Business and Corporate Law: Analysis of Three Cases

The Court of Appeal has recently stated that company directors may have personal liability where the company has committed a wrong. There had been considerable doubt and much had been written on whether this could be so or not. Those who thought that company directors could be sheltered from the wrongs committed under the guise of the separate legal personality of the company relied on the organic theory derived from Automatic Self-Cleaning v Cunningham1. This case involved two organs of the company – the directors and the shareholders – and that one organ could not make a decision that was reserved to the other organ in the company’s constitution.

In the analyzed case, the directors were empowered to sell some of the company’s undertakings to another company. Furthermore, the shareholder in the annual general meeting passed a motion allowing the directors to sell the business undertakings to the other company2.

However, the directors of the company decided that entering into a contract of selling the assets of the company to the said company could have detrimental effects on the Automatic Self Cleaning and therefore the decision to cancel the sale agreement was made. Due to the refusal of the directors to enact the directive given by the shareholders, a tussle erupted between the two organs of the company. The company had articles of association, which under article 96, empowered the company directors to act and exercise all the powers that were vested in them by the company. This statement can be considered a rule of attribution. In addition, the article enabled the directors to run the company activities effectively since they had the authority to do so as directed in the company articles of association that stated that they had the powers to manage the company in accordance with the best business practices and ethics. This may be referred to as a rule of attribution.

Directors are the people in charge of carrying out the affairs of the company in outmost good faith according to the articles of the memorandum that gives the directors such mandate. Therefore, under the articles of association, in the article3 97 (1), the company’s articles of association enabled the directors to directly enter in a sale and purchase contract whereby they could dispose or acquire the assets for the company. In addition, they are also empowered to acquire or dispose of patents, company rights, and leases. When carrying out this mandate, the company directors can do so without consultation with the shareholder on the issue of whom they should or should not enter into contact with. Hence, they are free to choose the company’s business or trading partners at will. However, when doing so, they should ensure that the contracts are beneficial for the company and drawn up without any malice or biasness.

Thereby the directors’ refusing to honor the shareholders’ request to sell the assets had a legal basis to do so since both the company’s acts and the articles of association empowered them to do so. In addition, due to the powers vested in them by the company, in case if they allowed the sale to proceed, they would have been liable for the negative outcome that would result from the sale.

Thereby the directors’ refusing to honor the shareholders’ request to sell the assets had a legal basis to do so since both the company’s acts and the articles of association empowered them to do so. In addition, due to the powers vested in them by the company, in case if they allowed the sale to proceed, they would have been liable for the negative outcome that would result from the sale.

In addition, the directors are legally mandated to enter into contracts that are only beneficial for the company, thus they have the legal authority to cancel any contract that contravenes this. Also, article 96 vested the control and management of the company in the directors, therefore the shareholders had no legal basis to try and force the directors to sell the assets. Therefore, the bid of the plaintiff to terminate the directors’ contract could not be upheld. In addition, the companies’ articles of association required a majority of the shareholders to vote on the issue, therefore the shareholders could not implement the termination of the directors nor order them to honor the sale of the company’s assets as they were acting within the provisions of the company’s articles of association.

In addition, the Companies Act4 s. 8, (131) (132) gives the directors powers to act in accordance with the powers granted to them and also to act in outmost good faith. S.8 (131) clearly outlines that the directors, who carry out their company’s obligations, should do so in terms of business ethics and due diligence since any decision they endorse will be considered to be legally responsible, thus all policies or implemented decisions should be for the benefit of the company.

Therefore, directors in any company have the mandate to annul any contracts or deals the other agents of the company enter if they qualify them as those that are contradicting the objectives of the company without further consultation with the shareholders. The powers enabling the directors to annul or override the decision of the shareholders or company agents are found in the articles of association and the Companies Act. Hence the directors acted in the manner that depicted their mandate in accordance with the powers that had been vested in them. Nevertheless, the directors should also be controlled by other agencies in the company as they can annul decisions based on misinformed ideas or due to biasness, but in the above case, the company directors acted in accordance with the stipulated law and the shareholders were at fault.

In addition, the directors are supposed to comply with the Companies Act and constitution: A director of a company must not act, or agree to the company’s acting, in a manner that contravenes this Act or the constitution of the company. This law can be found in Act s.135 which highlights the duties of the directors in light of Reckless trading. The Act states that the directors of the company under no circumstances should carry out the business of the company under directives that will result in negative outcomes for the company or those resulting in serious financial risks for the company and its beneficiaries. In addition, they should not allow other parties to undertake the business activities in ways that will be harmful to the company and result in substantial credit risks.

Therefore, under the articles of association and the Companies Act, the directors were not obliged to carry out the shareholders’ orders if they felt that they would infringe the success of the company. The articles of association and the Companies Act can be considered to be the source of the rules of attribution that justify the rightness of the directors’ decision to refute enabling of the shareholders’ proposal. Therefore, should the directors have allowed the sale of the company’s assets, they would have been held legally liable since both the company’s acts and the articles of association empowered them to make sound decisions for the benefit of the company even if it meant going against the shareholders’ will. Thus, the court ruling on the case was appropriate since it upheld the decision of the directors, which we find reasonable since the ruling respected the laws on the mandate of the directors.

In Meridian Global Funds (Asia) Ltd v Securities Commission5 a decision by two employees that the company should buy shares on the New Zealand Stock Exchange was attributed to the company. It was argued that the directors should be protected from the consequences of the wrong when it was held to be caused by the company only and not the director.6 The other argument was that a director could not evade responsibility for causing a wrong by claiming that the wrong had been caused by the company and not by the director personally7.

In this case, the employees of the company were involved in fraud without the directive of the directors or shareholders. The employees Koo and Ng bought shares with the objective of gaining major control of the ENC and the schemers would benefit from the purchase of the shares. The money to purchase the shares was from the Meridian Company and a buyback between the companies involved would take place. However, the scheme failed and Meridian ended up paying for shares worth $ 15.5 m in the New Zealand stock exchange. Nevertheless, there were laid laws that involved company’s buying majority shares inform the securities commission, this was found in the Securities Act8.

The purpose of the Securities Amendment Act9 1988 is to ensure an informed marketplace. Section 20 of the Act required that any stocks investor, who acquired large stocks thereby becoming their owner, had the legal obligation to inform the public issuer of the transaction of the said stocks on the stock exchange market that the stocks trading took place. Thus, the stock market and the companies involved would be fully aware of any transaction taking place.

Meridian did not give any notice under the Act. In the case the defendant argued that they could be held liable for the actions carried out by its employees and the company and the employees’ action were separate legal entities. However, the action of the company in the light of the fraud perpetrated by its employees found the company liable. The company lacked a supervisory board to oversee all transactions occurring on behalf of the company. In addition, the directors failed in their mandate given in the Companies Acts. Therefore, due to the action of the directors and lack of laws in the articles of association governing the supervisory roles of the board, and since it involved the action of the company’s employees, the company was vicariously liable10.

This is because, under s.3511, it did not constitute “a code relating to knowledge” stricter than the common law doctrine of identification. It presumed knowledge where the person under the statutory duty was not proved actually to have had it. The doctrine was established when a corporate person actually did have knowledge. The section replaced the common law concept of vicarious responsibility. A corporate person would have knowledge for the purposes of the Act in two situations only: where the doctrine of identification applied, or where s. 35 applied. Therefore, even though the directors of the company who are the entrusted managers of the company did not know of the illegal actions of their employees, they were vicariously liable and so was the company in this case.

Therefore, though the decision to indulge in the fraud was done by company agents, they could not be separated from the actions of the company since the resources used belonged to the company and it failed to detect the fraud and take sufficient measures, thus, it may be concluded that both the company and its agents were liable in this case. Nonetheless, the company agents and company have different degrees of liability. This position can also be observed in the following case, whereby, the conflict in opinion has been clarified by the Court of Appeal in Taylor v Body Corporate 22022312 where the director was found to have personal liability for the costs when the company had been involved in the construction of a series of houses that leaked and required expensive remedial work. In the hearing the presiding judge, Hardie Boys, said that agents or servants in a company should be held accountable for any activities that are results of the company’s activity, which may be a tort. However, one must be cautious in approaching the facts on such issues since not all actions that occur are the directors’ fault just because they are the agents of the company. Therefore, there are several other facts to consider before the director can be considered to be liable for any tortuous actions while a company will be held to be vicariously liable.

In circumstances where the tortuous action was due to the directors’ negligence, the first fact to be determined will be if the director owed a duty of care to the company in the light of the negligent act. Therefore, in deciding the liability degree on a company director, it will always be done on the basis of policy considerations and the facts of the action. Therefore, if the act was due to the director’s policies, then the personal liability shall be on the director hence it is not in contradiction for business incorporation laws for directors to be liable for actions that they did not personally get involved in since they had the power to oversee the business activities. In addition, shareholders are usually protected from the company’s liabilities since they are not directly involved in the running of the company, but the directors are not. However, under the incorporation principles, it recognizes different capacities in which the directors are involved in the business. Therefore, there are instances where they act as the representatives of the company and in other circumstances as individual representatives.

It is therefore important that one can clearly identify the circumstances under which a director was acting. Thus, if he was representing the company, both he and the company will be liable. However, in the situations where he was acting as his own representative, he will be personally liable for any events. In addition, one has to know if his actions were imputed or implied. After finding out that, one will be able to assess if he was personally liable for his action or the company was.

In conclusion to the above facts, there are several facts that one has to consider before finding a company or its agents liable. The manner by which they act and the presumption that the public carries over an act being conducted by an agent will usually determine the level of liability the company or the agent has. In the Taylor case, the director was liable since he owed a duty of care to the homeowners, which he failed to deliver. In addition, he was acting on behalf of the company and the homeowners believed that he represented the interests of the company. Therefore, due to this presumption, and Mr. Taylor’s conduct, the company ought to have been vicariously liable.

Nevertheless, there are instances in which agents act in their selfish interests and since they are agents of a given company, the company may be found to be liable for actions perpetrated by agents of the company which they carried out without mandate. These facts can be observed in the following cases where on the basis of testing whether a company is liable or not, the director of Fairline Co. in Fairline Shipping Corporation v Adamson [1975] QB 18013, was held to be liable because when carrying out the tortuous action he did not represent the company and the people were under no assumption that he was representing the wishes of the company. Similarly, the same facts were established in the case of Centrepac Partnership v Foreign Currency Consultants Ltd (1989) 4 NZCLC 64,94014 since the director was responsible and therefore his actions did not represent the mandate of the company but expressed selfish interests that he was accountable for.

However, it is very difficult to establish if a company agent acts on his own interests or in the company’s interests. There may be certain cases when a company may be considered liable when it was not or the instances when the agent is held to be liable alone while in fact, he was conducting the business of the company when the tort took place15. It is therefore crucial for the justice system to introduce other measures that can be used to critically evaluate whose shoulders the burden of liability falls on.

Executive summary

The first case analyzed has demonstrated that the directors were under no obligation to run the company according to the proposal of the shareholders where they saw that their actions would impact the company negatively. Since what the shareholders were asking contradicted the objectives of the company, the directors had the mandate to cancel the transaction under the Companies Act and the articles of association.

In the second case, the employees acted as agents of the company which therefore made the company liable. Since the directors were supposed to ensure that the company agents act according to the stipulated rules and regulations, they failed to do as they failed to provide a board to oversee the actions of its employees. They were therefore legally liable for the fraud that took place. In addition, the company was also liable since the agents acted on behalf of the company.

In the third case, the agent acted as the representative of the company, and by doing this, he made the other people believe that he was acting on behalf of the company. Due to his negligent act, he was liable for his actions and the company was vicariously liable.

Conclusion

From the above, directors are in charge of running a company in the outmost good faith. In addition, the Companies Act and the articles of association have vested powers on them to ensure that they carry out their mandate without interruption from other people such as the company’s employees and shareholders. If any incident occurs in the company, it is usually hard to separate the directors’ actions from the company’s or other agents’ ones, therefore they are usually held liable for the mistakes that occur in the company.

Some cases may occur when the directors of the company are liable when in fact they should not be since some actions were done beyond their control, for example when employees engage in fraud.

Also, the law should be applied consciously when finding if an agent or a company is liable for tortuous actions. Hence new laws should be introduced that cater for these anomalies in the application of the law.

Reference List

Automatic Self Cleaning v Cunningham [1906] 2 Ch 34 (CA).

Body Corporate 202254 and others v Taylor [2008] NZCA 317, [2009] 2 NZLR 17, (2009) 9 NZBLC 102,435.

Centrepac Partnership v Foreign Currency Consultants Ltd (1989) 4 NZCLC 64,940

Fairline Shipping Corp v Adamson [1975] QB 180.

Meridian Global Funds (Asia) Ltd v Securities Commission 1995] 3 NZLR 7; 2 AC 500 (PC).

Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454 (HC).

Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA.

Phyllis Gale Ltd v illicott (1998) 6 NZBLC 102,445 (HC).

Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830.

The Companies Act, 1993.

Securities Amendment Act, 1988.

Farrar, E. (2008). Company and Securities Law in New Zealand. Wellington: Thomson Brookers.

Grantham, R, & Rickett C.E.F (2002). Company and securities law: commentary and materials. London: Brookers Ltd.

Watson et al, (2009). The Law of Business Organisations., Auckland: Palatine Press.

Robin, C. (1987).”Tort and Contract”. Essays on Contrant. Sydney:Law Book Company.

Supreme court (1998). The weekly law reports. U.K law reports.

Supreme Court (2009) New Zealand Law Reports.

Watts, Editorial: Companies, their managers, and obligations in tort. (2008). CSLB 111 Rules of attribution. Web.

Footnotes

  1. K law reports.
  2. Watson et al, (2009). The Law of Business Organisations., Auckland: Palatine Press. Web.
  3. The Companies Act 1993
  4. Companies act 1993.
  5. Supreme Court (2009) New Zealand Law Reports.
  6. Supreme Court (2009) New Zealand Law Reports.
  7. Grantham, R, & Rickett C.E.F (2002). Company and securities law: commentary and materials. London: Brookers Ltd.
  8. Supreme court (1998). The weekly law reports.
  9. Securities Amendment Act 1998.
  10. U.K law reports.
  11. Securities Amendment Act 1988.
  12. Supreme Court (2009) New Zealand Law Reports.
  13. U.K law reports.
  14. Supreme Court (2009) New Zealand Law Reports.
  15. Watson et al, (2009). The Law of Business Organisations. Auckland: Palatine Press.