Legal liabilities of company

civil and criminal liability

A corporation can do only those things which are incidental to the fulfilment of the purposes for which it has been created under the law. All its acts must direct to its end purpose of creating the corporation. Thus a company incorporated by special statute is limited to the powers conferred by the statute and those which are reasonably incidental thereto. The purpose and objects of a company registered under the Companies Act, 2013 are contained in its Memorandum of Association and the company cannot go beyond the limits so laid down for its activities. Anything done by the company beyond its object clause is ultra vires.[i] It may be reiterated that a corporation is not a natural person. It doesn’t have a mind, body, soul or brain of its own. It has to act through its proxies, employees and other officers such as directors etc. It therefore, follows that a corporation neither has its own will nor an interest of its own. The interest of a company is, in fact, the interest of its shareholders which is represented by the Board of directors. Despite this reality, the law confers a fictitious legal personality on corporations which vests rights, duties and property in them. Consequently, a corporation can sue or can be sued and owes both civil and criminal liability for the acts done by it.

Civil Liability

Civil liability has imposed on the companies as well. Though the company is an artificial person having no brain and body of its own, however, it would be held liable for the wrongful acts committed by its agents or servants during the course of their employment.

Vicarious Liability

The company is an artificial person having no brain and body of its own, however, it would be held liable for the wrongful acts committed by its agents or servants during the course of their employment. This liability is based on the principle of vicarious liability. This is further strengthened by the Latin maxim of “Qui facet alium facet per se” meaning that the authorised act which is done through another is deemed to be done by him. The company is therefore, liable for the torts of its employees and agents just as a master is held liable for the wrongful and negligent acts of his servants. Thus, based on the principle of agency, the master, i.e. the corporation would be liable for the acts of the servants done in the course of employment. The operative word here is being the course of employment. Any act which has though been done by the agent but is not within the purview of its job and not been authorised to be done by the principal, the company shall not be liable for it. Only the person who does the act would be liable.

Over the years, the concept of vicarious liability has been incorporating various other facets within its ambit as well. The questions whether, the actions involving malice as an ingredient, has been subject to number of discussions by the court and there has been a shift in trend in recent years. Earlier, in the case of Stevens v. Midland Counties Rly. Company, Baron J. took the view that a corporation does not possess a mind of its own, hence it cannot be held liable in a civil action involving malice. This view was reiterated again in Abrath v. Nor Eastern Railway Company[ii]. In this case, the railway company prosecuted Dr. Abrath a surgeon for issuing a fabricated certificate to a passenger who had alleged that he had received injuries in a railway accident. The surgeon was, however, acquitted, thereafter, the surgeon sued the railway company for malicious prosecution. The plaintiff had to establish that a there was a hidden intent and motive behind his prosecution. Lord Bram well, however, ruled that a corporation being merely a fiction, it is not possible to attribute any mind to it and therefore, it is incapable of conceiving any malice. Overruling the decision in earlier case, Citizen’s Life Assurance Company v. Brown[iii], Lord Lindley has observed that a company can be held liable for the torts involving malice such as defamation. In this case a superintendent of the corporation had sent a letter to its policy-holders containing certain allegations against an ex-employee of the company. The ex-employee sued the company for defamation. Lord Lindley held the corporation is responsible and liable for defamation due to the principle of agency and since the alleged tort committed in the course of employment of the company, it cannot claim immunity.

This has put the matter to rest and firmly established that a corporation can be sued for malicious prosecution or deceit or defamation which involves malice as an essential ingredient.
A corporation is, however not liable if the act of its employee or servant or agent is not authorised by the Article of its Association. The case of Poulton v. London & S.W.Rly. Company[iv] is a leading decision on the point. In this case, a Station Master in the employment of the defendant Railway Company arrested the plaintiff for refusing to pay the freight for a horse that had been carried by the railway. The railway company had authority under the Act of Parliament to arrest a person who did not pay the fare, but not to arrest a person for non-payment of freight for the carriage of goods. The Court held the company not liable because it had no power itself to arrest for such non-payment and therefore, it could not delegate such a power to the Station Master (its employee) to do so. The plaintiff’s remedy for the illegal arrest in such a case could be against the Station Master personally and not the railway company as the master of its employee. The reason for the decision appears to be that the Station-Master did not have the implied authority to arrest the plaintiff on behalf of the railway company thus, he cannot be held liable for an act which the agent was not authorised to do and held that railway company cannot be held latter vicariously liable. 

Companies Act, 2013

Apart from the above mentioned liability, the company has a civil liability under the Companies Act, 2013 as well. A civil liability has been imposed for the misstatements in the prospectus under Section 35.  If any person on the issuance of a prospectus which contains misstatements has subscribed to the securities of the company and consequently has obtained any damage or loss, the director of the company at the time of the issuance of the prospectus, the promoter of the company, and any person mentioned in the prospectus would be liable for compensating persons who have suffered any loss due to the same.

Criminal Liability

A body corporate can be held vicariously liable for the wrongs committed by its employee just as the liability of the principal extends to unauthorised acts of his agent.

This view has been fairly new however, the orthodox view is that a corporation cannot be held criminally liable for the criminal acts of its employees on the principle of vicarious liability.  Salmond observes, “To punish a body corporate, either criminally or by the enforcement of penal redress, is in reality to punish the beneficiaries on whose behalf its property is held for the acts of the agents by whom it fulfils its functions.[v]” It is for this reason that criminal liability of corporation is of exceptional nature. Even assuming that a corporation is deemed to possess an imaginary will just as it is attributed an imaginary existence by legal fiction, the only acts that can emanate from the so-called will, are those which the Memorandum of Association permits it to do, i.e., which are intra vires the company. Therefore, a corporation cannot commit a crime because a criminal act or illegal act would be necessarily ultra vires its Memorandum of Association. This traditional view has, however, been abandoned now and a corporation can be held criminally liable for the criminal acts done by its representatives.

It is well settled that a corporation may incur criminal liability in cases involving malice, fraud or other wrongful motives. A company may be held liable for malicious prosecution, slander or libel or even deceit. The will of the human being who control the affairs of the corporation is attributed to the corporation itself.

Thus in R. v. I.C. R. Haulage Ltd[vi], the company was indicted for conspiracy along with its Managing Director and others and the fraud of the director was computed to the company.

The practical difficulty as regards imposition of criminal liability on corporations arises in respect of punishing them for their guilt. If the corporation be punished with fine or forfeiture, it would be easy to carry out the punishment without punishing its members. But if any corporeal punishment is awarded, then it would be difficult to separate the members from the corporate entity. Thus, the courts have to exercise their discretion in such cases.

In D.P.P. v. Kant & Sussex Contractors Ltd[vii], the manager of a transport company submitted false returns to obtain petrol coupons. The Division Court held that the company had committed fraud through its manager and therefore, was liable for that offence.

In yet another case, Moore v. Bresler Ltd[viii], the Secretary of the company was himself the Branch Manager and Sales Manager of the company. He did certain acts which were ultra vires the Board of Directors of the company. The Court, held the company criminally liable being a legal person. In R. v. I.C.R. Haulage Ltd[ix] a company was held liable for conspiracy for defrauding its managing directors and some others who had conspired to practise fraud upon another company,

Companies Act, 2013

In India also, criminal liability may be imposed on corporation under the Companies Act, 2013 and other statutes. Under Section 34, where the company has issued the prospectus, and the same is distributed an d circulated among the general public or the creditors and it contains some omissions or misleading statements, in such a case, every individual who has authorised the issue of  prospectus shall be liable under Section 447 for fraud. However, if any person has reason to believe that the statements contains no such omissions and are irrelevant and he had reasonable grounds to believe in the same, he would not be liable,

Under Section 53, the act has imposed a prohibition on issue of shares on discount. If any company does the same, the share would be void and company would be fined for the amount not less than one lakh but which may extend up to five lakhs. In addition, the person in default may face imprisoned for up to six months or fine of rupees one lakh which can go up to five lakh rupees. Under Section 57, if any person has wilfully personated a shareholder with the objective of obtaining any security, he shall be punished and may face up to three years in imprisonment and a fine rupees one lakh which can go up to five lakh rupees. Under Section 58(6), when the private company refuses to register the transfer and transmission of shares, such individual is in  default and may face imprisonment up to three years or fine of rupees one lakh which can go up to five lakh rupees.

Under Section 118(12), the minutes of proceedings of general meeting have to be recoded and if any person is interfering or tampering with the minutes of meeting then such individual is  in default and may face imprisonment up to 2 years or fine of  twenty-five thousand which can go up to one lakh depending upon the nature of interference. Under Section 128(6) the books of account, financial statements, and other important books are maintained by the Company. If the company fails to so do, the officer and the company shall be deemed to be in default and may face imprisonment up to one year or fine of Rs. 50,000 which may go up to Rs. 5 lakhs or with both. Under Section 129(7), the financial statements are to be maintained for every year and must present a true picture of the company. If the company fails  to so do, the officer and the company shall be deemed to be in default and may face imprisonment up to one year or fine of Rs. 50,000 which may go up to Rs. 5 lakhs or with both. Under Section 134 – Financial statements have to be annexed to the Board of Director’s report and must have the essential requirements depending upon the nature of the company. If the company fails  to so do, the officer and the company shall be deemed to be in default and may face imprisonment up to three year or fine of Rs. 50,000 which may go up to Rs. 5 lakhs or with both.

Under Section 182(4), there have been certain prohibitions regarding the contributions of companies other than government companies and they can only contribute a certain aggregate of amount earned in the last financial year. If the company makes a political contribution contravening the same, a fine may be imposed on the company which would be five times the amount of contribution of the company. The company will be in default and may face imprisonment up to six months along with a fine of the aforesaid amount. Under Section 184(4), every director at the first general meeting after his appointment shall disclose if he has any conflict or interest in the company or the body corporate and failure to do would make the director in default and could make him liable to face imprisonment up to one year or face a fine of Rs 50,000 which may go up to one lakh rupees. Under Section 187(4), all the Investments of Company whether be in assets or property is to be in the name of the Company and if the corporation contravenes the same it may face a fine of Rs. 25,000 which can go up to Rs.25 lakhs and Officer in charge of the same would also be liable along with the company be in default and face imprisonment of 6 months or a fine. Under Section 188(5), the company cannot enter into a related party transaction without the approval and consent of the Board of Directors and imposition of certain conditions of sale, lease etc. In case of unlisted Company, if it fails to follow the requisite preconditions, it can be punishable with fine of Rs. 25,000 which may go up to Rs. 5 lakhs or with both.  Under Section 447, prescribes that any person who is found to be guilty of fraud within the company management shall face imprisonment for up to 10 years and be liable to fine which may be 3 times the amount involved.

Conclusion

The liability of corporation has gained a profound foothold in the past few years. Corporations though not real persons, they have been bestowed with legal personality and must thus be responsible for its acts. Due to increasing ambit of corporations in everyday life, the liability has to be imposed on corporations as well. Thus, the new Companies Act, 2013 has also incorporated various provisions to incorporate liability of corporations.

Frequently Asked Questions

Why has liability been imposed on Corporation?

Corporations as is not a natural person, it has to act through its proxies; its employees and other officers. It therefore, follows that a corporation neither has its own will nor an interest of its own, but acts through agent. As humans are often subjected to prejudices and mismanagement, liability is imposed on corporation to pierce the veil and find out real culprits of the mismanagement.

Is vicarious liability imposed on Corporations?

The company is an artificial person having no brain, mind and body of its own, however, it would be held liable for the wrongful acts committed by its agents or servants during the course of their employment. This liability is based on the principle of vicarious liability. This is further strengthened by the Latin maxim of “Qui facet alium facet per se” meaning that the authorised act which is done through another is deemed to be done by him.

What is civil liability imposed on Corporations?

Civil liability has been imposed on the corporations through vicarious liability, tortious liability and corporate civil liability imposed through Companies Act, 2013. The courts have also increased the ambit of liability of corporations and have made them liable under the statutory provisions and in interest of justice and equity.

What is criminal liability imposed on Corporations?

Corporate criminal liability in India has been recognised under the criminal law as the company as a legal person or a separate legal entity. The company is liable for the acts done by the employees of the company. The corporate criminal liability in India is governed by the norms of the vicarious liability, and statutory liability imposed through the Act, 2013.

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje 

Reference

[i]Doctrine of ultra vires

[ii](1886) 11AC 247.

[iii](1904) AC 423.

[iv](1899) I QB 392.

[v]Fitzgerald PJ. : Salmond on Jurisprudence. (12th ed.), p. 315.

[vi](1944) I KB 551.

[vii](1944) K B 146.

[viii] (1944)2 All ER S15.

[ix] (1880) 5 QBD 287.