UK: England and Wales: corporate criminal liability - options for reform published by Law Commission

The Law Commission for England and Wales has today published a paper setting out options for reform in respect of the criminal liabliity of companies. The paper does not make recommendations but provides, instead, ten potential reforms.  These reforms include (a) permitting conduct to be attributed to a company if a member of its senior management engaged in, consented to, or connived in the offence; (b) introducing an offence of failure to prevent fraud by an employee or agent; and (c) introducing a reporting requirement requiring large corporations to report on anti-fraud procedures. Some potential reforms have been ruled out, including adopting models of attribution based on corporate culture or the principle of respondeat superior. 

For further information, see: press release | full options paper (pdf) | summary of options paper (pdf). 

 

UK: England and Wales: the fraudulent director and attribution of knowledge to the company

The ICLR has provided a summary for a decision of the High Court - Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch) - handed down last week: see here. To quote from the summary of the court's decision: "There was no principle of law that in any proceedings where the company was suing a third party for breach of duty owed to it by that third party, the fraudulent conduct of a director was to be attributed to the company if it was a one-man company. The answer to any question whether to attribute the knowledge of the fraudulent director to the company was always to be found in consideration of the context and the purpose for which the attribution was relevant".

Australia: attribution, aggregation and unconscionable conduct

A few days before Christmas the Federal Court of Australia (Full Court) gave judgment in Commonwealth Bank of Australia v Kojic [2016] FCAFC 186. One of the issues before the court was whether the knowledge of officers and employees could be aggregated and attributed to a corporation for the purposes of finding that the corporation had acted unconscionably under section 51AB or section 51AC of the Trade Practices Act 1974 (or the equivalent provisions in the Australian Securities and Investments Commission Act 2001).

At first instance ([2016] FCA 368) the trial judge held that the knowledge of two bank employees should be aggregated and that the bank had acted unconscionably. The Full Court (Allsop CJ, Besanko and Edelman JJ) unanimously overturned this decision, in an important judgment exploring the scope for aggregation and the meaning of unconscionable conduct.

UK: Supreme Court gives judgment in Jetivia v Bilta

The Supreme Court gave judgment earlier today in Jetivia SA v Bilta (UK) Ltd [2015] UKSC 23: see here or here (pdf). The court held that the appeal should be dismissed, finding that the wrongful activity of a company's directors and shareholders could not be attributed to the company; it also held that section 213 ("Fraudulent trading") of the Insolvency Act 1986 had extra-territorial effect.

A summary of the decision is available here (pdf) and also in the below video (if you cannot see the video, try viewing it here):

UK: Moore Stephens in the Times Law Reports

Last week's House of Lords judgment Moore Stephens v Stone Rolls Ltd. [2009] UKHL 39 - noted in this earlier post - has been reported in the Times Law Reports this week: see here. The report will be available online for at least the next 7 days. 

UK: House of Lords - auditors succeed in having neligence claim struck out

The House of Lords gave judgment in Moore Stephens (a firm) v Stone Rolls Limited [2009] UKHL 39 yesterday. By a 3:2 majority, their Lordships held that a claim for breach of duty (in contract and tort) brought by a company in liquidation (Stone & Rolls Ltd.) against its auditors (Moore Stephens) should be struck out. The claim concerned the auditor's failure to detect the fraud of the company's controller, Mr Stojevic.

For the purpose of the proceedings it was accepted that the auditors were in breach of the duty to exercise reasonable care in relation to the auditing of the accounts of Stone & Rolls Ltd. The question was whether a claim for this breach of duty was precluded by the public policy defence of ex turpi causa non oritur actio (no cause of action may be founded on an illegal act). The majority (Lords Phillips, Walker and Brown) agreed that it was. The minority (Lords Mance and Scott) disagreed. 

Reasoned opinions were provided by all five judges and a proper analysis of these will take some time. It is clear, nevertheless, that auditors are now well placed to defend negligence claims where companies are controlled by a single individual and that individual commits fraud that goes undetected. The irony is, of course, that the auditor's role is critical in such companies.  Indeed, as Lord Mance observed in his dissent (para. [206]):

The world has sufficient experience of Ponzi schemes operated by individuals owning “one man” companies for it to be questionable policy to relieve from all responsibility auditors negligently failing in their duty to check and report on such companies’ activities".

Several opinions discuss auditors' duties. Lord Walker observed (para. [179]):

Checking for fraud is part of an auditor’s task, but it is not his sole or primary task (for a reputable auditor to discover that the client company’s business is wholly fraudulent and criminal must be quite unusual).

Lord Phillips observed (para. [19]):

The leading authority is Caparo Industries Plc v Dickman [1990] 2 AC 603. The duties of an auditor are founded in contract and the extent of the duties undertaken by contract must be interpreted in the light of the relevant statutory provisions and the relevant Auditing Standards. The duties are duties of reasonable care in carrying out the audit of the company’s accounts. They are owed to the company in the interests of its shareholders. No duty is owed directly to the individual shareholders. This is because the shareholders’ interests are protected by the duty owed to the company. No duty is owed to creditors – Al Saudi Banque v Clarke Pixley [1990] Ch 313. The Auditing Standards require auditors who have reason to suspect that the directors of a company are behaving fraudulently to draw this to the attention of the proper authority. The scope of the duty ... is unquestionably imposed in the interests of, at least, the shareholders of the company".

Lord Mance stated (para. [217] - [218]):

[Auditing Standard] SAS 110.12 [issued January 1995] (para. 52) provides that:

'When a suspected or actual instance of fraud casts doubt on the integrity of the directors auditors should make a report direct to a proper authority in the public interest without delay and without informing the directors in advance'.

The text at paragraph 56 explains that matters to be taken into account when considering whether disclosure is justified in the public interest may include 'the extent to which the suspected or actual fraud is likely to affect members of the public'. Plainly, one situation in which members of the public would be affected is where the fraud conceals or risks bringing about the company’s insolvency. The viability of a company as a going concern is always a matter of audit importance.

The relationship of company and auditor is not therefore a simple two-party relationship. The company cannot in the audit context be equated with its board of directors or management. The company’s shareholders are – at least while the company is solvent - the main focus of an auditor’s activity and duties. The auditor, in undertaking the statutory role and contractual and tortious duties, is 'acting antagonistically to the directors' ".

Update: a summary of the decision has been provided here by the ICLR as part of its WLR Daily service (the summary will be removed when the decision is reported in one of the ICLR's series of law reports). 

UK: judgment in auditor liability case next week

It has been announced that the House of Lords will give judgment in Moore Stephens (a firm) v Stone Rolls Limited (in liquidation) next Thursday. This is an important case considering auditor liability and the attribution of knowledge to the company. 

For further information see: earlier blog post | summary of the Court of Appeal's decision | House of Lords appeal reported in the Times newspaper |High court decision |

UK: England and Wales: companies, harassment and attribution

Yesterday the Court of Appeal gave judgment in Ferguson v British Gas [2008] EWCA Civ 46. Jacob LJ began his judgment with the memorable line: "It is one of the glories of this country that every now and then one of its citizens is prepared to take a stand against the big battalions of government or industry" (para. [1]). This case is of interest because it concerned a company and the circumstances in which a company could be guilty of unlawful harassment contrary to the Protection from Harassment Act (1997). 

Ms Ferguson brought a claim against British Gas Trading Ltd. ("BG") for unlawful harassment contrary to Sections 1 and 2 of the 1997 Act. She ceased to be a customer of BG in May 2006 but between August 2006 and January 2007 was sent bills and letters threatening to cut off her gas supply, take court action and report her to credit reference agencies. Letters to the chairman of BG went unanswered and she spent many hours and suffered anxiety trying to resolve matters. She argued that BG's course of conduct represented unlawful harassment. British Gas argued that the claim should be struck out because it disclosed no reasonable grounds for bringing it. This is the question that the court had to determine; there was not, therefore, a full trial of the issues.

A unanimous court (Sedley, Jacob and Lloyd LJJ) refused to strike out the claim and rejected the argument put for BG that its actions were not of the gravity required successfully to establish unlawful harassment. The court held that there was a strongly arguable case that its actions did amount to unlawful harassment. 

The issue of corporate liability was raised by counsel for BG: with reference to Tesco v Nattrass [1972] AC 153 it was argued that the claim was bound to fail because Ms Ferguson had failed to plead that the course of conduct was either [a] directed by someone who would be regarded as the "directing mind" of the company or [b] the responsibility of an individual employee for whose acts the company would be vicariously liable. This argument was not subject to detailed discussion or analysis because there had been incomplete citation of relevant authorities. Nevertheless, Sedley LJ observed (para. [51]):

One excuse which has formed part of British Gas's legal argument for striking out the claim, and which has been advanced as incontestable and decisive, is that a large corporation such as British Gas cannot be legally responsible for mistakes made either by its computerised debt recovery system or by the personnel responsible for programming and operating it. The short answer is that it can be ... It would be remarkable if it could not: it would mean that the privilege of incorporation not only shielded its shareholders and directors from personal liability for its debts but protected the company itself from legal liabilities which a natural person cannot evade. That is not what legal personality means".

Note: issues of attribution have been considered recently by the Judicial Committee of the Privy Council in Lebon & Anor v. Aqua Salt Co Ltd (Mauritius) [2009] UKPC 2.