles it can therefore be seen that Morris has acted Ultra Vires. This does however cause difficulties as subsection (1) of 35A of the Companies Act 1985 provides that:
“in favour of a person dealing with the company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitations under the company’s constitution”
This means that there is nothing that the company can do about these ultra vires activities if the third party to which they have made contracts with have acted in good faith. The question therefore that arises is will knowledge, actual or constructive, of the limitation in the company’s constitution take the third party to not have been acting in good faith. This is not the case as s711A subsection 1 sets out this:
“A person shall not be taken to have notice of any matter merely because of its being disclosed in any document kept by the registrar of companies (and thus available for inspection or made available for inspection”
This section, however, is not yet in force, more alarmingly though the section 35A (2)(b) provides that the third party falling within this section is not to be regarded as acting in bad faith “by reason only of his knowing that an act is beyond the powers o the directors.” This is likely to mean that any of the third parties with whom Morris had entered into a contract with would not have been acted in bad faith.
The next part of this section that needs to be considered is “dealing with a company”. Subsection 2 provides that “a person “deals with” a company if he is a party to any transaction or other act to which the company is a party.” This means that a person will be dealing with a company as long as he is party to a transaction to which the company is also a party. It will not matter whether the person is an insider or an outsider.
S35A makes clear that the purpose of the section is to protect good faith third parties dealing with the company. Its aim is not to alter the internal effect of a director’s decision to act without authority, except in so far as such amendment is needed to protect the third parities. S35A (4) means that individual shareholders can bring n action to restrain the company from doing an act to which the directors’ have committed the company in excess of their powers. Such relief cannot be granted if it would impede the fulfilment of the company’s legal obligations to the third party. S35A(4) allows the shareholders to bring injunctive proceedings. The Rule in Foss v Harbottle means that the individual shareholder’s right to restrain the commission of an ultra vires ct is clearly established, but the right to restrain an act in breach of the articles is subject to various obscure qualifications.
If the company were to become insolvent then under s214 of the Insolvency Act there may be power to make Morris personal liable for his actions that were outside of the companies articles and objects. This section operates only when the company has gone into insolvent liquidation and the declaration can only be made against a person who, at some time before the commencement of the winding up, was a director or a shadow director of the company and who knew or ought to have concluded, at that time, that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Therefore this section would come into operation if the company became insolvent and this would relate specifically to the borrowing of money by Morris to fund the diversity of the business. It would need to be shown that at the time he borrowed this money he was aware or at least should have been aware that there was no likelihood that the business would not go into liquidation. We are told in this scenario that the business has been performing badly for some time. But the declaration is not to be made if the court is satisfied that the person concerned thereupon took every step with a view to minimising the potential loss to the company’s creditors as, on the assumption that he knew there was no reasonable prospect of avoiding insolvent liquidation, he ought to have taken. We are told that Morris went out and was attempting to “drum up new business”, if this and the fact that he was trying to expand the business could be construed as him taking steps to minimise the potential loss then he may not be found liable under this section, it seems unlikely though. The reference to drumming up business is very vague and does not indicate to us in which ways he was attempting to minimise the loss to the company. In judging what facts he ought to have known or ascertained, what conclusions he should have drawn and what steps he should have taken, he is to be assumed to be a reasonable person having both the general knowledge, skill and experience to be expected of a person carrying out his functions in relation to the company and the general knowledge, skill ad experience that he in fact has.
These are thus two questions which have to be answered, both on an objective basis. Should the director have realised there was no reasonable prospect of the company avoiding insolvent liquidation and, once that stage has been reached, did the director take all the steps he or she ought to have taken to minimise the loss to the company’s creditors, especially, no doubt by seeking to have the company cease trading? Both these judgements will depend heavily on the facts of the particular cases: what sort of company was involved, what were the functions assigned to or discharged by the director in question, what outside advice was taken and what was its content? It is difficult to assess this on the very limited facts that we are given, but we are aware that Morris appears to be a director of some standing. It would appear that he was the one who founded the company and who has been managing director for some considerable time, we therefore assume that he has considerable experience and would have noted that the company had not been performing well for some considerable time and that he should have been able to asses the implications of this, .i.e. whether this meant that it as likely that the company was going to go into liquidation. It would therefore be assumed that should the company go into liquidation then this would be a S214 declaration and Morris will be liable to account to the liquidator for this and may well have to compensate the company for any losses that he may have caused.
It was accepted in Re Produce Marketing that the jurisdiction under s214 was primarily compensatory, in contract to assessments under s213 where a penal element may be appropriate. The outer boundaries of the compensation are thus set by the amount by which the company’s assets have been depleted by the director’s conduct. Within that, the court has discretion to fix the amount to be paid as it thinks proper. Therefore Morris would become liable for anything up to £100,000 worth of compensation.
Question 2 –
It is likely as there are no assets in Alpha Ltd that Xi Ltd could apply to make them insolvent. Xi as a creditor of the company can apply to the court to make Alpha Ltd insolvent. The company will be assumed to be insolvent and it is the creditors in whose interests the winding up is undertaken and they who have the whip hand. If no declaration of solvency has been made, the company must then cause a meeting of its creditors to be summoned for a day not later than the fourteenth day after the resolution for voluntary winding up is to be proposed and cause notices to be sent by post to the creditors not less than seven days before the date of the meeting and must advertise it once in the Gazette and once at least in two newspapers circulating in the locality in which the company’s principal place of business in Great Britain was situated in the last two months.
There are advantages to the company becoming insolvent as the liquidator in the action can then seek to bring an action against the Director of Alpha and Delta who has moved the assets of Alpha to Delta. Of course as stipulated above as the creditor whom makes the company insolvent they will have the first call on any of the debts and will therefore be priority debtors. The reason for this is that Section 213 of the Insolvency Act deals with fraudulent trading which provides that:
- If in the courts of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of nay person or for any fraudulent purpose
- The court on the application of the liquidator may declare that ay persons who were knowingly parties to the carrying on the business in [that] manner are to be liable to make such contributions (if any) to the company’s assets as the court thinks property.
Although the effect of the section has been described as penal as well as compensatory, s.213 provides a civil remedy, sums recovered inuring to the benefit of unsecured creditors as a body rather than to individual victims of the fraud. There is general recognition that successful resort to s.213 is rare because of the difficulty in proving an intention to defraud and, as Ian Fletcher has noted: “there has been a lack of consistency over the years in the judicial approach to formulating a test for fraudulent conduct which is to be applied in cases falling under s. 213 and its statutory antecedents“.
To establish that intention, what has to be shown is “actual dishonesty, involving, according to current notions of fair trading among commercial men, real moral blame.” That may be inferred if “a company continued to carry on business and to incur debts at a time when there is, to the knowledge of the directors, no reasonable prospect of the creditors ever receiving payment of those debts”, but can be inferred merely because they out to have realised it.” In R v Grantham the court upheld a direction to the jury that they might convict of fraudulent trading a person who had taken an active part in running a business if they were satisfied that he had helped to obtain credit knowing that there was no good reason for thinking that funds would become available to pay of the debts when they became due or shortly thereafter.
In interpreting exactly how this law should be applied it is important to consider in some detail the case of Morphitis v Bernasconi. The facts of the case are complex, , but are of some relevance to the points of law which arose and not dissimilar to the present case. In brief, the company (“Oldco”) sought to divest the successful business it carried on for fair value to a newly-formed company (“Newco”), retaining onerous lease obligations which, upon Oldco’s liquidation, could then be disclaimed by a liquidator. To enable Newco to retain the goodwill associated with Oldco’s name without exposing its directors to liability under the “Phoenix” restrictions contained in s.216 of the Act,1 the directors of Oldco resigned their positions at the time of divestment and planned to wind up Oldco no less than twelve months after the divestment, at which point they would be appointed to the board of Newco.
Keeping Oldco out of liquidation in the twelve-month period was fundamental to the scheme’s effectiveness. However, Oldco continued to accrue liabilities to the lessor under the leases throughout this time. Instead of meeting those liabilities as they fell due, Oldco and its solicitors negotiated extensions and revised repayment schedules with the lessor. Oldco was subsequently wound up by the court and the leases disclaimed.
The liquidator brought a claim against the ex-directors of Oldco (who had continued to be involved in Oldco’s affairs notwithstanding their prior resignations, thereby defeating the object of the scheme) and against Oldco’s solicitors for their involvement in the scheme under s.213 of the Act. The liquidator claimed that the directors and solicitors had deceived the lessor into a belief that it would be paid the sums due under the leases in due time or within an agreed rescheduling time when at all times they knew or intended that no monies would be paid after the expiration of the twelve-month period. The solicitors settled the action against them by making a £75,000 payment into court, which left the directors’ liability as the only issue for decision before the Court of Appeal.
The Court of Appeal’s decision was unanimous and they found that fraudulent trading had not been made out on the facts. The Judge did not doubt that the lessor had been misled, and even hinted that the scheme could not have been successfully implemented without deceiving the lessor. However, fraud alone is not sufficient to trigger liability. On the facts of the case, the Judge held that Oldco’s business had been carried on with the intention of protecting the directors from liability under s.216 of the Act, not with the intention of defrauding creditors.
This distinction was highlighted by Templeman J. Re Gerald Cooper Chemicals Ltd More is needed than merely a fraud on a creditor perpetrated in the course of carrying on the business. For example, a wilful misrepresentation made by a supplier to a customer as to the quality of goods being supplied is not of itself fraudulent trading. Fraudulent trading would however arise if that same supplier had accepted a deposit from his customer knowing that he could not or would not supply those goods and used the deposit monies to discharge some other liability.
In the former scenario, and in this case, the aggrieved creditor has as his remedy an action against the directors in the tort of deceit, entitling him to claim for damages for his loss. This action may benefit the creditor more than an action under s.213. This is because any damages awarded under s.213(2) of the Act are held by the liquidator for distribution to the company’s general body of creditors, whereas the creditor who brings his own action retains all of the proceeds that are received.
On a separate point, to come within s.213 there is no need to show that the company carried on any volume of business or trade or had any number of creditors. The fact that the lessor was Oldco’s only creditor, and that Oldco was a “shell” company having only lease liabilities did not preclude the liquidator’s claim. Following Re Gerald Cooper Chemicals, the Judge confirmed that a business may be carried on with intent to defraud creditors notwithstanding that only one creditor was shown to have been defrauded, and by a single transaction. Further, In Re Sarflax was authority for the proposition that the “carrying on of a business” can include the collection and distribution of assets in payment of debts.
Although obiter, the Judge also gave some important guidance on the court’s power to determine the appropriate level of contribution to be made to the company’s assets by a person held liable for fraudulent trading. There must be a nexus between the loss caused to the company’s creditors by the carrying on of the business in the fraudulent manner and the quantum of the contribution the court orders should be made to the company’s assets. In most cases, the contribution will therefore equal the net loss to the estate of the fraudulent trading.
Of greater significance, and contrary to case law decided under the previous legislation, the Judge stated that there was no jurisdiction under s.213(2) of the Act for the court to impose a punitive element in the amount of any contribution it orders to be made. The purpose of the section is to compensate the estate, not punish those found liable of fraudulent trading–the power to punish the wrongdoer is instead found in s.458 of the Companies Act 1985.
As has been demonstrated this case is very similar to the present case. There was an intention to defraud Xi Ltd as in the present case, they were only one creditor, and the money and assets were moved to another company, therefore on this basis it is likely that if Alpha pursue this route then they will be entitled to recover the money which belongs to the insolvent Alpha and not to Delta. The director who moved the money will personally liable to Xi for this money as it was his direct intention to defraud them out of this money by hiding it away in another company. He will be liable for the entire amount of the debt.
Question 3 – Part 1
To convict a company of corporate manslaughter, the prosecution must prove the company’s conduct, which led to the deaths, was the conduct of a senior person in the company-the directing mind (also often referred to as the ‘controlling mind’). In practical terms, this means that for a company to be guilty of corporate manslaughter a senior person (normally a director) also has to be guilty of manslaughter. Therefore this would mean that one of the directors would have to be guilty of corporate manslaughter in order for the company to be prosecuted. This point needs to be examined further. First it needs to be established therefore whether or not there was a “directing mind” behind the act or omission that brought about the death of the German Holiday Maker. In HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd Lord Denning said that whether a person is a directing mind depends upon whether they are “directors and managers who represent the directing mind and will of the company and control what it does”. This is an important distinction.
In Tesco Supermarkets Ltd v Nattrass, which concerned a prosecution pursuant to the Trades Descriptions Act 1968, the House of Lords defined individuals who are directing minds as “the board of directors, the managing director and perhaps other superior officers of the company [who] carry out the functions of management and speak and act as the company”. Thus indicating only directors will be liable under this law.
In the failed prosecution for corporate manslaughter of P&O Ferries that followed the sinking of the Herald of Free Enterprise in 1987, the judge emphasised the need to prove that the person prosecuted as the directing mind had sufficient responsibility for safety.
The case law therefore appears to suggest that Patrick could not be found to be a directing mind and therefore could not therefore be held accountable to the company in any claim for gross negligence. This would therefore not equate to a claim for corporate manslaughter. Although, it could be said that the directors were grossly negligent in employing Patrick in this role with such little experience and therefore the person responsible for him being employed was therefore grossly negligent. Whilst this is a possibility, it is highly unlikely that any conviction for corporate manslaughter will be founded on this basis. However if one of the directors was found liable for these actions then the prosecution would next have to consider the basis of the case on principles of manslaughter by gross negligence as is set out below.
The prosecution would bring a case on the basis of gross negligence. It has been shown that in order to convict of this the jury must be able to show that
- The defendant owed a duty of care to the deceased; and
- He was in breach of that duty; and
- The breach of duty was a substantial cause of death; and
The breach was so grossly negligent that the defendant can be deemed to have had such disregard for life of the deceased that it should be seen as criminal and deserving of punishment by the state.
It is, in conclusion, highly unlikely that Xi Ltd will be prosecuted for this offence, and however the position may be somewhat different if the new legislation is enacted as will be discussed below.
Question 3- Part 2
The aim of the new bill is to bring a new, more effective offence of corporate manslaughter and is designed to target those organisations that have paid little regard for the safety of their workers or members of the public affected by their business. It is hoped that the effect of the new will be that greater attention to health and safety will certainly be paid.
The new offence is similar to the current offence of gross negligence manslaughter, specific to organisations. The basis of liability will change under the new law, taking the focus away from a single senior individual who must ’embody’ the organisation. Instead, senior management conduct will be key. Additionally, the decisions and systems put in place by senior managers may be viewed collectively and not individually as is the present law. This means that senior management or directors will not be able to delegate their duties to less experienced members of an organisation in order to avoid prosecution and in fact inappropriate delegation could itself be seen as gross negligence.
The proposals are for a new, specific offence of corporate manslaughter. An organisation could be prosecuted if a senior manager’s gross failure to take reasonable care for the safety of the organisation’s workers or members of the public resulted in a fatality. A new basis for corporate liability for manslaughter is proposed, including a new test that focuses on senior management failures. The offence is designed to capture “truly corporate failings in the management of risk, rather than purely local areas”.
The draft Bill proposes an offence that applies where an organisation owes a duty of care:
- As an employer or occupier of land; or
- When supplying goods or services or when engaged in other commercial activities (eg mining or fishing).
The draft bill states that: “the heart of the new offence lies in the requirement for a management failure on the part of its senior managers … the test for management failure focuses on the way in which a particular activity was being managed or organised. It focuses on responsibility on the working practices of the organisation … it considers wider questions about how, at a senior management level, activities were organised and managed.” This test concentrates much more on the skills of the mangers in delegating to other members of staff. “In particular this allows senior management conduct to be considered collectively, as well as individually.”
An organisation’s senior management is defined as: “only those who play a role in making management decisions about, or actually managing, the activities of an organisation as a whole or a substantial part of it … it is intended to cover, for example, management at regional level within a national organisation, such as a company with a national network of retail outlets, factories or operational sites”. The draft bill targets “those responsible for the overall management of each division”.
The draft bill stresses that “the offence is to be reserved for cases of gross negligence, i.e. a gross failure that causes death which is conduct that falls far below what can be reasonably expected in the circumstances”, and further, whether they knew or ought to have known there were failings or risk of death or serious injury or sought the organisation to profit from the failure.
Suspicious deaths in organisations will continue to be investigated in the normal way. Only where there are grounds to believe that these were caused by the gross negligence of senior managers in the way that they organised or managed the organisation’s activities, will corporate manslaughter be considered. The Code for Crown Prosecutors still applies, although the circumstances in which a realistic prospect of conviction is possible will be greater and more convictions will result.
It is important to note at this juncture that only corporations and listed Crown bodies will be caught by this legislation, not unincorporated associations. This of course will raise questions as to whether or not some organisations will choose to have unincorporated status simply in order to escape liability under this new offence.
The Bill extends to England and Wales. The position on jurisdiction largely replicates that for the existing law of manslaughter. The general rule that nothing done outside England and Wales is an offence under English criminal law does not strictly apply, although geography is still relevant. Under s 10 of the Offences Against the Person Act 1891, the courts have jurisdiction in a case of homicide if: the injury is inflicted in England and Wales, even if the death occurs elsewhere; or where the death occurs in England or Wales, even if the injury is inflicted elsewhere-provided that the injury is inflicted within the jurisdiction of the English courts.
If the Bill is enacted, there are likely to be more successful prosecutions, including those of large companies. This does not mean that every death or public disaster will be followed by a successful prosecution. For example, one of the reasons that no successful prosecution for corporate manslaughter was possible following the Herald of Free Enterprise as it departed from Zeebrugge for Dover, was because the practice of leaving shore without the doors closed was not recognised as gross negligence at that time and was in fact common practice in ferrying, this is different now.
In conclusion it can be seen that the outcome of the prosecution for Xi Ltd would be very different under the new law and it is far more likely that they would be prosecuted for this death as they failed to ensure that the correct level of staff were in place to look after there customers and this resulted in the death of the holiday maker.
Companies Act 1985
Insolvency Act 1986
Foss v Harbottle (1843) 2 Hare 461
HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd  1 QB 159
Morphitis v Bernasconi  EWCA Civ 289
R v Adamako  1 AC 171
R v Grantham  QB 675 CA
R v P&O European Ferries (Dover) Ltd  93 Cr App R72
Re A Company 1988 001418  B.C.L.C. 197
Re A Company  B C L C 197
Re Company (No.001418 of 1988)  B.C.C. 526
Re Cyona Distributors Ltd  Ch. 889
Re Gerald Cooper Chemicals Ltd  Ch. 262
Re Oasis Merchandising Services (Ward v Aitken)  1 All E.R. 1009
Re Patrick Lyon Ltd  CH 786 at 790
Re Produce Marketing Consortium Ltd  1 W L R 745
Re Sarflax  Ch. 592
Re William C Leitch Ltd  2 Ch 71 at 77
Tesco Supermarkets Ltd v Nattrass  AC 153
Coutino M, (2005) “How Will Corporate Manslaughter Change?”, New Law Journal 155.1344
Forlin G, (2004) “Directing Minds: Caught in a Trap?” New Law Journal 154.7118(326)
Forlin G, (2005) “Corporate Manslaughter: Where are We Now?”, New Law Journal 155.7176 (720)
Davies P, (2003) “Gower and Davies Principles of Modern Company Law”, Seventh Edition, Sweet and Maxwell
French D, Mayson S, Stephen R & Ryan C, (2005) “Mayson French and Ryan on Company Law”, Oxford University Press
Hicks A & Goo S, (2004) “Cases and Materials on Company Law” , Oxford University Press
 (1843) 2 Hare 461
 See Re Produce Marketing Consortium Ltd  1 W L R 745
 Insolvency Act 1986 s214(4)
 See Re Produce Marketing Consortium Ltd  1 W L R 745
 Re A Company  B C L C 197 contrast with Morphitis v Bernasconi  EWCA Civ 289
 Re A Company 1988 001418  B.C.L.C. 197
 Re Oasis Merchandising Services (Ward v Aitken)  1 All E.R. 1009
 Ian Fletcher, Law of Insolvency (3rd ed., Sweet & Maxwell, 2002), 27.015
 Re Patrick Lyon Ltd  CH 786 at 790
 Re William C Leitch Ltd  2 Ch 71 at 77
  QB 675 CA
  EWCA Civ 289
  Ch. 262
  Ch. 592
 See for example Re
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