One such practice would be fraudulent trading, that being where, during “…the course of the winding up of a company it appears that any business of the company has been carried on with the intent to defraud creditors of the company…”. If this is the case then the court can order that any person who were “knowingly parties to the carrying on of the business” with the intent to defraud creditors are personally liable to make contributions to the company’s assets. It should be stressed that fraudulent trading is difficult to prove bearing in mind the necessity of proving that the person concerned intended to defraud and that they were knowingly party to the carrying on of the business but it is however indicative that directors do not have unrestricted freedom to do as they see fit to make money either for themselves or for their shareholders.
A further illustration of a scenario where a director can be made personally liable for his actions in relation to the running of a company is that of wrongful trading. The Insolvency Act 1986 provides that a director may be required to swell the assets of the company out of his own personal wealth if the court is satisfied that the director is guilty of wrongful trading. Similarly, the same act provides that directors or other officers of the company may be required, at the discretion of the court to, in effect indemnify the company of any money or assets that have been misapplied or retained or that they have become accountable for. Wrongful trading and summary remedy against delinquent directors provide an easier mechanism for making what, on the face of it, look like acts of the company a personal liability for the offender.
Where separate legal personality appears to shield those people running the company, such as in the case of Yukong Line Ltd v Rendsburg Investments Corporation Ltd (No 2) in which it was determined that members of a company do not normally intend that the company is to be their agent. This authority is sufficient to show that no agency relationship exists and therefore the members are not likely to be liable for the actions of the company, however there are instances where the courts find it necessary to disregard the separate legal personality by ‘lifting’ or ‘piercing the corporate veil.’ One such instance may be where the company has been set up as a ‘façade’ or ‘sham’ in order that existing liabilities or indeed the law is defeated as was the scenario faced by the court in the case of Gilford Motor Co v Horne. In this case the court was prepared to look behind the corporate veil in order that the corporate form cannot be used in order to avoid personal liability and therefore responsibility. In effect the courts appear to be saying that the fact you have set up a company does not provide you with the ability or right to do things that you wouldn’t necessarily do in your own name. A variation on this theme is provided by the Companies Act 1985 and concerns those who act as directors irrespective of which title, if any, they hold. This has the effect of making all the circumstances by which a director can be made personally liable for his/her actions applicable to those who act as de facto or shadow directors and provides a further illustration that the corporate form cannot simply be manipulated in order to make a profit without the individual either taking responsibility, or having responsibility for their actions thrust upon them.
Further statutory provisions providing that a director cannot pursue profits without personal responsibility can be found in the form of the Company Directors Disqualification Act of 1986. This act provides circumstances under which a director can be disqualified from being a director of any company and such examples would be for being convicted of an indictable offence, for persistent breaches of company law, fraudulent trading, for unfitness and following a DTI investigation.
There are plenty of other circumstances under which a director may be liable due to their actions in running a company in order to make profit but it is imperative that liability is not substituted for the word responsibility in the quote above as this would give a distorted picture of reality. Responsibility is a much broader term than liability and can encompass a much broader range of circumstances relevant to the subject of this essay.
Robert Goddard quotes from the Government’s White Paper on Modernising Company Law that:
“the basic goal for directors should be the success of the company in the collective best interests of the shareholders, but that [the] directors should also recognise, as the circumstances require, the company’s need to foster relationships with its employees, customers and suppliers, its need to maintain its business reputation, and its need to consider the company’s impact on the community and the working environment.”
This quote has been included in order to introduce the need for consideration of stakeholders such as the employees, customers and suppliers etc mentioned above. It could be asserted that directors, whilst striving to make their company as profitable as possible, should not merely have consideration for their employees and other stakeholders but should have a responsibility to foster the relationships outlined by the Government. Sarah Worthington puts forward two theories relating to the running of a company, the first being the ‘inclusive’ or ‘enlightened shareholder’ approach which advocates that a company should be run in order that the shareholders receive dividend payments and that they receive a sizeable return on their investments and the second theory is the ‘pluralist’ or ‘stakeholder’ approach which advocates that there should be a balance of interests between the shareholders and the stakeholders. In terms of ascertaining whether or not any individual responsibility lies where a company is used to generate profit this second theory proves useful.
In terms of directors, who have the task of protecting shareholders’ investments and indeed ensuring profits are made, the idea of the company being run for the benefit of not just the aforementioned shareholders but also stakeholders, does in fact appear to place responsibilities upon them. Goldenberg quotes a commentator as observing
“By making ordinary business decisions managers now have more power than most sovereign governments to determine where people live; what work they will do, if any; what they will eat, drink, and wear; what sorts of knowledge they will encourage; and what kinds of society their children will inherit.”
Assuming this is indicative of the influence large companies have over peoples lives, and it likely to be the case, then the directors of large corporations could not possibly refute any claim that they have individual responsibility to ensure that while they pursue profits for their companies, they do not cause a detriment to the quality of life of those around them. It may be fair to say that these responsibilities are not of a legal nature and as a result cannot necessarily be enforced, but it would be naïve to suggest that every potential, or indeed present, employee, supplier, creditor or shareholder would condone an excessively blinkered approach to money-making and therefore in the interests of the company it is the responsibility of the directors both collectively and individually to ensure that their policies do not serve the purpose of making profit regardless of the consequences. In order to explain, take for example BP who had what some would call a ‘laid back’ approach to the effect their operations had on the environment. This was seized upon by pressure groups such as Greenpeace and by the national press which, although did not threaten the economic stability of the company, raised public awareness and somewhat damaged the reputation of the company. This was sufficient to ‘persuade’ those in control that they had a responsibility to run the company in such a manner that profits were made but yet consideration was taken of external factors which may indirectly affect the company’s profit-making ability. It could be argued that this was the responsibility of the company but to look at it another way would be to consider how those controlling the company would look themselves if they decided not to take notice of the criticism aimed at the company – after all, if it were the case that they decided to do nothing then their personal reputations could well be damaged causing them problems should they seek a directorial position elsewhere.
As has been examined, there may be cases where the directors of a company have an individual responsibility whilst trying to ensure profit is forthcoming but what of the members? In light of the fact that many shares in companies are held by institutional investors who, unlike the individual shareholder, may be able to influence the policies enacted by those controlling the company due to the size of their shareholding. It could be argued therefore, that an insurance company which owns twenty percent of the shares in a company has a responsibility to use their influence to ensure the company makes the not only prudent business decisions but the correct ethical and public relations policies to ensure that their investment is as secure as possible. What is noticeable though is the fact that these institutional investors are also corporations, using another company as a vehicle to make profit and it would therefore likely be the case that no individual responsibility could be said to lie.
Institutions are not the only investors who invest money in companies in order to make profit; individual persons also have share holdings in order that they receive a financial return. But do these individual shareholders make a profit without individual responsibility? Two arguments could be put forward, one arguing that they do have individual responsibility and one arguing the opposite – that they don’t. Those who contend that they have no responsibility would point to the fact that there is a separation between the ownership and the management of the company and therefore what the management do in order to generate profit for the owners is of no concern to the owners – the management are there to manage and the owners are there to reap the benefits that come with their position. After all, it would be unfair to place responsibility on the shoulders of people who own a small fraction of a company’s issued share capital. In contrast, those who contend that the members do have individual responsibility could argue that it is up to the members to make their feelings clear to the management should they consider their actions ‘inappropriate’. Goldenberg states that
“It should, however, be noted that the exercise by shareholders of their rights need not be confined to protecting their own financial well-being. It is open to shareholders to use their position as such to further other causes”.
Whether the fact that it is open to shareholders to use their position to ‘further other causes’ can be considered to be a responsibility upon them would be a matter to be determined by the circumstances and indeed by the character of the shareholder – one shareholder may think an issue has nothing to do with them whereas another may determine that the same issue is one which is of the utmost importance and thereby makes it their responsibility. There does not appear to be definitive criteria on application of which it can be determined whether a member has individual responsibility or not.
Section 303 of the Companies Act 1985 provides that a director, by way of ordinary resolution, may be removed by resolution of the members and it is here that individual responsibility of the members may lie. Members have the right to vote to determine whether a director is removed from office or not and a strong argument could be made that the members both collectively and individually have a responsibility to vote to dismiss a director who is failing to make the company a success, failing to satisfy stakeholders or is just generally not doing a sufficient job. Likewise, at a general meeting where directors are appointed depending on the number of votes they receive, the members may have a responsibility to the other shareholders and stakeholders to vote for the person who will do the best job for all those concerned.
Having discussed some and by no means all aspects relating to any individual responsibility that may lie whilst using the corporate form for obtaining individual profit it has become apparent that in some circumstances it is fair to say that the criticism levelled ninety-two years ago is still applicable today. For the purposes of this essay the liability of members and directors was discussed and as far as the members were concerned it appeared to be the case that they were in the best position to use the companies to make individual profit without individual responsibility due to the fact that it was only upon the liquidation of the company that the law would impose any sort of responsibility upon them personally – that being to pay up. In contrast when dealing with directors who were also thought of as using companies to make individual profit there appeared to be many more instances where they could be made not only individually responsible, but liable under modern laws. Examples cited were those of fraudulent and wrongful trading, where the company was used as a sham as well as the provisions of the Company Directors Disqualification Act 1986 and although not discussed, the crime of insider dealing which carries criminal penalties.
The above are instances where the law provides where individual responsibility shall lie but it would be true to say that nearly a century on from the criticism levelled by The Devil’s Dictionary it is not only the law that dictates where individual responsibility will fall. Ethical and moral factors can, and do determine whether a person has individual responsibility such as whether to vote for a certain director or not, whether to stand up to decisions made which affect stakeholders but it is important to remember that it is dependent on the shareholder concerned whether they consider themselves to have the responsibility. Directors on the other hand would appear to have significant individual responsibility bearing in mind that their decisions do affect the lives of others.
Broadly speaking it would appear that the extent to which a corporation can be said to be ‘an ingenious device for obtaining individual profit without individual responsibility’ is somewhat limited. Modern day laws in the form of the Companies Acts, Insolvency Acts and the Company Directors Disqualification Act make the corporate form less of a ‘license to print money’ without any risk especially for those who as directors aim to make profits. However in terms of the members it seems to be the case that as far as law is concerned, except when the company is in financial difficulty or where a company is used to perpetrate a fraud, which is relatively uncommon, no individual responsibility will lie and therefore the above criticism could be argued to be as relevant today as it was when made.
Word Count: 3184
Bibliography
Cases and Materials in Company Law – 17th Edition, L.S. Sealy, Butterworths, London, 2001;
Company Law, Mayson, French & Ryan on, Stephen Mayson, Derek French and Christopher Ryan, Oxford University Press, Oxford, 2002;
Company Law – Theory, Structure and Operation, Brian R. Cheffins, Clarendon Press, Oxford, 1997;
IALS Company Law Lecture. Shareholders v Stakeholders: The Bogus Argument, Philip Goldenberg, Company Lawyer, 1998, Vol. 19(2), 34-39;
Modernising Company Law: The Governments White Paper, Robert Goddard, Modern Law Review, 2003, Vol. 66(3), 402-464;
Reforming Directors Duties, Sarah Worthington, Modern Law Review, 2003, Vol. 64(3), 439-457;
Smoke and Mirrors, Neil Hawke and Pamela Hargreaves, International Company and Commercial Law Review, 2003 14(2), 75-82;
Wrongful Trading, Marion Simmons, Insolvency Intelligence, 2001, 14(2) pp12-16;
This is as a result of s13 Companies Act 1985 and the case Salomon v A. Salomon and Co. Ltd (HL 1896) [1897] AC 22;
p497, Company Law – Theory, Structure and Operation, Brian R. Cheffins, Clarendon Press, Oxford, 1997;
p498, Company Law – Theory, Structure and Operation, Brian R. Cheffins, Clarendon Press, Oxford, 1997;
s123, Insolvency Act 1986;
s213(2) Insolvency Act 1986;
s214, Insolvency Act 1986;
s212, Insolvency Act 1986, Summary remedy against delinquent directors, liquidators, etc;
ss6, 7, 9 and Schedule 1;
Modernising Company Law: The Governments White Paper, Modern Law Review, 2003, Vol. 66(3), 402-464;
Note that s309 of the Companies Act 1985 provides that the directors have a statutory duty to have regard for the interests of their employees although this duty is owed to the company;
p440, Reforming Directors Duties, Modern Law Review, 2003, Vol. 64(3), 439-457;
It should be noted that whilst dealing with directors it is important to consider that those being discussed are to be taken as being shareholders also;
p34, Philip Goldenberg, IALS Company Law Lecture. Shareholders v Stakeholders: The Bogus Argument, Company Lawyer, 1998, Vol. 19(2), 34-39;
