White Collar Fraud & Companies

Are the Corporate Police becoming tougher?

I am reminded of a spoof that Michael Moore did involving a white-collar version of the show Cops – instead of cops chasing down young black males, Moore (satirically) proposed the idea of police running after multi-millionaire/billionaires, throwing them to the ground, cuffing them and putting them in the backseat of a cop-car. Of course, in the real world, no matter how much we’d like to see Bond (or perhaps your boss) being rugby tackled or on the receiving end of a taser, that’s not how they’ll typically be treated for white-collar crime.

In the 80s and late 90s a number of white-collar criminals received relatively light sentences. Michael Milken served less than two years and still had a fortune of around $2.1billion. Frank Quattrone, on the other hand, received a deferred prosecution agreement and will not face prison time and will in fact receive compensation.

On the other side of the century, Bernard Madoff who defrauded investors of billions of dollars was sentenced to 150 years in prison; the maximum allowed. It appears that the time of the corporate lawlessness is over.

But when exactly should a director be liable for losses suffered?

Apart from the obvious situation where the director, for instance, provides a personal guarantee for a transaction, I would say that the extent to which a director is personally liable is quite limited. Certainly in a case where the director has abused his position for his or another’s benefit he should be personally liable – e.g. the example given where a director provides an interest free-loan to a friend, or perhaps provides a friend with work where he is paid exuberantly well. Both cases involve a conflict of interest as well as a breach of the director’s fiduciary duty to the company and the director should be liable for any profits arising from that - and more!

This of course isn’t just limited to directors (although perhaps because of their position the standards are higher for them) – employees cannot hide behind the corporate veil if they also misuse their position.

I think these elements are certainly fair – and I doubt anyone would question a director being personally liable when he or she has committed fraud or breached his fiduciary duties. The conflict comes when a director, for instance, is alleged to be liable for simply a bad business deal – albeit one done in good faith and with sound business judgement. So yes, a balance needs to be reached to encourage the formation of corporations which is essential to economic growth as well as ensuring personal responsibility for shady directors..

The veil of incorporation has been considered in Trustor AB v Smallbone [2001] 3 All ER 987. The significance in this case lies in the way counsel for the claimant invited the Court of Appeal to lay down rules as to when the veil of incorporation may be lifted. Smallbone was a director of Trustor AB, a Swedish registered company. Without the consent of the other directors, he transferred large amounts of corporate funds into a company controlled by him, Introcrom Ltd. He then removed some of these funds from Introcrom Ltd’s bank account into his own name. Being aware of all the circumstances, Smallbone was found to be jointly and severally liable with Introcrom Ltd for those sums received by him from its bank account. The court then had to consider whether Smallbone was liable for sums paid from that account to other persons.

Trustor AB, the claimant company, sought to obtain the lifting of the veil of incorporation of Introcrom Ltd under three headings:the company was a sham with no unconnected third party involvedthe company was involved in the improprietyit was necessary that the veil should be lifted in the interests of justice.The Court of Appeal was content to lift the corporate veil on the first two grounds but not the third. It was stated that there was no general power to lift the corporate veil simply because it was necessary in the interests of justice.Again the case of Adams v Cape Industries plc was cited with approval. The veil should not be lifted merely because legal technicalities resulted in injustice.

http://www.accaglobal.com/archive/corpsecrev/44/895748

Also another interesting article on the Australian perspective: Piercing the Corporate Veil in Australia by Ian Ramsay, David Noakes.