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Protecting Directors or Protecting Companies? Charles Bott QC and Jonathan Lennon explore issues around who can be prosecuted; the company or the director.
Corporate liability: the SFO’s View
The new Director of the SFO, Lisa Osofsky, recently told Parliament’s Justice Select Committee that senior individuals within large corporate organisations were not being held accountable because the agency was ‘hamstrung’ by the so called ‘identification principle’ – the rule which requires ‘controlling minds’ to be in the dock before a company can be convicted. Osofsky said the law was outdated because it evolved when only a few people ran most companies:
‘I just look at the delta between what we’re able to do with corruption and what I see down the road in dealing with corporate crime in terms of fraud and economic crime, and it is so vast and different that I’m worried we won’t always be able to pursue the fraud cases that we want.’
Reflecting her American background, she said; ‘I can go after Main Street but I can’t go after Wall Street’ and she described the gulf between what SMEs could be held accountable for and what large corporates evaded as ‘unfair’:
‘We know that there are crimes where there is a corporate culture, corporate demand for hitting sales targets, doing away with inconvenient health and safety rules in a certain way, that will often make employees take action.’
Osofsky’s view was that such employees should be held accountable and that the SFO needed to tackle the ‘corporate behaviour that allow these individuals to perform these acts’.
So, what is this ‘identification principle’ that so vexes the new Director of the SFO?
The Law: Is the Company Going to be Prosecuted?
The starting point is that an indictment lies against all persons who commit, procure or assist in the commission of an indictable offence. A company is a legal person – but it does not have a mind of its own so it cannot commit an offence which has a mental ingredient, a mens rea, without adopting somebody else’s mind. Anyone who aids, abets, counsels or procures an offence is now treated by the criminal law as a principal offender. But if Parliament intends for an offence to be aimed at companies, as well as individuals, it will usually make that clear in the legislation – see e.g. the Corporate Homicide and Manslaughter Act 2007. In such circumstances there is no difficulty in prosecuting the company itself. More general liability is expressed in the Interpretation Act 1978, where Schedule 3 includes ‘bodies corporate’ in the definition of ‘persons’. But problems will still arise with offences where there is no express provision in the Act for corporate liability. That is where the ‘identification’ principle comes in. The ‘acts and state of mind’ of those who represent the ‘directing mind and will’ of the company are imputed to the company itself: Lennards Carrying Co and Asiatic Petroleum  AC 705, Bolton Engineering Co v Graham  1 QB 159 (per Denning LJ) and R v Andrews Weatherfoil 56 C App R 31 CA.
Fifteen years after the Bolton Engineering case, the House of Lords conclusively established the rule that a company will have imputed to it the acts and state of mind of those of its directors and managers who represent its ‘directing mind and will’: Tesco Supermarkets Ltd v Nattrass  A.C. 153, HL. The defendant in that case was charged with an offence under the Trade Descriptions Act 1968: its defence was that the company operated over 800 stores and could not be responsible, on a proper reading of the legislation, for the acts of one of its managers. In the Andrews-Weatherfoil case, an allegation of corruption tried shortly after the House of Lords ruled in Tesco, it was said that it was not every ‘responsible agent’ or ‘high executive’ or ‘agent acting on behalf of the company’, who could by his actions make the company criminally responsible . Eveleigh J. said : ‘It is necessary to establish whether the natural person or persons in question have the status and authority which in law makes their acts in the matter under consideration the acts of the company so that the natural person is to be treated as the company itself.’
The Privy Council case of Meridian Global Funds Management Asia Ltd v Securities Commission  2 A.C. 500, PC provides useful guidance. The court there followed Tesco v Nattrass and held that the question of corporate liability was one of construction rather than ‘metaphysics’. A company’s rights and obligations are determined by rules whereby the acts of natural persons are attributed to the company. These are both ‘primary’ rules of attribution – generally contained in the company’s articles and constitution – and wider principles derived from the law of agency and vicarious liability.
A lot of the case law in this area involves questions of civil liability where the courts’ approach is helpful, but may not be definitive in a criminal context. An interesting example of a case following Meridian is Orr v Milton Keynes Council  EWCA Civ 62. The question was whether, in an Employment Tribunal, race discrimination by a manager could be imputed to the employer local authority. It was held that, in employment cases, there was no justification for imputing to the employer knowledge that he did not or could not reasonably have. The thrust of Meridian is that one looks to the company ‘rules’ first but, exceptionally, where those principles would defeat the intended application of a particular law to a company, a ‘special rule’ of attribution may be necessary to determine whose act or knowledge or state of mind was, for the purpose of that statute, to be attributed to the company. This is a rather fluid principle – but in essence the rule is that liability is always that of an individual unless the legislation says otherwise, or where not to litigate against the company would defeat the purpose of the legislation. As was said in Att.-Gen.’s Reference (No. 2 of 1999) (2000) 3 WLR 195, Meridian proceeded on the basis that the primary ‘directing mind and will’ rule in Tesco Ltd v. Nattrass, still prevails: it had merely fashioned an additional special rule of attribution geared to the purpose of the particular statute: see R v St. Regis Paper Co Ltd  1 Cr.App.R. 14, CA.
In the St. Regis Paper case, the company was charged with regulatory offences under environmental legislation, where a technical manager had dishonestly made false entries in paperwork concerning waste disposal. The judge, purporting to follow Meridian, found that – as the manager was entrusted with managing waste disposal, which was a regulated activity – his dishonesty could be attributed to the company. The judge directed the jury to that effect and the company was convicted. The Court of Appeal disagreed with the judge’s analysis. The Appeal Court held that, as a matter of statutory construction, it was impossible to impose criminal liability on the company in circumstances other than those where an intention to make a false entry could be attributed by operation of the rule in Tesco – i.e. the directing mind and will test. The Court found that ‘there was no warrant for imposing liability by virtue of the intentions of one who could not be said to be the directing mind and will’ of the company.
However, in an earlier case, not apparently cited in argument in St Regis, a different result flowed in a similar regulatory prosecution. In Information Commissioner v Islington LBC  L.G.R. 38, DC, it was held in the High Court that on a prosecution of a local authority for an offence under the Data Protection Act 1984, the act of one of its employees in using data for an unauthorised purpose ‘could be combined with the recklessness of the controlling minds of the authority’ as to the lack of registration, where there was evidence of such an act (but no evidence that the actor knew or was reckless as to the lapse of the registration) and of such recklessness (but no evidence that the controlling minds had any individual knowledge of the particular act). Thus, whether or not the individual council employee had acted recklessly in breaching the law, it was right and proper for the Council itself to bear liability given the purpose of the legislation; thus for the purposes of s5 of the DPA the knowledge and actions of the ‘directing minds’ of a corporate body were to be taken together with actions of those to whom administrative functions were delegated.
More than One Officer
Context is everything. In a medium sized or large business, more than one company officer may be at fault. Where a number of officers have been concerned in the act or omission giving rise to a potential offence, but none individually has the required mens rea, it is not permissible for the Crown to aggregate all states of mind of the officers to prove a dishonest state of mind: Armstrong v Strain  1 All ER 139; see also R v P&O European Ferries (Dover) Ltd & others  93 Cr App R 72.
On the other hand, the CPS guidance as to prosecuting individual officers is clear from its own website:
It is important to prosecute not only the corporation but those who are in control….Certain types of offences (for example false accounting and regulatory offences) committed by a body corporate with the consent or connivance of a director/ manager/ secretary of a company make those officers criminally liable. When proceeding against company officers in these circumstances the offence by the body corporate must be proved, but it is not always possible to secure the conviction of the company, and this is not required (R v Dickson and Wright 94 Cr App 7). Prosecutors may consider proceedings against the company officers where the company has been dissolved, for example.
Prosecuting Company Officers
The CPS guidance makes it clear to prosecutors that they can properly charge company officers with corporate offences if the company is guilty but is not itself in the dock. This requires the ‘lifting of the corporate veil’ – i.e. prosecuting those behind a company. There is a good deal of case law on the lifting the corporate veil which we will not attempt to recount here. But the notion that company officers may be prosecuted if they themselves are also guilty is nothing new and no more than common- sense. The principle is recognised in a number of statutes which specifically establish the liability of company officers as individuals; see e.g. s12(2) of the Fraud Act 2006, which provides that where a company has committed a fraud offence under the Act, its officers may be criminally liable where the offence is; ‘ proved to have been committed with the consent or connivance of’ that officer.
But the notion of personal responsibility for corporate acts has its limitations . Certainly that was the view of the Court of Appeal in R v Boyle Transport (Northern Ireland) Ltd  EWCA Crim 19, where it was said that the principles to be applied to the lifting of the corporate veil were the same in the civil courts as laid down originally in Salomon v. A. Salomon & Co. Ltd  A.C. 22, HL, and restated in Prest v Petrodel Resources Ltd  UKSC 34. The Boyle case is an important reminder to those representing company directors that the protection of incorporation is stronger than some lawyers may think. In that case, two directors of a haulage company were convicted of conspiring to make false instruments pertaining to tachograph records. They received prison sentences: a new company was then set up and the assets of the first transferred in order to carry on trading. In the subsequent confiscation proceedings, the judge pierced the corporate veil of the new company so that the directors could be pursued. He was wrong to do so – despite the obvious artifice involved. The Court of Appeal held that it could not be determinative that the Appellants were the old company’s ‘operating minds’. On the contrary, they were the sole, legally appointed, directors. What the judge considered to be the ‘realities of the situation’ – did not justify his conclusion; the company had been properly set up as a limited company and there was no evidence that it would not have been viable: the company was not to be regarded as an alter ego of the defendants and no case for lifting or piercing the corporate veil was made out.
Of course the results of actual cases turn on their own facts. But, at all stages of the criminal process – from charging decisions to confiscation proceedings after conviction – basic principals of law are important and should not be overlooked. Any case that is tried by a jury may turn on its general ‘feel’ and whether the balance between the blame attached to a company and the individuals – and the consequences of conviction – seems fair and reasonable. For practitioners, there may be ways to ensure the company is protected or, conversely, that the company protects its directors. But none of this is straightforward and the law may start to move in a different direction if the frustrations expressed by the Director of the SFO – and others – gain political traction.
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