Publication Type

Conference Paper

Publication Date

9-2015

Abstract

When a company entersinto a transaction or undertakes an action that turns out to be either illegalor otherwise exposes the company to substantial fines or other pecuniarysanctions, the question arises as to whether the company may then recover itsfines, expenses and other losses from its directors and employees, in theabsence of the relevant legislation specifically providing for, or denying aclaim by, the company. Inthese cases, the board may have made a specific decision to cause the companyto enter into the unlawful conduct or may have failed to prevent the improperconduct from undertaken by its employees or officers acting on the company’sbehalf. This paper assumes that the directors or employees have not acteddishonestly or otherwise breach the no-conflict or no-profit rule. While theboard is not likely to sue one of its own members, the action may be brought bya differently constituted board or shareholders pursuant to the statutory derivative action.While there arefew criminal prosecutions of companies, particularly for economic crimes, thisis likely going to change with the introduction of the deferred prosecutionagreements via the Crime and Courts Act 2013, and the proposed increase infines for fraud, bribery and money laundering offences on companies will resultin the issue becoming even more important. Loss-shifting claims by the company against the directors or officers presentseveral difficult policy issues.The company has the incentives to make the claim as itwill generally not be able to claim the fine/penalty from its own insurer, and may wish to have recourse against its directors or employees for negligenceor breach of duty of care, particularly if they are covered by directors’ andofficers’ (D&O) insurance. However, in principle, it appears surprising ifthe impact of a criminal sanction could be negated by a civil claim. Yet,shareholders or creditors (where the company is insolvent) may not haveparticipated in the wrongdoing at all and it appears harsh that the company isdenied the claim from its directors. While the mostrecent discussions of the point of illegality by the House of Lords in Gray v Thames Trains[6] and Stone& Rolls are largely inconclusive, the recent decisions of the Court ofAppeal in Safeway v Twigger[7](Safeway) and Bilta(No. 2) v Nazir[8](Bilta) highlight the policy debates in this area. In Safeway, which concerns the infringement of the Chapter Iprohibition of the Competition Act 1998, the Court of Appeal held that theclaims by the company against its directors and employees for the fine/penaltyand associated expenses were barred because they infringed the public policymaxim ex turpi causa that a personcommitted an illegal or unlawful act could not maintain an action for anindemnity against the liability which resulted from the act. Much of thereasoning of the Court of Appeal will apply to other kinds of corporatecriminal or quasi-criminal wrongdoing. InBilta, Safeway was distinguished on the grounds of [ ]. However, anumber of questions remain. First, would public policy prohibition the recoveryof fines/penalties against the director or employee in respect of a strictliability offence or an offence which carry strict liability but where thedefendant has a defence of due diligence? Safewaywas a case concerning fault-based quasi-criminal liability for the corporatewrongdoing, and the case left open the possibility of claims in respect of strictliability offences. Second, would the same prohibition barring claims apply tolosses payable by the company as result of court-ordered compensation orderswhich form part of the settlement of the quasi-criminal prosecution or deferredprosecution agreement? These are not technically fines or penalties. Third,would the prohibition on recovery extend to losses suffered by the company inconjunction with the wrongdoing? Part II deals with the scope ofthe public policy bar as set out in Safewayand the existing case law in respect of loss-shifting by the company in respectof recovery of fines/penalties and other losses. It argues that notwithstandingSafeway v Twigger, English case lawdraws a clear distinction between fines/penalties and other losses; the caselaw shows that the courts should be very slow to find the existence of a publicpolicy bar in the latter. Part III arguesthat contrary to academic arguments, the prohibition on the company’s abilityshifting losses arising from the fines orpenalties can be justified conceptually not only on criminal lawprinciples, but also on corporate law principles. While the prohibition in Safeway may be inconsistent with thepolicy of enforcing directors’ duties, allowing such compensation claims by thecompanies for the penalties fines paid over to the regulator will also lead toother issues, such as resulting in a windfall for the companies who may havebenefitted from the criminal wrongdoing in other aspects, and loss-shifting mayeven disincentivise companies to take appropriate preventive measures to avoidthe occurrence of corporate wrongdoing. However, the publicpolicy prohibition in respect of claims based on the company’s fines/penalties doesnot apply with equal force with the company’s civil claims. Using examples of possible civilclaims arising from criminal prosecutions or quasi-criminal prosecutions ofcorporations will be drawn from the following key pieces of legislation: section7 of Bribery Act 2000, Proceeds of Crimes Act, Financial Services and MarketsAct 2000, and employment and workplace legislation. Part III argues thatthe prohibition should not bar the company from recovering from its errant directorsother kinds of losses. It draws the distinction between fines/penalties andcompensation, noting that the distinction may not be so clear in instanceswhere compensation orders are part of the fines/penalties. Using examples under theProceeds of Crimes Act, [ ]. Part IV comparesthe UK approach with the approaches in Australia and Singapore, as to theissues arising from loss-shifting in corporate wrongdoing actions. In the caseof Australia, while Australia has a similar prohibition to UK in respect ofbarring recovery of fines/penalties, enforcement actions continue to be takenagainst directors for breach of their duty of care and skill in connection withcorporate wrongdoing due to its active public enforcement regime by ASIC. Inthe case of Singapore, the issue of whether a company may bring an actionagainst its former chief executive officer for bribes paid by the company tothird parties (and which the CEO did not benefit personally) arose in Ho v Scintronix. The comparisonshows that while current arrangements may not be optimal, there are goodreasons for not allowing loss-shifting by companies against their directorsfollowing from corporate criminal prosecutions. Part V concludes. [7] [2010] EWCA Civ 1472.[8] [2013] EWCA Civ968; [2014] Ch 52.

Keywords

Loss shifting, Safeway, corporate illegality, Bilta v Nazir

Discipline

Business Law, Public Responsibility, and Ethics | Business Organizations Law

Research Areas

Corporate, Finance and Securities Law

Publication

Critical Issues in Corporate Law 2015, September 10

Publisher

Elsevier

City or Country

Hong Kong

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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Presented at Australian Corporate Law Teachers Association Conference, UNSW, February 2016

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