Commercial and Corporate Law: Liability of Directors and Company for Negligent Acts and Crimes

This article discusses the liability of directors and companies for negligent acts and crimes in commercial and corporate law. It explains the principles established in Salomon v Salomon & Company Ltd and the Corporation Act 2001. The article also explores the circumstances under which a company can be held liable for criminal acts and the concept of corporate liability.

Running head: COMMERCIAL AND CORPORATE LAW
Commercial law
Name of the Student
Name of the University
Author Note

1COMMERCIAL AND CORPORATE LAW
Assessment item 1
Answer to (A)
It is a well-known principle of law that reads a company is a separate entity distinct from
its members and shareholders. This principle has been established in the famous case of
Salomon v Salomon & Company Ltd1, the court has observed that the solicitor can only
represent a company only. Therefore, it can be stated that an invisible veil is present in between
the company and the stakeholders. However, if the company has been incorporated for
fraudulent purpose, the veil can be pierced. This principle has been established in Re a
Company2.
In Australia, there are several incidents regarding the negligent acts of directors are
occurring. There are many judicial formulations there to define the liabilities of directors for
performing negligent act. The Corporation Act 2001 prescribes certain provisions regarding the
duties of the directors3. According to section 180 of Corporation Act, every director should have
to work diligently and should perform their acts in good faith. In Charitable Corporations v
Sutton4, it has been observed by the court that in case the directors have failed to perform their
duties with due diligence, they will be held responsible for that and face penalties under section
1317E of the Corporation Act 2001. In ASIC v Cassimetis5, the director of the company who is
also one of the shareholders in it had failed to perform his duty with due care and he has faced
penalties due to this.
1 [1897] AC 2. In Battle v Irish Art Promotion Centre Limited [1968] IR 252
2 (1985) [1985] BCLC 333
3 Reeves-Latour, Maxime, and Carlo Morselli. "Bid-rigging networks and state-corporate crime in the construction
industry." Social Networks 51 (2017): 158-170.
4 (1742) 2 Atk 400
5 (2016) FCA 1023

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In Ouerend 1 Gurney Co. v. Gibb6, it has been observed by the court that the director
should have to act like a prudent man and in case of any failure to this, he shall have to get
penalties. The directors of a company have certain duties towards the shareholders and in case
any failure regarding the same, the directors should have to face penalties. However, in certain
case, it has been found that the directors are also shareholders to the company. In the case of
Cassimetis, the directors of the alleged company have stated that they also incur the losses and
therefore, they should not be held liable. In this case, court has observed that the law has not
mentioned that directors who are also the shareholders in a company could not be held liable for
negligent act. Therefore, it can be stated that if the directors will face penalties under the
Corporation Act in case of negligent act.
The general principle of law is that company is a separate entity. The directors are treated
as the mind of the company and therefore, the acts of the directors are sometimes regarded as the
acts of the company. The Tort law of Australia is derived its origin from English law. Under the
Tort law, it has been prescribed that all the person has certain duties that should be performed
with care and in case of any failure to this, the wrongdoer might have to face the penalties. In the
case of Salomon v Salomon, the court has held that company is a separate person and therefore,
if the company has failed to protect the interest of the shareholders by conducting fraud, the
company will liable to the shareholders. Duty of care is certain legal obligations that are imposed
on every individual. A person is restricted to do anything that causes harm to others and the act
should be foreseeable in nature. In a case where a company has been incorporated with certain
fraudulent purpose, the veil between the company and the directors will be lifted and the
company will be held liable for any negligence under the Tort law of Australia. In Rainham
6 (1872) L.R. 5 H.L. 480

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Chemical Works Ltd (in liq.) v Belvedere Fish Guano Co. Ltd7, it has been held by the court
that where certain wrongful acts have been performed in a company, the company will be
responsible for the consequence. If a director has committed a tort that is not distinct from the
acts of the company, the company will be held liable.
Answer to (B)
It is a well-known principle of Company law that a company is a separate person and it
will not be held liable for any of its stakeholders. This principle has been established for the first
time in the case of Salomon v Salomon. However, there are certain situations where this
principle has not been followed. In certain cases, where the corporation or the company has been
incorporated for encompassing any fraudulent works, it has been stated by the law that if any
member of the company will act in negligent way and earns profit for the company, it will be
treated as the company is guilty for the crime8. Further, it is to be stated that company itself
cannot perform an act by itself; the directors of the company are the mind. Therefore, if the
directors are involved in certain fraudulent act and they are doing certain task or commit a crime
for gaining illegal profit for the company, the whole company will be held liable for the crime
and not the individual director.
Now the question is when a company will be held liable for committing a crime. There
are certain elements that are required to be fulfilled in case of committing a crime. These
elements can be divided into two ways such as criminal intention and criminal act or omission.
When any member of a company will meet all these requirements and they do this for the
7 [1921] 2 AC 465
8 Corkery, Jim, Maiken Mikalsen, and Katie Allan. Corporate social responsibility: The good corporation. Centre for
Commercial Law, 2017.

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interest if the company, the company will be held liable for crime. As an example it can be stated
a company that allows the employees to dump the hazardous substances in an illegal way, it can
be assumed that the company is doing so for saving money from the aspects of disposal ground.
Further, in na case where the agents of a company involve in certain acts, the company will be
held liable and it is not required that the owners of the company are not involve in such act.
In New York Central and Hudson River Railroad Co. v. United States9, it has been
observed that a company can be liable for the bad conduct of the employees and in such case, the
company has to be faced both the civil and criminal liabilities. The court can follow the principle
of corporate liabilities or vicarious liability in case to held a company liable for any criminal
acts. The concept of corporate liability has derived its origin from the provisions of Common law
and the Criminal Code Act 1995 (Cth.) makes a statutory model for corporate liability that is
criminal in nature. It is noted that the company can be held liable for both civil and criminal way.
In Australia, there are certain cases where a company held liable for crime. White-collar
crime and bribery are some of it. In Australia, many companies are involved in certain crimes
that are committed by the business professionals during the course of their business. These
crimes include fraud, bribery, ponzi schemes, money embezzlement, money laundering and
forgery. According to section 12.3 of the Criminal Code of Australia, if the directors of a
company have committed a criminal conduct during their occupation and they have prior
knowledge regarding the same, company will be held liable for crime if the act has done for the
interest of the company. Further, if any member of the company held liable for conducting any
negligent work during the course of their business and if it has been proved that, the work has
9 (1909) 212 U.S. 481

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been committed for the interest of the company, the court can held the company liable for the
acts.
In Tesco Supermarkets Ltd v Nattrass 10, it has been observed that the directors are
regarded as the mind of the company and in case they are committing a crime, it will be treated
as the mind of the directors reflect the mind of the company. In this case, the term corporate
manslaughter has been used. In United States v Bank of New England11, it has been observed by
the court that aggregating knowledge of the members of the company regarding any criminal acts
will held the whole company be responsible for a crime and this principle is known as
aggregation principle. According to Gobert (2002), if a company has failed to report before
appropriate authority regarding the fraud or failed to take any precautions regarding the same, it
will be held liable for criminal offence12. However, the theory of corporate liability will help the
court to find out the guilty of company and the members in case of any criminal offence.
10 [1972] AC 153
11 (1987) 821 F2d 844
12 Paternoster, Ray. "Deterring Corporate Crime." Criminology & Public Policy 15.2 (2016): 383-386.

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Reference:
ASIC v Cassimetis (2016) FCA 1023
Charitable Corporations v Sutton (1742) 2 Atk 400
Corkery, Jim, Maiken Mikalsen, and Katie Allan. Corporate social responsibility: The good
corporation. Centre for Commercial Law, 2017.
New York Central and Hudson River Railroad Co. v. United States (1909) 212 U.S. 481
Ouerend 1 Gurney Co. v. Gibb (1872) L.R. 5 H.L. 480
Paternoster, Ray. "Deterring Corporate Crime." Criminology & Public Policy 15.2 (2016): 383-
386.
Rainham Chemical Works Ltd (in liq.) v Belvedere Fish Guano Co. Ltd [1921] 2 AC 465
Re a Company (1985) [1985] BCLC 333
Reeves-Latour, Maxime, and Carlo Morselli. "Bid-rigging networks and state-corporate crime in
the construction industry." Social Networks 51 (2017): 158-170.
Salomon v Salomon & Company Ltd [1897] AC 2. In Battle v Irish Art Promotion Centre
Limited [1968] IR 252
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
United States v Bank of New England(1987) 821 F2d 844

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