Corporate liability, also referred to as liability of legal persons, determines

the extent to which a company as a legal person can be held liable for the acts
and omissions of the natural persons it employs and, in some legal systems,
for those of other associates and business partners.
Since corporations and other business entities are a major part of the economic
landscape, corporate liability is key element in effective law enforcement for
economic crimes. A 2016 mapping of 41 countries’ corporate liability systems
shows wide variations in approaches to liability and that corporate liability is a
dynamic area of legal innovation and evolution.[1]
The term legal person refers to a business entity (often a corporation, but
possibly other legal entities, as specified by law) that has both legal rights (e.g.
the right to sue) as well as legal obligations. Because, at a public policy level,
the growth and prosperity of society depends to a large extent on the
business community, governments must carefully tailor the extent and ways
that each permitted form of business entity can be held liable.
Important design elements of corporate liability systems
include jurisdiction, successor liability, related and unrelated entities as
sources of liability, sanctions and mitigating factors.[1]
Poorly designed or non-existent corporate liability systems can make it
impossible to enforce laws effectively and can lead to profound injustices for
individuals or entities seeking accountability and redress for wrongdoing. [2]

Nature of corporate liability

Countries can base their corporate liability systems in criminal or non-criminal
law (that is, administrative or civil law) or in both. They can also enact
legislation that creates liability for legal persons in specific areas of law (e.g.
covering health and safety, and product safety issues). Under this approach,
the wording of a statutory offence specifically attaches liability to the
corporation as the principal or joint principal with a human agent.
Generally, countries’ approaches to this issue reflect long-standing and diverse
legal traditions. For example, Australia and Canada anchor their corporate
liability systems in criminal law, while the German and Italian systems are
based in administrative law. Some jurisdictions use criminal and civil systems
in parallel, thereby expanding options for pursuing legal accountability for legal
persons and for making political judgments on when to use the criminal law in
order to maximise the impact of those cases that are prosecuted. The United
States’ system of corporate liability is an example of one that incorporates both
criminal and civil law elements.[1]

Standards of liability
Standards of liability for legal persons help clarify when a legal person can be
held liable for an unlawful act. This raises subtle questions: since business
entities can only commit crime through the agency of the people (natural
persons) they employ or otherwise contract with, under what conditions should
culpability be attached to the business entity? Indeed, what does culpability
mean for such entities? Can the concepts of knowledge and intent required
for mens rea (guilty mind) even be applied to business entities?
Typically, companies are held liable when the acts and omissions, and the
knowledge and intent of its employees or business partners can
be attributed to the corporation. But again, countries adopt a wide variety of
approaches to this attribution. These vary from the all-encompassing approach
of strict liability to those that look at the entity’s corporate culture and
management systems in order to determine whether these ignored, tolerated or
encouraged criminal activity.[1]
Strict liability[
Strict liability is a standard of liability under which a person (legal or natural)
is legally responsible for the consequences flowing from an activity even in the
absence of fault or criminal intent on the part of the defendant. The difficulty of
proving a mens rea is avoided by imposing absolute, strict liability, or vicarious
liability which does not require proof that the accused knew or could
reasonably have known that its act was wrong, and which does not recognise
any excuse of honest and reasonable mistake. When applied to corporate
liability, strict liability eases the task of attaching liability to business entities.
Identification or ‘controlling mind’ test
Under this standard, only the “acts of a senior person representing the
company’s ‘controlling mind and will’ can be attributed to the company. [3] This
approach has its roots in English law. In a seminal case, Tesco Supermarkets
Ltd v Nattrass [1972] AC 153, the House of Lords found that a store manager
was not a part of the "directing mind" of the corporation and therefore that his
conduct was not attributable to the corporation.
This approach has been criticised because it restricts corporate liability to the
acts of directors and a few high-level managers. It may therefore unfairly favour
larger corporations because they may be able to escape criminal liability for the
acts of employees who manage their day-to-day activities. This has proved
problematic as in the cases involving corporate manslaughter.
A 2016 study of 41 countries’ corporate liability systems shows that meeting
the ‘controlling minds’ test is not usually required for liability, though it is
almost always sufficient to attribute liability to a company. [1]
Aggregation tests and collective knowledge
This standard, termed the Doctrine of Collective Knowledge, originated in US
law. It holds that the individual knowledge of a legal person’s agents can be
aggregated into ‘collective knowledge’ in order to establish corporate liability.
[4]
In effect, this doctrine is relevant to establishing the knowledge (but not the
intent) aspect of mens rea for legal persons. In United States v Bank of New
England (1987) 821 F2d 844, the Supreme Court sanctioned the use of the
doctrine to uphold the conviction of the Bank of New England for wilfully failing
to file reports relating to currency transactions. The Court confirmed the
collective knowledge doctrine, arguing that, in the absence of such a principle,
business entities could divide the duties of their employees so as to
compartmentalise their knowledge, thereby avoiding liability. [4] [5]
Aggregation has been applied in Australian courts, but is rejected in England. [6]
Corporate culture and compliance systems
Many legal analysts (e.g. Gobert) argue that if a corporation fails to take
precautions or to show due diligence to avoid committing a criminal offence,
this will arise from its culture where attitudes and beliefs are demonstrated
through its structures, policies, practices, and procedures.
This approach rejects the notion that corporations should be treated in the
same way as natural persons (i.e. looking for a "guilty" mind), and advocates
that different legal concepts should underpin the liability of fictitious legal
persons. These concepts reflect the structures of modern corporations which
are more often decentralised and where crime is less to do with the misconduct
by or incompetence of individuals, and more to do with management and
compliance systems that fail to address problems of monitoring and controlling
risk.
Many corporate liability systems consider that corporate culture and the
management and compliance systems adopted by companies are relevant to
understanding culpability. Such considerations may enter as an element of the
offense (so that prosecutors must prove that management and compliance
systems were inadequate) or as an element of defence for the company (wherein
the company must show that its systems were adequate). Some countries do
not permit management and compliance systems to preclude liability, but
nevertheless allow them to be considered as mitigating factors when imposing
sanctions.[1]
Benefit test
Before they will impose liability on a legal person, some countries require that
the natural person who commits the offence does so with the intent to benefit
the legal person. Across countries, numerous variations on the benefit test
exist — notably, some require that the legal person actually does benefit from
the illegal act.[1]
A benefit test has been applied in the Federal Court of Australia, the House of
Lords (now the Supreme Court of England) [citation needed] and the Supreme Court of
Canada. Put simply, the test proposes that where a company gains the benefit
of an act, it is considered to be attributed with that act. The test is applied
differently when an act is performed by a "mind and will", which usually
prompts the use of the organic theory, as opposed to an agent which usually
prompts the use of the agency theory.[6]
Specific issues
Successor liability
The problem of successor liability arises when a company does something that
alters its organisation or identity, such as a name change or a merger or
acquisition. Rules on successor liability determine when and how corporate
liability is affected by various changes in a company’s organisation or identity.
For example, is a company’s liability for bribery extinguished when it is
acquired by another company? In the absence of successor rules, companies
may be able to avoid liability through reorganisation or by otherwise altering
corporate identity. The 2016 study of comparative corporate liability systems
shows that successor liability is, in quite a few countries, an under-scrutinised
area of law — in some jurisdictions, it may be the case that even cosmetic
organisational changes can, from a corporate liability perspective, ‘wipe the
slate clean.’[1]
Sanctions
Sanctions for corporate crime can take a number of forms. First, there are
fines, which, in many jurisdictions, are subject to maximum and (in fewer
cases) minimum thresholds. Second, confiscation is designed to deprive the
sanctioned companies of the proceeds of their crimes. Third, other, punitive
actions may be taken that deprive the company of certain rights or privileges or
that impose certain obligations. Loss of rights may include ineligibility for
public subsidies or to participate in public procurement processes. Sanctions
may also impose monitoring of the company’s legal compliance policies, either
by a court or by a court-appointed corporate monitor.’ [1] The combined impact
of these sanctions, taken together, is supposed to be deterrence — they should
dissuade the sanctioned companies and others from engaging in crime. There
is some doubt in many jurisdictions that sanctions are actually set in such a
manner as to make them dissuasive.”[7]
Fraud
In some instances of fraud, the court may pierce the veil of incorporation. Most
fraud is also a breach of the criminal law and any evidence obtained for the
purposes of a criminal trial is usually admissible in civil proceedings. But
criminal prosecutions take priority, so if civil proceedings uncover evidence of
criminality, the civil action may be stayed pending the outcome of any criminal
investigation.
Secondary liability
Some crimes are considered inchoate because, like a conspiracy or attempt,
they anticipate the commission of the actus reus (the Latin for "guilty act") of
the full offence. One option for prosecution would be to treat a corporation as
an accomplice or co-conspirator with the employees. In general terms, most
states permit companies to incur liability for such offences in the same way as
natural persons so long as there are at least two natural persons involved in
the conspiracy and one other accomplice to aid the commission of the offence
by a principal.
Tortious Liability of Companies
‘Tort’ is an illegal act or violation of a right leading to legal liability for which compensation is awarded by civil courts. Torts’ law is an uncodified law
founded on justice, honesty, and good faith.

In most cases, a company will both commit offenses and have offenses committed against it. As a company is an artificial being, there is also both the
need for humanitarian aid and that of an entity in order for businesses to be held personally liable. Liability occurs either from a person committing an act
or from his or her unlawful omission. But in such situations, as he allowed the wrongful act or omission, managers can also be simultaneously responsible.
[1]

Only certain activities that are incidental to the fulfillment of the purposes for which it was set up under the legislation can be performed by a company. All
of its activities must be guided towards its ultimate objective of establishing the company. In its Memorandum of Association, the intent and objects of a
company registered under the Companies Act, 2013 are contained and the company cannot go beyond the limits set for it. Anytime beyond that will be
considered to be ultra-virus.[2]

Also Read: Sexual Harassment in online workplace

Liability in Tort
It is difficult to describe precisely the circumstances under which this can arise. The courts have therefore attempted to strike a balance between legal
concepts, such as

1] An incorporated corporation should be treated as separate from its owners, directors, and officers and as distinct from its shareholders.

2] For their tortious acts, anyone must be held responsible.

As far as a tort is concerned, a company usually has a degree of responsibility that must be met, depending on the extent and consequence of the tort, for
the tort committed by its directors and/or workers during the course of their employment.

In the case of Williams and another v Natural Life Health Foods Ltd[3] it considered whether a business director should be personally held responsible
for a reckless misrepresentation. The House of Lords held that a director would be held liable in compliance with the rules of common tortuous principles
only if the presumed personal responsibility for the representation had been assumed and the other party fairly depended on that presumption of
liability.

The Williams decision reflects the protective approach adopted by common law to restrict the situations in which the limited liability corporate shield can
be withdrawn. In order to ensure that the legislation operates in such a way as to promote business, the House of Lords added more importance to the
enterprise objective and less importance to the personal responsibility objective. If a director was an essential part of the driving mind or will of the
organization, whether he directly or implicitly confirmed the presumption of personal responsibility, it will not be presumed to have accepted
responsibility that is objectively decided.

In the case of Context Drouzhba v Wiseman[4] that a director who has threatened to make dishonest misrepresentations would not be able to increase
the company’s limited liability and separate legal personality as a shield when fraud is involved. While it requires a lesser degree of misfeasance than
others, as noted above, in the sense of tortious liability.

Liability of a Company: Tortious, Civil, Vicarious and Criminal

Companies Act- Civil Liability

A civil liability was levied pursuant to Section 35[5] for the misstatements in the prospectus. If any person has subscribed to the company’s securities for
the issuance of a prospectus containing mistakes and therefore has sustained any harm or loss, at the time of the issuance of the prospectus, the director
of the company, the promoter of the company and any person referred to in the prospectus will be liable for reimbursement to individuals who have
suffered any loss due to the loss.

Liability of Director and Shareholders

If the director knowingly engages in the act or authorizes or instructs others to conduct such an act, a director would be liable for tortious liability.
However, it may not happen that the exact degree of responsibility is apparent. It is usually held that the company would be held responsible for inflicting
damage/loss on the third party with ordinary expertise and care due to the violation of its general duty.[6]

Attaching personal responsibility for the actions of the company to directors and shareholders will challenge the corporate veil bestowed on a corporation.
However, by arguing that the actions were performed on behalf of the company, directors and shareholders will not be covered from tort liability.[7]

Shareholders’ responsibility is much more limited than that of directors and officers. This is the inevitable consequence of the partnership between
shareholders and managers in which shareholders have selected executives as their agents to maximize or at least protect their investment.

When a business operates by natural persons, when deciding whether or not a business violated a duty of care that it owed to someone else, it causes an
issue. In order to decide whether an individual act, such as an agent or employee, is regarded as an act of the organization, the law has established
attribution laws. For most civil liability purposes, an individual’s activities can be traced to a corporation.[8]

In explaining the director’s tortious liability, there are two main approaches: The Agency Approach and the Identification Approach.[9]

Identification Approach: The Identity Approach implies that, based on the concept of limited liability and independent legal entities, when operating in
the course of the operation of the company, the director should be regarded as acting like the company itself.

Based on this approach, as it is the company that has committed the tort, not the director, some courts have therefore ruled that such identification would
usually exclude the director from personal responsibility and the company should be responsible for tortious actions committed by the director instead of
the director himself.[10]

In the most relevant case of Trevor Ivory Ltd v Anderson[11], decided by the Court of Appeal of New Zealand, the identification approach was adopted.
Hardie Boys J. stated that “…in appropriate circumstances the directors are to be identified as the company itself so that their acts are taken in truth the
company’s acts. Indeed, it is considered that the nature of corporate personality requires that identification should be the basic premise…”

While the Hon’ble Judge acknowledged that, based on the “assumption of personal liability test,” personal liability can still be placed on a director.
However, it can rightly be said that under this test, directors can most of the time avoid their obligation in most circumstances.[12]

Agency Approach: According to the Agency Approach, the director is merely an employee of a corporation which is a different body and cannot be
personally responsible for his or her own misconduct. Since the director is seen as an employee of the organization, the director would usually be
responsible for all the tortious actions performed by him or her in compliance with the rules of agency law.

In essence, the Agency Approach means that the court should strictly adopt the well-developed tort law concept for persons to the companies and their
directors in determining the responsibility of the director in tort without any change made by the rules of company law.[13]

This approach is generally taken to be a creature of the theory of tort law. In essence, the Corporation Solution involves the direct responsibility of the
director in tort without any change rendered by the rules of company law. Nowadays, the approach of agencies appears to be more preferable than the
approach of identification.

Vicarious Liability
The corporation is an artificial entity with no brain or body of its own, but it will be held responsible during the course of its employment for the unlawful
actions committed by its agents or servants. This liability is founded on the vicarious liability principle. n Therefore, the company is responsible for the
wrongs of its workers and agents just like a master is held liable for the wrongful and negligence of his servants.

In the case of Citizen’s Life Assurance Company v. Brown[14], Lord Lindley noted that a corporation may be held accountable for fraudulent acts such
as defamation. In this situation, a letter containing some claims against a former employee of the company was sent by the superintendent of the
business to its policyholders. For defamation, the ex-employee sued the firm. Because of the theory of agency, Lord Lindley held the corporation liable and
liable for slander, and because of the alleged tort committed in the course of the company’s employment, it does not claim immunity.
Criminal Liability
A corporate entity can be held vicariously responsible for the wrongs committed by its employee, just as the principal’s responsibility applies to his agent’s
unlawful actions.

Even if a corporation is believed to have an imaginary will, just as legal fiction assigns an imaginary life, the only actions that can emanate from the so-
called will are those that the Memorandum of Association requires it to do, i.e., which are intra-vires of the company. Therefore, since a criminal act or
unlawful act would obviously be ultra vires its Memorandum of Association, a company should not commit a crime. However, this common view has now
been abandoned and a company can be found criminally responsible for its members’ illegal actions.[15]

In D.P.P. v. Kant & Sussex Contractors Ltd[16], in order to receive fuel coupons, the manager of a transport firm submitted fake returns. The Division
Court held that, through its manager, the corporation had committed fraud and was thus responsible for that crime.

Companies Act- Criminal Liability

Under Section 34[17], if a prospectus has been issued by a corporation and is circulated and distributed among the general public or creditors and
contains such omissions or false statements, in such a case, any person who has approved the issuance of the prospectus shall be liable for fraud in
accordance with Section 447.

Section 447[18] specifies that any person found guilty of fraud within the management of the company shall face imprisonment for up to 10 years and be
liable for a fine that may be three times the amount involved.

Conclusion
In the last few years, corporate liability has developed a profound foothold. Corporations, while not actual people, have been given legal personality and
must thus be accountable for their actions. Because of the growing scope of corporations in daily life, corporations must also be kept accountable.

If foreseeable by the corporate directors or by the firms, the malicious tort would then be held liable according to the theories. In general, however,
companies may not be held responsible for punitive damages on the grounds of a tort committed by workers.

In general, companies will be held responsible for an offense committed by a company. However, whether the deliberate tort was inevitable to the
corporate directors or whether the company acknowledged the benefits of the tort tribunal, the company would usually be found liable except for a
deliberately committed tort by an employee.