Chapter 14

Individual and corporate liability

Guidance for policymakers

• Corporate liability
• Individual liability
• Forms of individual liability
• Deemed liability
• Imposition of duties

14.17PCO noted that different methods of attributing liability involve significant trade-offs, including for the economy. Given the range of contexts in which pecuniary penalties are used, it was of the view that any guidance should set out the advantages and disadvantages of the different approaches, without mandating any particular position.

14.18Pecuniary penalties are used in a range of contexts. We agree with PCO’s submission that there is no “one size fits all” approach to individual and corporate liability. What is appropriate will depend on the legislative scheme, what it is trying to achieve and the incentives it seeks to put in place to best achieve that purpose. But it is possible to set out generally applicable principles and direct policymakers towards the full range of considerations that should be taken into account. These principles and considerations will also be of assistance to those designing regimes based on criminal liability.

14.19Pecuniary penalty provisions should be clear about whether corporations and/or individuals are to be liable. Relevant questions include:

• What type of conduct (corporate or personal) is the pecuniary penalty seeking to moderate?
• Is the conduct the kind that is usually carried out by individuals or corporations?
• Is the activity being regulated one in which the costs of paying the pecuniary penalty could easily be passed on to others (for example, consumers or shareholders)?

14.20If corporations are to be liable, the following should also be considered:

• Are the normal rules of agency sufficient to attribute the actions of individuals to the corporation, or should a specific provision of attribution be included?
• Should individuals also be liable for the corporate misconduct? Relevant considerations include:

• whether corporate liability alone is sufficient to promote compliance; and
• whether an individual would be subject to other disciplinary proceedings in the event of corporate non-compliance.

14.21If there is to be individual liability, a number of forms are available. We discuss these in detail below. They are:

• concurrent principal liability;
• deemed liability;
• imposition of duties; and
• accessory and other forms of secondary liability.

Corporate liability

A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will. Others are directors or managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.

[T]he Court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as an act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.

14.26The substantive rule at issue in Meridian was a requirement to provide notice when a person knows, or ought to know, that they have become a “substantial security holder” in a relevant company. The question was whether the knowledge of the investment managers who acquired the shares could be imputed to the company they worked for. The Privy Council found that it could, as the policy of the Securities Amendment Act 1988 was to compel immediate disclosure. To give effect to this policy, the knowledge of the people who acquired the interest, rather than the Board or senior management, needed to be imputed to the company.

14.28Legislation may also contain a specific provision of attribution. This has the benefit of clarity as to whose conduct or state of mind can be attributed to a corporation. An example is contained in section 90(1)–(2) of the Commerce Act:

Individual liabilityTop

14.29The purpose of a regulatory regime may make it appropriate to limit liability to individuals, and exclude the liability of corporations. As noted in the Financial Markets Authority submission to the Law Commission’s Issues Paper:

In some cases our securities law gives primary (or even sole) liability to individuals rather than corporates, recognising that some actions against a company by aggrieved shareholders, for example, simply reduce any value that those shareholders have in the company.

14.30This reflects the fact that a corporate pecuniary penalty can sometimes unfairly punish innocent parties (such as shareholders) who, in fact, may be amongst the people the regulated regime is seeking to protect. In such instances, it may be appropriate to restrict liability to individuals, provided that the expected standards for compliance are both clear and well understood.

Rather than having the state monitor the activities of each person within the organization, which is costly and raises practical enforcement difficulties, it may be more efficient to force the corporation to do this, especially if sanctions imposed on the corporation can be translated into effective action at the individual level.

The purpose of the change is to acknowledge that general deterrence is promoted if the individuals within firms that perpetrate offences face a personal pecuniary risk. Even though companies tend to gain the most from breaching the Act, remuneration structures and wider career aspirations can create incentives for individuals to breach the Act in order to directly benefit themselves.

14.37Individual liability, therefore, is expected to promote compliance by providing a personal incentive for individuals to act in a manner that ensures corporate compliance.

Conclusion

14.40If the provision imposes individual liability, consideration of what form this liability should take will be needed. Different forms of individual liability are discussed in the next section.

Forms of individual liabilityTop

14.41This section considers three types of individual liability: concurrent principal liability, deemed liability and imposition of duties, followed by a discussion of ancillary liability. Given the wide range of behaviour that pecuniary penalties apply to, which approach is most appropriate will depend on the circumstances, the legislative context and the purpose of the pecuniary penalty provision. With that in mind, the following discussion explains the different forms of liability, makes some general statements as to when that form of liability may be appropriate, and notes matters requiring consideration in the formulation of the liability provision.

14.42Whichever approach is adopted, the legislative drafting should make it clear who is liable and what they can do to avoid liability. In all cases, it is important that individuals and corporations are clear about their responsibilities, obligations and liability.

Concurrent principal liability

14.44If it is intended that individuals are concurrently liable as principals, the legislative drafting should be clear. As with attribution for corporate liability under Meridian, whether a statute allows for concurrent individual liability as a principal is a matter of statutory construction. The policy of the provision will also be relevant in ascertaining parliamentary intention.

The question to be considered is, in short, whether the director, servant or agent is acting for the company or as the company … When a person is acting for the company it is easier to view his conduct as both his own and vicariously that of the company. When a person is acting as the company, it is … more difficult, at least in general terms, to regard the conduct as that of both the person so acting and the company.

Section 90(2) speaks of conduct engaged in on behalf of a body corporate. That mode of expression suggests the company is liable vicariously rather than by attribution. The same can be said of the use of the word “also” in the statutory direction that the conduct of the director, servant or agent “shall be deemed … to have been engaged in also by the body corporate” (emphasis added). Not only linguistically but also in policy terms the section should be construed as making the proscribed conduct both that of the director, servant or agent and that of the company. That construction is consistent with the statement in s 27 that “no person” shall enter into a proscribed arrangement.

… our conclusion, in short, is that both the language of the enactment and the statutory policy that “no person” shall enter into a contravening arrangement results in both principal and agent having principal liability.

Conclusion

14.47Concurrent individual liability as a principal may be appropriate in some circumstances. A factor that may favour such an approach is where the contravening conduct is likely to be engaged in by one person in a corporation (such as sending electronic spam) rather than multiple individuals within an organisation (such as a corporate merger, in which many people would be involved). If concurrent individual liability as a principal is envisaged, the legislative drafting should be clear that this is the intent (for example, in any attribution provision). If this is not intended, the provision should likewise be clear.

Deemed liabilityTop

14.48Deemed liability makes an individual, by virtue of their position or function in an organisation, liable as a consequence of corporate breach. The most common instance is for directors or senior managers to be deemed liable in cases of corporate contravention.

14.49Deemed liability differs from primary or accessorial liability as it does not attach as a consequence of a corporate officer’s involvement in the breach, but because of their position or function within the corporation.

14.50A deeming provision effectively places responsibility for corporate non-compliance on a specified individual or individuals. The advantage of such liability is that it allows an enforcement agency to seek a penalty against a corporate officer simply because they occupy a particular position or perform a certain function within a corporation. Such provisions also provide a strong incentive on corporate officers to put systems and procedures in place to ensure corporate compliance. They also have the benefit of providing certainty as to which corporate officers within a corporation have responsibility for ensuring compliance with the relevant standards.

… as a general principle, individuals should not be made criminally liable for misconduct by a company except where it can be shown that they have personally helped in or been privy to that misconduct, that is, where they were accessories.

[W]here civil penalty provisions take the same form as offence provisions, and the same conduct may lead to both the contravention of an offence and a civil penalty provision, jurisdictions may wish to consider adopting a consistent approach.

Examples

14.58An example of this type of provision is contained in s 154I(4) of the Biosecurity Act 1993 (emphasis added):

Conclusion

14.61Deeming provisions can be appropriate in limited contexts, subject to diligent policy analysis. A careful balance is needed of the public interest in providing corporate officers with a personal incentive to ensure corporate compliance on the one hand, and having high-quality personnel in relevant roles on the other.

14.62Consideration should be given to the personal liability risk that the individual is already subject to. While a deeming provision on (for instance) directors in a single statute may not seem overly onerous, a proliferation of deeming provisions across a range of statutes may significantly deter candidates from taking on such roles. The balance struck must take into account the litigation risk imposed on such personnel in other legislation to ensure it is an appropriate reflection of the overall risk faced by those occupying such positions.

14.63Another factor that must be borne in mind is the risk that such provisions could result in overly cautious decision making. In some contexts, this may be a desirable outcome, such as where decisions relate to public safety. However, in other contexts an overly cautious approach may have adverse effects on, for instance, the economy. Of course, the purpose of individual liability is to influence individual decision making. However, it should aim to do so in a manner that still promotes good decision making that is not unduly influenced by personal litigation risk.

14.64With all this in mind, deeming provisions are appropriate in some contexts. One such context may be where there is a very high public interest in corporate compliance because of the risk non-compliance poses to public safety. A deeming provision could be justified to provide corporate officers with a strong personal incentive to take individual responsibility to make sure corporate actions do not endanger the public.

14.65Such provisions may also be appropriate where corporations are voluntarily participating in a highly regulated field. In that context, there is likely to be high awareness of the standards and rules that make up the regulatory regime. The combination of high awareness and voluntary participation may mean it is reasonable to expect corporate officers to bear responsibility for ensuring corporate compliance.

14.66However, it will generally be unreasonable to impose liability on an individual who has acted in a reasonable and diligent manner to ensure corporate compliance. Therefore, such provisions should generally ensure that individuals who have taken reasonable steps to ensure compliance are not liable.

14.67Careful consideration should be given to the framing of the deeming provision. The risks set out above can be reduced if the provision is clear as to when an individual will be exposed to individual liability and what they can do to avoid it. Factors excluding liability may either form part of the “ingredients” of the contravention or an affirmative defence. Such policy decisions will impact on the party that bears the burden of demonstrating the relevant circumstances exist.

14.68As with the framing of defences generally, they should be carefully considered to ensure perverse incentives are not created, such as causing corporate officers to disengage in processes in order to avoid liability.

Imposition of dutiesTop

14.71The advantages of this approach are similar to those for deeming provisions. They are an efficient method of providing for corporate officer liability, and they provide certainty as to who is responsible for certain actions. Additionally, they provide certainty to corporate officers as to what they need to do to avoid liability. There is a clear link between the corporate officer’s responsibility and the acts/omissions that make them liable.

14.72The shortfall of this approach may relate to its effectiveness. Such a provision could allow a corporate officer to put in place a process and then absolve themselves from any further responsibility for ensuring it is being followed or is effective. However, careful drafting could ameliorate this risk.

Conclusion

14.73The imposition of duties on corporate officers provides a more nuanced alternative to the deemed liability approach. This could be appropriate where it is necessary for corporations to have appropriate processes and procedures in place in order to comply with a regulatory regime. The provision will need to be carefully crafted to ensure it is effective, with consideration of an ongoing monitoring obligation on the corporate officer.

GUIDELINES