Introduction
A common part of the English law is the law of torts. According to Salmond, “Tort is a civil wrong for which the remedy is a common law action for unliquidated damages, and which is not exclusively the breach of a contract, or, the breach of a trust, or, other merely equitable obligation[1].” There are a few acts which do arise out of any statute or any contract; such a wrong can be either negligence or a civil wrong caused with intention. Intentional wrongs are abuse of process, fraud, and civil rights violations,[2] etc. The omission of an act which a person is bound to perform by duty of care and such an omission has caused harm to another person can be termed as negligence.
The definition of tortious liability is as follows:
“Tortious liability is when it arises from the breach of a duty which is primarily fixed by law. This duty is required to be towards persons generally and its breach should be redressable by an action for unliquidated damages.[3]” As per W.V. H. Rogers, the main difference which lies between tortuous liability and contractual liability is the nature of duty. The duties in the torts are more fixed by the law whereas the duties in case of contracts are fixed by the contractual parties. Also a contract requires a consensual agreement between the parties, whereas torts do not have any such requirement.
A tort can be both committed by a Company as well as be committed against a Company. In order for a tort to be committed by a Company and it be held liable, there is both need of humanitarian assistance as well as an individual against whom the wrong is committed.
Directors Liability For Torts
The common law has been vexed long enough with respect to torts committed by Company directors. The law of torts holds the director of a Company to be individually liable whereas the Company law holds the corporate entity as a whole liable. To prove the liability of a Director, there needs to be proven his active involvement directly in the said act or any instructions given by him or to carry out the same by someone. There is generally this question arising every time as to who is liable, the Company or the director; an appropriate answer to this question can be given via two approaches: the agency approach and the identification approach. Clearly these two approaches are totally conflicting with each other in order to prove the liability of a director either be it with tort law or company law.
The Identification Approach
According to the identification approach, the director should be treated to be liable for any act done by the Company based on the principle of separate legal entity for any act done in the course of business. This approach holds the director liable for any act done by him or by any member of the company where there is some active involvement of the director. In Trevor Ivory Ltd v Anderson[4], the Court of appeal of New Zealand had resorted to the Identification Approach and had applied the principle applied in the Tesco Supermarkets Ltd. V. Nattrass[5] where it was held that where the director is the directing mind, any act committed by the company is deemed to be the acts of the director.
The Agency Approach
However, as per the agency approach, it is taken that the Director is an agent of the Company and the company is treated as a separate entity and keeping this in mind the director is made liable only for the acts committed by him. This approach has widely been accepted as a creature of the Tort law. The recent trend has it that the agency approach is the one more preferred over the Identification Approach. In the leading case of Williams v. Natural Life Ltd [6]. It was held that we should resort to agency approach. In this case the business of the plaintiff company after two years of successful running was found to be garnering huge losses. Hence, it was concluded that the actions of the director were not in the interest of the company. The court of appeal in this case held that “ in order to fix a director with personal liability, it must be shown that he assumed personal responsibility for the negligent misstatement made on behalf of the company. In my judgment, having regard to the importance of the status of limited liability, a company director is only to be held personally liable for the company’s negligent misstatements if the plaintiffs can establish some special circumstances setting the case apart from the ordinary; and in the case of a director of a one-man company particular vigilance is needed, lest the protection of incorporation should be virtually nullified. But once such special circumstances are established, the fact of incorporation, even in the case of a one-man company, does not preclude the establishment of personal liability. In each case the decision is one of fact and degree.[7]” Subsequently this appeal was dismissed by the court of appeals.
Liability Of Shareholders For Company’s Tort
Initially the limited liability concept was the brainchild of England. There were cases which held that shareholders are not liable personally for the debts of the corporation but in the year 1671 in the case of Dr. Salmon v The Hamborough Company[8] it held that, if the members of the corporation are levied with assessment then the creditors can progress against the members and by default the members in their individual capacity will be liable. This was termed as the Theory of Leviation.[9]
The first act in India dealing with company was the Joint stock company act 1850, one provision of which was unlimited liability of the shareholders but this act was later renewed by a subsequent act of 1857 which established limited liability of shareholders[10].
The general rule of law shows a limited liability of the shareholders as the company and its shareholders are two separate legal entities. The shareholders in a company are liable towards the company only to the extent of the value of their shareholding[11] or the amount they have guaranteed towards the company.
Since a company is only an abstract and works through natural persons, there are situations where for the actions of a company or corporation, the members carrying out the affairs of the company are made liable.
Shareholders liability for torts committed by corporations can be established only in certain cases in which the shareholder personally has to make good the losses or payback to the creditors of the company. Like in the general rule of law of torts a person is made liable for his actions, same is the case where a shareholder is seen violating its right to vote or fraudulently embezzles company’s assets and funds[12].
There are certain other cases where personal liability of a shareholder can be established, some of which are discussed below.
Piercing the corporate veil which essentially means the people behind the working of the company are to be made personally liable for the frauds and wrongdoings done notwithstanding the protection of corporations being s separate legal entity[13]. This concept goes along with the alter ego theory, wherein if shown by the creditors or the plaintiffs that the shareholders are hiding under the shell of the corporation which doesn’t function as a business entity, then there is established a personal liability of the shareholders for the tortuous acts or contractual agreements of the corporation[14].
Personal guarantees which establishes the principle that when shareholders themselves undertake to guarantee the company’s loans to a certain extent, on any default they are required to repay the loans or borrowings till that extent. It takes away the protection which is given generally to the individuals.
The shareholders are also liable for the illegal acts or omissions. The torts committed by them even though for the benefit of the business doesn’t waive off their liability. Not performing a certain duty or acting negligently invokes personal liability[16]. Negligence only occurs when there is breach of duty of care and the remedy is thus linked to the proximate damage resulting from the breach of care[17].
The concept of limited liability in corporate torts has been criticised by looking back on the history and showing that this doctrine protected shareholders from contractual corporate liability and voluntary creditors and not from what is prevalent these days, to the tortuous liability[18].
The topic has been long discussed as to when should the liability of shareholder arise and there were certain rules which were suggested or tried. Some of which are further discussed.
Occurrence rule which suggested that shareholders at the time when the tort was committed should be liable. Judgement Rule attaches the liability to the shareholders holding shares at the time of the judgement. The information rule is the most suggested rule which holds the shareholders liability begins when tort claims are filed, the claims were probable and within the management’s awareness or when there is dissolution without a contractual successor[19].
Another rule suggested in a Columbia Law Journal was to hold only those shareholders liable for the tortuous acts of the corporations who could be said to have control over the corporation or had significant ownership of the corporation. This saves the shareholders who have a minority of shares and thus also gives the tort victims a remedy. This rule also recognised the joint controlling capacity of two or more shareholders in which all would be jointly and severally liable[20].
Conclusion
Any act that is a civil wrong for which the wrongdoer can be sued for damages by the complainant is a tort. However, it has long been debated as to whether a company which has a separate legal entity can be held liable for the torts or wrongs that have been committed by the employees and its workers during the course of employment. The question that was also debated was whether the shareholders of a company who hold shares of different amounts can be made liable for the debts and loan recovery of the company.
It can be easily concluded from the above discussion through statutes, various case laws that a corporation due to its separate legal entity can be sued for the wrongs that are committed by the employees and its directors. Also the directors liability can be found out through two ways which are the identification approach and the agency approach. Also the shareholders share some of the liability of the corporation for unpaid debts and can also be made to pay during winding up proceedings.
References:
1. R.V.F Hueston , ‘Salmond & Hueston on the Law of Torts’, (first published 1957, Sweet & Maxwell 2001) 21
2. William H. Gates, Lawyer’s Malpractice: Some Recent Data About Growing Problem, [1985] Mercer Law Review
3.
4. [1992] 2 NZLR 517
5. [1971] UKHL 1
6. [1998] 2 All ER 577
7. [1997] B.C.L.R. 131, 152C-D
8. Ch. Cas. 204 ( 1671)
9. Frederick G Kempin, Limited Liability in Historical Perspective, 1960 American Business Law Association Bulletin
10. Madhu Tyagi & Arun Kumar, Company Law (Atlantic Publishers, 2015) 4
11.Graham Greanleaf, ‘Corporate Embezzlement’ < https://www.translegal.com/lesson/3249>
12.‘Can Shareholders be held liable for corporate torts’ <https://www.lexology.com/library/detail.aspx?g=0d3623d5-2452-49cb-bd57-40a934678bb7>
13.‘Lifting the Corporate Veil’ < http://www.businessdictionary.com/definition/corporate-veil.html>
14.Prof. Richard Wilkins, ‘Personal Liability of Shareholders’ <https://thebusinessprofessor.com/knowledge-base/shareholder-personal-liability-for-corporate-obligations/>
15.‘Guarantee & Corporate Loans’ <http://real-law.ca/personal-guarantees-for-corporate-loans/>
16.Rukmini Dhalla, ‘When are shareholders liable for corporate debts and liabilities’ <http://www.cgcfirm.com/2017/03/when-are-shareholders-and-llc-members-personally-liable-for-corporate-debts-and-liabilities/>
17.‘Companies Liabilities for Negligent Actions <https://www.lawteacher.net/free-law-essays/business-law/companies-liability-for-negligent-actions-business-law-essay.php>
18.Daniel R Kahan, “Shareholder Liability for Corporate Torts: A Historical Perspective” [2010] 97 GLJ 42, 64
19.Henry Hansmann & Reinier Kraakman, “Toward Unlimited Shareholder Liability for Corporate Torts” [1997] 117 YLJ 25
20.Mendelson, Nina A, “A Control-Based Approach to Shareholder Liability for Corporate Torts.” [2002] 102 203-303.
About the author –
This article is authored by Shefali Agarwal, Final year law student at National Law University Odisha.