Introduction
This paper argues that the tort of unlawful means conspiracy has a potentially significant role to play in extending liability for financial losses beyond insolvent companies to entities and individuals that stand behind them. This prospect arises following the decision in Revenue and Customs Commissioners v Total Network S.L.,Footnote 1 in which the House of Lords extended the scope of the tort to include unlawful acts that are not independently actionable by the claimant against at least one of the conspirators personally, thus breaking the nexus with the doctrine of joint tortfeasance. The House signalled the potential for unlawful means conspiracy to be applied in a range of novel situations. The attractiveness of the tort is that, where an agreement to injure another exists, liability can be found not only in those who commit unlawful acts, but also in those who take steps to further the conspiracy.
Developments in unlawful means conspiracy are potentially significant in the insolvency context, given the problems that have been experienced in extending liability for financial losses to shareholders by way of corporate veil piercing doctrine and in using the tort of negligence to create liability in small company directors. The tort would provide a means of redress against a form of harm causation that is justified by reference to the dangers inherent in the use of collective power. The article presses the point further by arguing that courts should accept that unlawful means conspiracy might be committed between even the smallest company and its controlling shareholder.
The potential use of unlawful means conspiracy to extend liability beyond the insolvent company has been raised in a number of jurisdictions. Yet courts have been wary of its use for reasons that go beyond the undeveloped nature of the tort, including the desire to respect the separate legal personality of the small company and concern about deriving a corporate “intention” from a controlling shareholder's own state of mind and calling the resultant “agreement” to injure a conspiracy. The latter concern is that, in order to found liability, there must be agreement between two independent minds and that this cannot be found within the small company. Each of these issues will be addressed.
The paper is structured as follows: In Part I, the problem for discussion is explained. Part II then summarises arguments that veil piercing has failed as a means of extending liability to shareholders and that (statutory provisions aside) the most suitable means of extending liability is through the application of ordinary civil law rules. The applicability of specific tort doctrines is examined briefly. Part III then addresses the tort of unlawful means conspiracy, setting out its elements and its applicability within the company. In Part IV, the paper turns to potential stumbling blocks in the separate legal personality doctrine and the need for agreement between independent minds. It is concluded that courts should take seriously the competence of the company not only to enter into contractual agreements but to conspire with its controlling shareholder as well. Finally, Part V moves from discussion of doctrine to matters of theory and attempts to provide a justification for the tort of unlawful means conspiracy and for its use within the small company context.
I. The Problem
The company is a separate legal person and, in the typical case, will be incorporated so that shareholders enjoy limited liability for corporate debts. This means that shareholders, prima facie, are not liable for corporate debts beyond what they have contributed in share capital. The result of limited liability is risk-sharing amongst all those who do business with companies – each is taken to accept that there will be no recourse to shareholders personally should corporate creditors be unable to pay their debts. Risk-sharing is said to encourage investment in business activities and to be important in the functioning of the modern economy.Footnote 2
However, the use of the corporate form has proved contentious in a range of cases where actors engage in practices that fall below acceptable standards of commerce, including standards of risk taking.Footnote 3 The problem for creditors arises when the company with which they deal is under-capitalised and becomes insolvent. The law has yet to adequately address this issue. Statutory provisions concerning corporate transactionsFootnote 4 and directors' dutiesFootnote 5 aimed at ex ante decision-making might be ineffective in preserving corporate assets in a number of scenarios, such as where directors are enthusiastic risk-takers, where companies decline for legitimate business reasons and where the risks of losses arise over a long horizon.
Veil piercing doctrine does not provide a satisfactory mechanism for unpaid creditors seeking to access the assets of controlling shareholders. Its shortcomings are well known and need be the subject of only brief comment here. There are three main grounds for veil piercing. In cases of fraud, liability turns upon proof that controlling shareholders intended to use the company for a fraudulent purpose.Footnote 6 The fraud standard is high and requires proof of a subjective intention to injure or recklessness.Footnote 7 Given the onerous nature of the requirement, it is no surprise that this is not a frequently successful claim.Footnote 8 One might also doubt the logic of a veil piercing argument in such cases, given that fraud (or deceit) can be committed by any legal persons, whether shareholders or not.
The second main ground of veil piercing involves the “sham” company. A sham company is intended to have an existence other than as an independent and substantial entity.Footnote 9 This is a problematic ground, given that a ‘sham’ company is still a real companyFootnote 10 and that it is difficult to separate out companies operating in this way from run-of-the-mill small or closely-held entities. In the absence of fraud, it is perilous for courts to second guess what the controllers intended to be the substance and operation of legally-constituted entities. Shortcomings in the case law are exemplified by the “leading case”, Gilford Motor Co Ltd. v Horne,Footnote 11 which might have been better decided on the basis of breach of contract by the covenantorFootnote 12 or knowing procurement by the company of a breach of contract.Footnote 13
The third ground of veil piercing is agency. A court might pierce the veil where one company is properly to be seen as carrying on the business of another and on behalf of that other.Footnote 14 Again, however, this ground has been criticised because, where agency properly-so-called arises, there is no need to pierce the veil. Rather, ‘the defendant [shareholder] would simply be liable, qua principal, for the acts of its agent’.Footnote 15 More fundamentally, this ground of veil piercing undermines an important holding in Salomon v A. Salomon and Co. Ltd.,Footnote 16 that the company must be treated from its registration as competent to deal with all comers,Footnote 17 including its controlling shareholder. This is a matter explored further, below.
In summary, each ground of veil piercing is the subject of either conceptual or practical shortcomings. Modern authority following Adams v Cape Industries plc Footnote 18 appears set against continued use of the doctrine except in the clearest cases, most usually involving fraudulent conduct.Footnote 19 All of this points to the need to explore alternative avenues of extending liability beyond insolvent companies to those who stand behind them. This paper suggests one method of doing so, by use of the tort of unlawful means conspiracy, which would permit the creation of liability in all those who agree to injure and who use unlawful means to do so. Before making this argument, it is first necessary to consider the wider context in which it is to be made.
II. Ordinary Civil Law Principles
A. General
It is submitted that ordinary civil law principles have an important role to play in extending liability beyond the insolvent company to those who stand behind it. Relevant principles include statutory ascriptions and contractual allocations of responsibility and the operation of equitable principles,Footnote 20 although the focus of this paper is upon tort law. Liability should be extended to all those involved in wrongdoing, whether they be parent companies, directors (including shadow directors), company officers or others.Footnote 21 This would ensure the uniform application to all legal persons of policies including compensation for, and deterrence of, wrongdoing.Footnote 22 The extent of liability for financial claims available under ordinary civil law principles might not be as wide as that which is possible under broader conceptions of veil piercing doctrine, given the greater rigour that accompanies application of long-established rules. Arguably, however, this is acceptable insofar as corporate risk sharing itself is acceptable when the interests at stake are purely financial.Footnote 23 What follows is a brief consideration of relevant tort principles and the doctrine of ordering and procuring.
B. Specific actions
1. Strict liability and negligence
One would expect to find both corporate and extended liability for acts and omissions giving rise to financial losses to be straightforward where a rule of strict liability applies (such as vicarious liability for the acts of employees).Footnote 24 In such cases, liability arises regardless of fault. More difficulty arises where there is a need to prove negligence – because of the requirements that a duty of care be owed and that fault be proved. However, negligence is certainly arguable in some cases that might otherwise be the subject of veil piercing pleas. A recent illustration is Chandler v Cape plc,Footnote 25 where a duty of care was held to be owed by a parent company to its subsidiary's employees for their health and safety.Footnote 26 Actions against a parent company might also arise for the causation of financial losses. However, to this point it has been a relatively arduous task to create personal liability in negligence in small company directors. This issue is considered below and brief argument is made that this difficulty is surmountable.Footnote 27
2. Intentional tort
So far as intentional torts are concerned, these fall into two broad classes. First there are “intentional” torts which require that relevant conduct be “voluntary” in natureFootnote 28 – such as trespass to land. Usually there is little need to go beyond an examination of the external actions of the defendant in order to determine whether this kind of “intention” is present. Liability arises when the defendant walks up to the door of premises upon which he or she is clearly not welcome, but not when he or she is forcibly carried onto those premises.Footnote 29 There is no doubt that a company can be liable for those torts requiring voluntary conduct committed by its agents. Those agents are also personally liable for the torts that they commit.Footnote 30
Second, there are the “true” intentional torts, which require a more substantive mental element, such as an intention to injure.Footnote 31 This form of intention can be difficult to prove.Footnote 32 It is rarely the case that a court will have access to the subjective intentions of individuals (although this is possible, for example, where they record plans in a document). “The reality is that a person's subjective state of mind is personal to the [individual] and can only be determined as an adjudicated fact by resort to its objective manifestations”.Footnote 33 It is found through an examination of the circumstances in which the individual acted and the evidence that has come to light.
The difficulty (or artificiality) experienced in determining true intention is only magnified when it comes to attributing such states of mind to the company. Part III of this paper turns to a discussion of the intentional tort of unlawful means conspiracy, the focus being on conspiracies found “within” the company. A possible advantage of the approach towards the company adopted in this paper (that the company should be treated as legally competent in all of its actions) is that it reduces the need for application of the principles of attribution.Footnote 34 It opens up the possibility of creating liability for those actions that are “best described” by reference to an intentional tort. This matter will be examined in some detail.
3. Ordering and procuring
A director or controller is liable as a joint tortfeasor for the torts of the company that he or she “ordered or procured”. In Performing Right Society Ltd. v Ciryl Theatrical Enterprises Ltd., Atkin L.J. held that “a managing director is not liable for tortious acts done by servants of the company unless he himself is privy to the acts, that is to say unless he ordered the acts to be done”.Footnote 35 In cases where it is necessary to prove a fault element, it is necessary to prove that the director or controller shared in the fault of the company.Footnote 36 The reason is that “the personal liability of the director in such circumstances cannot be more extensive than that of the individual who personally did the tortious act”.Footnote 37 The exact boundaries of this form of liability are uncertain.Footnote 38 It is not yet clear, for example, whether voting in favour of the commission of a tort at a board meeting would be sufficient to constitute directing or procuring the tort.Footnote 39 Perhaps this must depend upon the facts. There are good arguments for thinking that a successful vote in favour of action that is clearly wrongful should count as directing or procuring the commission of a tort. But these matters will not be explored here.Footnote 40
III. The Tort of Unlawful Means Conspiracy
The question arises whether the current tort arsenal could be strengthened in the corporate context by application of unlawful means conspiracy. It is submitted that this tort has a potentially significant role to play in extending liability beyond the insolvent company to others, including its controlling shareholder. First, it has been developed to deal with agreements between natural persons and would have a role to play in a liability regime that takes the personhood and competence of the company seriously. Second, unlawful means conspiracy hinges, as adumbrated, on agreement and ensures that liability is extended beyond the actor who injures to those who enter into the agreement and do something to further it. This permits access to further sources of compensation for damage. Third, the tort can be brought in circumstances where the unlawful act is not independently actionable by the claimant against at least one of the conspirators personally.Footnote 41 Fourth, damages for its commission are at large. The tort and its application in the corporate context will now be considered in detail.
A. History
An action in conspiracy first took a recognisable form in the Third Ordinance of Conspirators,Footnote 42 which created a criminal offence concerned with the institution of false and malicious actions at law. It was developed by the Court of Star Chamber so as to extend beyond a concern with the administration of justice to create criminal liability for agreements to commit any of a multitude of crimes.Footnote 43 With the abolition of the Star Chamber, the action became a common law misdemeanour.Footnote 44 It could also be pleaded as an action on the case for damages, the “gist of the action being that damage was inflicted by defendants who combined together for the purpose of inflicting it”.Footnote 45 Although the eventual expansion of this form of liability into the civil law was seen as a corruption of the doctrine,Footnote 46 it is now firmly established – even if its precise operation is still contested.Footnote 47
B. Description
Tortious conspiracy arises where two or more persons agree upon a course of action with an aim of injuring another and where the latter suffers injury as a consequence of the wrong committed.Footnote 48 It comes in two forms.Footnote 49 Lawful means conspiracy arises when persons combine to act with the predominant purpose of injuring another and when they do injure that other.Footnote 50 The predominant intention element is a substantial hurdle; no action is available for financial losses arising from conduct justifiable on the basis of self-interest.Footnote 51 The utility of the tort has been reduced by developments in unlawful means conspiracy, to be examined next. Given that it is unlikely to be an important avenue of redress in a commercial setting, it will be further referred to only to discuss Gulf Oil (Great Britain) Ltd. v Page Footnote 52 and the ostensible “magic” that inheres in a tort making actionable what is done by a group when the same behaviour is not actionable against individuals alone.Footnote 53
Unlawful means conspiracy is obviously related to lawful means conspiracy, but there are some important differences between the two torts. The presence of unlawful means results in a lesser (but still substantial) requirement that the intention to injure be one of the purposes of the conspirators in executing their agreement.Footnote 54 In long-accepted parlance, the unlawful means must be “aimed at” or “directed” against the claimantFootnote 55 and injury must be caused to him or her. Yet this formulation of the required intention has been thrown into a degree of doubt following Revenue and Customs Commissioners v Total Network S.L. Footnote 56 In that case, Lord Walker spoke of the use of criminal conduct as “the means (what Lord Nicholls of Birkenhead in OGB Ltd. v Allan Footnote 57 called “instrumentality”) of intentionally inflicting harm”.Footnote 58 Lord Hope spoke in similar terms of an intention to harm by using unlawful means,Footnote 59 but also of the unlawful means being “directed at the claimants”.Footnote 60 Lord Mance spoke of the need for intention in conjunction with the means being “targeted” at the claimant,Footnote 61 while Lord Scott merely spoke of an intention to cause economic harm.Footnote 62 Finally, Lord Neuberger spoke of the damage in the present case as having been “directly intended” and as a “foreseeable and inevitable consequence” of the success of the agreement,Footnote 63 but it is questionable that he was attempting, in the latter respect, to define the elements of the tort.
The potential uncertainty created by the Total Network case becomes apparent when one considers Lord Hoffmann's statement in OBG Ltd. v Allan equating the phrase “ ‘targets’ the plaintiff” with “a highly specific intention”.Footnote 64 Arguably, this is not the same as intention to injure as means or ends. A fortiori, it is not the same as reckless indifference as to the causation of injury. Another problem is that, in the OGB case, Lord Nicholls said of “intention” that this could be present in the tort of “interference with the claimant's business by unlawful means” “even if the defendant does not wish to harm the claimant, in the sense that he would prefer that the claimant were not standing in his way”.Footnote 65 One can only assume that Lord Walker did not intend, in Total Network, to adopt this understanding of intention as sufficient in unlawful means conspiracy. Of course, the issue for resolution in Total Network related to what constitutes unlawful means rather than intention.Footnote 66 It might, therefore, be concluded that it should not be taken as having altered the meaning of intention in unlawful means conspiracy, which has traditionally been stated as that of “aiming” or “directing” the unlawful means at the claimant.
The Total Network case was not even cited in a subsequent decision on unlawful means conspiracy by the Court of Appeal in Baldwin v Berryland Books.Footnote 67 The court cited OBG Ltd. v Allan as the “leading authority on intention … in this context” and quoted from the judgment of Nourse L.J. in Kuwait Oil Tanker Co. S.A.K. v Al Bader,Footnote 68 who defined conspiracy by unlawful means as requiring an “agreement … to injure [the claimant] by unlawful means”.Footnote 69 The court in Berryland Books remarked that the necessary intention would need to be based on sufficient knowledge of circumstances in which injury could arise. It held that “what is required is actual intention or reckless indifference”, where reckless indifference would arise upon “a conscious decision not to inquire into the existence of a fact”.Footnote 70 The fact that Total Network was not cited is further support for the proposition that that case did not alter the intention requirement.
Liability in unlawful means conspiracy arises from the agreement and is primary; the conspirators are liable as joint tortfeasors.Footnote 71 This point deserves emphasis. Each of the conspirators is liable for the damage caused, even if only one of their number carries out the unlawful act that directly injures the claimant.Footnote 72 With respect to the defendant who does not directly employ unlawful means to injure, his or her act must have a purpose of furthering and must actually further the agreement in some way.Footnote 73 In the Berryland Books case,Footnote 74 for example, there was a conspiracy to divert business from an established bookseller to a new bookseller. A director of the established business, Mr Selvandam, was held liable for breaching his fiduciary duty in the use of confidential information and corporate opportunities and in the destruction of company records.Footnote 75 A business manager was also held liable for various actions in breach of her duty of fidelity to the company.Footnote 76 But the Court of Appeal accepted that, although Mr Navaratnarajah had taken sufficient steps by incorporating the new company and acting as its initial director, he was not liable for unlawful means conspiracy because he had not acted with the intention of diverting book sales. He had simply tried to assist a friend in establishing a new business.Footnote 77
Being an action on the case, unlawful means conspiracy is complete only upon the suffering of some recognised form of harm.Footnote 78 To be actionable, there must be some causal connection between the agreement entered into and the resultant harm to the claimant.Footnote 79 The unlawful means must be the means by which harm is causedFootnote 80 (although it has been noted that this is a somewhat vague requirement and that the means used might be direct or indirect, the boundary between these possibilities being itself unclear).Footnote 81 Another advantage of a successful suit is that, unlike the position in negligence, damages are not limited by the remoteness rule. Damages are available for all financial losses flowing directly from the commission of the tort.Footnote 82 The claimant may even be able to recover exemplary damages.Footnote 83
In the Total Network case,Footnote 84 the House of Lords considerably expanded the scope and application of the tort. It held, as adumbrated, that the unlawful act in unlawful means conspiracy need not be independently actionable by the claimant against at least one of the conspirators personally.Footnote 85 Sufficient unlawful means might reside in the commission of a crimeFootnote 86 – such as the common law crime of cheating the revenue – for which there is no corresponding action in tort.Footnote 87 Even a breach of statutory duty might suffice,Footnote 88 although it is not entirely clear to what extent this is the case. This ensures that the tort has something to offer beyond what is available under the doctrine of joint tortfeasance, with respect to which all those whose combine to commit a tort can be held jointly liable for the commission of the tort.Footnote 89 Indeed, the reach of unlawful means conspiracy has been enunciated in wide terms, Lord Walker remarking that “the range of possible conspiracies [is] so wide and varied that it would be unwise to attempt to lay down any general rule” as to the circumstances in which it applies.Footnote 90 This dictum indicates the potential for the tort to be of some significance in resolving disputes arising in the corporate context. Perhaps the true limit to liability will be found in the idea, expressed by Lord Scott, that “[t]he circumstances must be sufficiently reprehensible to justify imposing on those who have brought about the harm liability in damages for having done so”.Footnote 91
C. Application
Given the inadequacies of veil piercing in permitting access to the assets of controlling shareholders, conspiracy by unlawful means holds the potential to provide a useful alternative means of extending tort liability beyond an insolvent company to controlling shareholders and others. The degree of fault embodied within the tort (agreement with the aim of injuring) is less stringent than that in cases on veil piercing as a result of fraud, but is more stringent than that of negligence. Within the range of existing tort options, this represents a satisfactory mid-point between these two degrees of fault and should permit a widening of the net of liability without overly-deterring future investment. Another attractive feature is that liability does not depend upon a weighing up of various factors; there is no inevitable need to engage in the retrospective standards-setting that occurs in many veil piercing cases.
At present, however, there is some uncertainty as to the combinations of action involving a company that will support an unlawful means conspiracy claim. Conspiracy might arise from agreement between natural persons, such as the corporate controller and another shareholder or legal adviser. In such a case, the potential arises for the company to be vicariously liable for the commission of the tort. Alternatively, conspiracy might arise between a company controller and the company itself,Footnote 92 in which case the company is liable as a primary tortfeasor. Although the tort is more likely to arise where there are a number of individuals involved in wrongful corporate acts, the attractiveness of the action is its potential to allow for extensions of liability beyond the company to those who stand behind it, even in the case of a small company with a single controlling shareholder.
Scenarios in which the tort of unlawful means conspiracy has a potentially useful role include cases in which a breach of a statutory provision (relevant provisions including the statutory directors' duties) by at least one of the conspirators is alleged, which is unlawful but does not ordinarily sound in a personal action in tort.Footnote 93 Such a pleading was successful in the Berryland Books case,Footnote 94 considered already. In each additional scenario provided below involving the smallest of companies, it is assumed that X Co's sole director-shareholder D has substantial assets and, thus, is worth suing personally.
Illustration 1: D director causes X Co. to commence litigation against C with the intention to financially injure C. The expense prevents C from succeeding in a takeover of a third party company and profiting from this. The litigation has some merit (meaning abuse of process is not available), but causes X Co. to decline into insolvency. Trading while insolvent is a breach of Insolvency Act 1986, s 214 and of statutory duties owed to the company under Companies Act 2006. An action would arise against both X Co. and D in unlawful means conspiracy (although this action might be stayed until it is ascertained that X Co.'s liquidator will not seek contribution from D personally).
Illustration 2: D is the sole director and shareholder of X Co. and the sole director and majority (55%) shareholder of Y Co. The remainder (45%) of the shares in Y Co. are owned by D's spouse, Z. X Co. and Y Co. are in potential dispute with respect to title to certain goods. Prior to D announcing to Z their future divorce, D causes Y Co. to compromise the terms of the dispute with X Co. in a way that is beneficial to X Co. and detrimental to Y Co. This decision involves no deceit, but is a breach of statutory duties owed to the company under Companies Act 2006. The goods are sold to an innocent third party. An intention of both X Co. and D was financial injury of Z. An action would arise in unlawful means conspiracy against both X Co. and D.Footnote 95
IV. Potential Obstacles to Liability
Despite the apparent cogency of a suit in unlawful means conspiracy in these kinds of case, the tort has not been much used to create liability in those who stand behind the corporate entity, especially where that entity is a small company. It is important to examine the reasons for this and to determine whether they are likely to undermine the usefulness of the tort.
A. Separate legal personality
One potential barrier to the use of unlawful means conspiracy in the small company context is that it would undermine separate legal personality. In Normart Management Ltd. v West Hill Redevelopment Co Ltd.,Footnote 96 Finlayson J. A. of the Ontario Court of Appeal stated:
a directing mind of a corporation cannot, by causing the corporation to act in a certain way, be said to have made an agreement with that corporation … To conclude otherwise would be to challenge the recognized separate legal identity afforded to corporations under our law and to conclude that every corporate action which may give rise to a breach, by virtue of the decision making authority of the corporate management, is an action of the directing mind personally.Footnote 97
This concern about the personal liability of small company directors reflects that which has arisen in the English law on negligent misstatements. In Williams v Natural Life Health Foods Ltd.,Footnote 98 franchisees sued a franchisor company in negligence for misleading projections about the viability of a health foods store. The franchisor company proved to be insolvent and the claimants joined the “managing director and principal shareholder” as a defendant. The House of Lords held that an action against the director could only succeed in a case of financial loss upon proof of a special relationship between the parties “giving rise to an assumption of responsibility”.Footnote 99 This would require proof of positive exchanges between the parties by which the director indicated that he accepted personal responsibility for any failure in care giving rise to damage.
The ostensible aim in the Williams case was to preserve the legal separation between company and director.Footnote 100 This explains the use of the “device” of the “assumption of responsibility” conception of duty of care,Footnote 101 which is more difficult to satisfy than ordinary proximity. Arguably, the result was to create an area of immunity from liabilityFootnote 102 for the controlling shareholder of a small company.Footnote 103 This is highly problematic. The concept of an “assumption of responsibility” has been vociferously attacked in the literature.Footnote 104 It is indeed a strange concept for tortious liability to depend upon what the claimant could reasonably have perceived the defendant's attitude to personal liability to be.Footnote 105 Ordinarily, actors are liable for their wrongful acts. This would entail that directors are liable for their wrongful acts (including where the act “as the company”),Footnote 106 at the same time as passive shareholdersFootnote 107 are protected by limited liability.Footnote 108 Moreover, there is an inconsistency between the immunity extended to small company directors and the position of others, such as company agents and employees, who are held personally liable for their tortious conduct.Footnote 109 These points aside, there is reason to doubt the cogency of the reasoning in the Williams case following the House of Lords' decision in Commissioners of Customs and Excise v Barclays Bank.Footnote 110 The effect of the latter case is, arguably, to relegate the “assumption of responsibility” test to the status of a type of proximity to be found in the three-stage test for duty of care.Footnote 111 This would revive the applicability of ordinary proximity in cases arising between small company directors and corporate creditors.
Of course, these points do not deal with the underlying policy concern in the Williams case about the need to recognise the separate legal personality of the small company. There are acknowledged tensions in the operation of company law protections for those who own and operate small companies.Footnote 112 In general, such companies are less likely to be bastions of entrepreneurship and economic growth than to be the means of minimising taxation, minimising personal liability and ensuring perpetual existence.Footnote 113 It is submitted that common law courts should recognise the artificiality of incorporation in such cases by ensuring the proper availability of civil actions against corporate controllers. This is all the more necessary, given the absence of any remedy of shareholder removal of wrongdoing directors from officeFootnote 114 or of share market expressions of disapproval of wrongdoing.Footnote 115
The House of Lords in Standard Chartered Bank v Pakistan National Shipping Corporation (No. 2) Footnote 116 drew a line under the application of the “assumption of responsibility” test in the case of a director making fraudulent representations. The approach taken in that case to liability for an intentional tort would be entirely consistent with the application of unlawful means conspiracy to small company directors. Indeed, Lo believes that the courts are moving away from the practice of immunising directors from tort liability and that they are “back on the correct course” in applying tort rules to company directors.Footnote 117 Such a change in direction might only be strengthened by recent perceptions of managerial recklessness in financial institutions large and small and the need to ensure better standards of corporate governance.
B. Two independent minds
Another conceptual barrier to the application of unlawful means conspiracy in the corporate context exists in judicial wariness about deriving a corporate “intention” from a controlling shareholder's own state of mind under the identification doctrine and calling the resultant “agreement” to injure a conspiracy. This is seen as a kind of “double counting”. Once again, the problem is especially acute with respect to small companies.
The identification doctrine works on the assumption that, just as natural persons have minds, so too must a mind be found in the company in determining the intentional torts for which it is to be held responsible. This is not difficult when the corporate constitution specifies how corporate decisions are to be made. It is more difficult, for companies of any real complexity, with respect to actions taken out of the boardroom and other constitutionally-defined circumstances.Footnote 118 One reason for this is that knowledge within the company is diffused.Footnote 119 Full knowledge about a subject matter might not lie with any single person, but within a collective. Decisions might be contributed to by a number of persons, final approval for a proposal only coming “from the top” after a long gestation period.
In Tesco Supermarkets Ltd. v Nattrass, Lord Reid spoke of the need to identify the person who acts as the company, whose mind “is the mind of the company”.Footnote 120 This remains the core test within the wider set of attribution rules considered by the Privy Council in Meridian Global Funds Management Asia Ltd. v Securities Commission.Footnote 121 Under present law, “particular circumstances” must be demonstrated that confer the position of directing mind and will to a person who is not a director of the companyFootnote 122 or a named office-holder. Thus, it was said in a criminal case that there is “no warrant for imposing liability by virtue of the intentions of one who cannot be said to be the directing mind and will of” the relevant company.Footnote 123 The effect of the Meridian case is to acknowledge the difficulty attending the use of ordinary rules of attribution and to permit the “fashion[ing of] a special rule of attribution” where a law, including a tort rule, “was intended to apply to companies”.Footnote 124
The court will use the identification doctrine to determine whether the company entered a conspiracy with the requisite intention. The company will be identified with the person(s) “who could cause it to combine with others” so as to harm the claimants(s).Footnote 125 This has been seen as an unsatisfactory means of establishing criminal conspiracy. In R. v McDonnell, it was held that a charge of criminal conspiracy could not be sustained “where the sole responsible person in the company is the defendant himself [as] it would not be right to say that there are two persons or two minds”.Footnote 126 This approach was followed by the Supreme Court of Canada in Canadian Dredge & Dock Co. Ltd. v The Queen, which held that the person who is the directing mind of the company, on the basis of whose acts the company is found to have committed a crime, “is not guilty additionally of the offence of conspiring with the [company] to commit the wrongful act … because in the identification theory there is only one entity, the natural, and legal person having merged into one identity, and hence the basic requirement of two persons in a conspiracy is not met”.Footnote 127 Finally, in Stone & Rolls Ltd. v Moore Stephens Lord Walker said that a company “has the mind of its human embodiment, though that is not treated as a separate mind for the purposes of the crime of conspiracy”.Footnote 128
Needless to say, reservations expressed by courts in applying criminal conspiracy to small companies need not impede the development of the civil law. The civil law embodies a wider conception of liabilityFootnote 129 that includes vicarious liability of employer companies for the intentional acts of its employees.Footnote 130 Moreover, there is no reason to think that the identification doctrine should immunise wrongdoers from personal liability. Identification doctrine is “not strictly relevant when looking at the liability of individuals”.Footnote 131
In Gulf Oil (Great Britain) Ltd. v Page,Footnote 132 the Court of Appeal upheld the possibility of directors' liability in lawful means conspiracy, the tort being alleged against a company and its controlling shareholders. The defendants had engaged a third party to exhibit from behind an aeroplane a sign which read “Gulf exposed in fundamental breach”. No action in defamation was available because the statement was true.Footnote 133 Although the point was not subject to detailed analysis, the court found that the allegation of conspiracy (including the allegation of predominant purpose to injure) was sufficient to permit the granting of an interim injunction against them prohibiting the continuation of the offending activity.
Similarly, the Irish Supreme Court held in Taylor v Smyth Footnote 134 that there can be an actionable conspiracy between a controlling shareholder and his or her company despite specific argument that the controlling shareholder could not be liable for conspiring “with himself”.Footnote 135 McCarthy J. saw “no reason why the mere fact that one individual controls the company of limited liability, should give immunity from suit to both that company and that individual in the case of an established arrangement for the benefit of both company and individual to the detriment of others”.Footnote 136
Finally, the Singapore Court of Appeal held in Chew Kong Huat v Ricwil (Singapore) Pte. Ltd. Footnote 137 that there can be unlawful means conspiracy between a controlling shareholder and his or her company. The court found liability in the managing director and 50% shareholder of Sintalow Hardware Pte. Ltd.Footnote 138 in diverting to that company a contract for the supply of pipes, the opportunity for which had arisen in contractual negotiations between another company of which he was managing director and shareholder (Ricwil)Footnote 139 and a third party. The diversion of the business opportunity was a breach of fiduciary duty owed to Ricwil. The court was satisfied that there was an intention to injure RicwilFootnote 140 and did not indicate any concern with how the company had formed its intention to injure.Footnote 141
C. The issue of corporate intention
Although courts have been prepared to find intention and agreement between a company and its controlling shareholder, this is not to say that the analysis of corporate intention has been entirely satisfactory. The identification doctrine, as it is applied to companies, has a number of known defects.Footnote 142 In small companies, there is the danger that it will be applied in a way that is over-inclusive, all actions involving corporate participants being attributed to the company.Footnote 143 In such a case, the small company is in danger of becoming an insurer of all individual interactions with it. In large companies, the identification doctrine is apt to be under-inclusive because the vast majority of corporate actors will not be acting “as the company”.Footnote 144 The doctrine does not suitably accommodate decision-making that is cumulative, where later decisions build upon earlier decisions, or decision-making that is “the product of corporate procedures and policies rather than individual decisions”.Footnote 145 Corporate policies and systems for implementation might have been introduced prior to the appointment of senior managers in office during the commission of a wrong.Footnote 146 Decisions might, thus, have been “pre-programmed” without the active participation of those managers. These characteristics make it inherently difficult to identify corporate intentions. There is no scope under the identification doctrine for considering management and control of the company “generally or in the round”.Footnote 147
Another problem with the identification doctrine is that it “treats A and B [Co], for certain purposes, as the same legal person”.Footnote 148 This undermines a core assumption of company law that the company is itself – and without reference to the actions of others – competent. One might recall that, in Salomon v A. Salomon and Co. Ltd.,Footnote 149 Lord Macnaghten observed that “[t]he company attains maturity on its birth. There is no period of minority – no interval of incapacity”.Footnote 150 Moreover, Lord Davey noted that “a company may contract with the holder of the bulk of its shares, and such contract will be binding though carried by the votes of that shareholder”.Footnote 151 This was affirmed by the Privy Council in Lee v Lee's Air Farming Ltd., where Lord Morris stated that “the capacity of the company to make a contract with the [controlling shareholder] could not be impugned merely because the [controlling shareholder] was the agent of the company in its negotiation”.Footnote 152
There might be little need to resort to the identification doctrine, if one were to adopt Viscount Maugham's view in Crofter Hand Woven Harris Tweed Co. Ltd. v Veitch that, when determining the intentions of persons (in that case, a natural person), one assumes that they are “to be taken as intending the direct consequences of their acts”.Footnote 153 In the same case, Lord Wright said that intention is “generally determined by reference to overt acts and to the circumstances in which they are done”.Footnote 154 These statements are entirely apposite to the artificial person that is the company. Where it is proved that the company's co-conspirator acted with a certain intention, and where actions taken on its behalf are consistent with the presence of intention, why is it not sufficient to conclude that the company had that intention? In his study of complicity in the criminal law, Kutz found this holistic approach to be the best available for justifying punishment.Footnote 155 Although there is no space here to recount the steps to this conclusion, they include the observation that findings of intention in the criminal law often are “a construct teetering upon a scaffolding of circumstantial evidence and psychological inference”.Footnote 156 Kutz concluded:
When we can best make sense of someone's individual actions by relating those actions to a collective project – that is, when we ought to attribute to him or her a participatory intention – then we have a basis for individual moral accountability for collective acts.Footnote 157
D. Fraud on the company
The liability of the company is entirely justified where it is acting consistently with its wrongdoing corporate controller. However, there are cases in which the corporate controller (or some other individual within the company) acts to defraud it. In such cases, the question arises whether the company can be treated as a conspirator liable to third parties. According to the reasoning adopted above, the answer would be “no”. The company's own actions would be seen as consistent with its position as a ‘victim” of a fraud rather than a party to it. Indeed, under the identification doctrine, corporate liability to third parties generally is precluded where directors were acting to defraud the company itself.Footnote 158 However, liability will arise in “single actor” cases – that is, where no-one but the fraudulent director constituted the company.Footnote 159
In Belmont Finance Corporation Ltd. v Williams Furniture Ltd.,Footnote 160 Belmont (through its receiver) brought an action in conspiracy against two of its three directors for causing it to purchase at a gross over-valuation the shares in another company. The consideration for the purchase consisted of all the issued shares in Belmont. The allegation was that the directors knew of the over-valuation and conspired to commit an offence under the Companies Act 1948, s. 54 in providing financial aid for the purchase of Belmont's own shares.Footnote 161 Foster J. dismissed the action in conspiracy on the basis that Belmont had been a party to the agreement and thus could not sue its co-conspirators. On the face of it, this might appear a reasonable decision – if one assumes that the two directors, in initiating the purchase, were acting as the company. However, the decision was over-turned on appeal. Buckley L. J. held that the key issue was whether Belmont “can sensibly be regarded as a party to the conspiracy”.Footnote 162 He held that it could not, because the knowledge of wrongdoing of the two directors
should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large number of its assets … [T]he company was a victim of the conspiracy … [I]t would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received from his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.Footnote 163
Orr and Goff L. J. J. agreed.Footnote 164 In the result, the company was not debarred from its suit against the defendants for damages for conspiracy.Footnote 165
The essential problem with the decision in the Belmont case is that it could be regarded as arbitrary. Ordinarily, under the identification doctrine, the company would be regarded as having been the principal in the transaction, having the knowledge of its directors. However, this was not a convenient analysis when the company was itself defrauded. The result would have been better explained by use of a more objective test, such as has been suggested, which treats the external acts of the company as evidence of any relevant “intention”.
Matters become more complicated when a small company is both the means of defrauding third parties and a victim of fraud by the corporate controller. In Stone & Rolls Ltd. v Moore Stephens,Footnote 166 S & R (through its liquidator) brought an action in negligence against its auditor for failing to identify the fraudulent transactions to which S & R had been party when under the control of one Stojevic. The relevant issue was one of attribution of Stojevic's fraud to S & R in circumstances where the company's assets were paid away to third party fraudsters and where it had a substantial unpaid judgment debt. By a bare majority, the House held that the company was to be treated as a principal in the fraud and was barred ex turpi causa from suing its auditors. This was despite the holding in In re Hampshire Land Co. Footnote 167 that “knowledge of the agent will not be attributed to the principal when the knowledge relates to the agent's own breach of duty to his principal”Footnote 168 because such a person cannot be expected to “make a clean breast of their delinquency”.Footnote 169
The diverse reasoning employed in the Moore Stephens case is indicative of the difficulties they had in applying various rules,Footnote 170 including the identification doctrine. Lord Walker (arguably the key judge) was of the view that Stojevic was the “persona of S & R”, its directing mind and will.Footnote 171 It was thus primarily liable for the frauds committed.Footnote 172 His Lordship was prepared to treat in the same way any small company “where there is a single dominant director and shareholder … even if there are other directors or shareholders who are subservient to the dominant personality”.Footnote 173 S & R was precluded from bringing an action even where brought on behalf of an innocent creditor.Footnote 174 If the law were otherwise, “it would create a very large gap in the public policy defence, since most fraudsters (individual and corporate) become insolvent sooner or later and have liabilities to those they defrauded”.Footnote 175
It is to be admitted that there is no easy way in which to deconstruct Moore Stephens and to allocate liability for the underlying wrongs. Part of the difficulty lies in the ambiguity of the company as a legal person. The majority's analysis – and its use of the rules of attribution – might be seen as coherent, if the company is treated merely as a means to an end and not as an end in itself.Footnote 176 The company is reduced to a medium through which the rights and obligations of natural persons are determined. This seems to be Davies' conception, when he writes:
It is entirely proper to use different rules to govern the liability of the company to the third party, on the one hand, and of the agent or employee to the company, on the other. There is no reason why rules developed to protect third parties against losses caused by fraudulent agents should also operate to protect those same fraudulent agents against the company.Footnote 177
One does not have to agree with the notion that the company is an end in itself to see the point that this manipulation of concepts in order to reach the “right” result does tend to hollow out the legal personhood of the company. The company has no inherent responsibility for wrongs; it might be treated as wrongful or not according to who is suing and who is being sued.Footnote 178 Rules of attribution are applied in ways that are result-driven rather than principled.
V. Justification of Intra-Corporate Conspiracy
Authority establishes that unlawful means conspiracy might arise in the corporate context and beyond. Obviously, liability is based on both the unlawfulness of the means utilised and in the fact of agreement to injure. The reasons for imposing liability upon such agreements need to be explored. What is the significance of combinations to injure? Perhaps the best place to begin consideration of this issue is with the tort of lawful means conspiracy.
There has long been a debate about the defensibility of the tort of lawful means conspiracy. This stems, in part, from its perceived inconsistency with the holding in cases like Mayor of Bradford v Pickles Footnote 179 that a “bad intention” does not alter the lawfulness of acts that one otherwise has a right to undertake.Footnote 180 The fact of combination is a key reason for imposing such liability (along with a predominant intention to injure). Yet, in Crofter Hand Woven Harris Tweed Co. Ltd. v Veitch, Lord Wright noted that “[t]he rule may seem anomalous, so far as it holds that conduct by two may be actionable if it causes damage, whereas the same conduct done by one, causing damage, would give no redress”.Footnote 181 And in Lonrho Ltd. v Shell Petroleum Co. Ltd. (No. 2), Lord Diplock asked: “Why should an act which causes economic loss to A but is not actionable at his suit if done by B alone become actionable because B did it pursuant to an agreement between B and C?”Footnote 182
Commentators have wondered at the ostensible “magic” of such liability,Footnote 183 commentators noting that a single company might be capable of doing much more damage than even a large group of sole traders acting in combination. Thus, in Crofter Hand Woven Harris Tweed Co. Ltd. v Veitch, Lord observed that “the power of a big corporation or trader may be greater than that of a large number of small fry in the trade”.Footnote 184 These statements assume the contrary of what this paper attempts to argue. They assume that actions taken by the company do not involve multiple potentially liable individuals. They assume that there is no such action as an intra-corporate conspiracy.
In what follows, some of the problematic aspects of group behaviour are identified. These may well provide a justification for liability in lawful means conspiracy and strengthen the reasons for liability in unlawful means conspiracy. Specific reason is then provided for recognition of intra-corporate conspiracy, even in the case of the small company where the agreement to injure is made between the controlling shareholder and the company he or she controls.
It has been observed that “groups cultivate a special social identity. This identity often encourages risky behavio[u]r, leads individuals to behave against their self-interest, solidifies loyalty, and facilitates harm against non-members”.Footnote 185 Larger groups are able to enjoy the functional advantages gained by the diffusion of responsibility for tasks necessary to carry out a common goal. Groups thus permit the subversion of social norms “through strategies that disaggregate” complex tasks, “playing on the idea that little bad acts are excusable”.Footnote 186 Successful group endeavours have the potential to cascade into multiple such endeavours.Footnote 187 This is because the “very formation of a joint enterprise generates a mutual commitment to [wrongdoing], supplementing and reinforcing the resolve of an individual were he acting alone”.Footnote 188
A reason for state (including judicial) concern about combinations is the potential threat that they present to the power and stability of the state and its various components;Footnote 189 and the weight and authority that they create in their dealings with those outside the group. The “law takes a particularly censorious view where conspiracy is involved”.Footnote 190 This explains, at least in part, why the crime (but not the tort) of conspiracy resides in the agreement and why there need be no action taken to further the agreement.Footnote 191 It also explains why Lord Hope in the Total Network case could say that “it is in the fact of the conspiracy that the unlawfulness resides”.Footnote 192 In similar terms, Lord Scott noted that “[t]he essential ingredient of this type of action is the combination of people all intent on causing harm to the victim …”Footnote 193 The features of group behaviour that have just been noted are present in the corporate context. It almost goes without saying that “the collective intentionality associated with a corporate organisation can be an extremely powerful social force”.Footnote 194 Although this is especially true of the corporate behemoths, this same kind of power can be found, to a lesser degree, in even the smallest of companies.
Corporate controllers have at their call enhanced bargaining power when able to invoke the name and organisational capacity of a company.Footnote 195 This power extends beyond the financial might and (perceived) reputation of the company to encompass the advantage of limited liability which shareholders enjoy – and which acts as an inducement to having the company engage in their chosen activities and fight their chosen battles. Limited liability creates an asymmetric regime of risk exposure. If we take the example of a lawsuit between an incorporated business and a sole trader, the company's controlling shareholder faces a lower risk of personal financial loss than does the sole trader. The law suit, viewed as a “risky asset”, “is more valuable for shareholders than [ ] for individuals or partnerships”.Footnote 196 It follows, perforce, that the whole range of activities that might be conducted in business and subject to legal suit is less risky to shareholders than to individuals or partnerships. The likelihood of risk externalisation is increased as a company nears insolvency because shareholders have nothing (much) left to lose. In such situations, there is a greater likelihood that the company will take high stakes gambles.Footnote 197 In summary, individuals acting through their companies enjoy a degree of protection not available to sole traders.
Unlawful means conspiracy has the potential to provide compensation for harm in cases of illegitimate combination, including illegitimate use of the power of incorporation. Application of the tort would, no doubt, be most controversial in cases involving small companies, especially one person companies. However, its application in that setting would be a sound development, given the doubtful economic (and social) justifications of such incorporations.Footnote 198
VI. Conclusions
This article has taken the recent “resuscitation” of the tort of unlawful means conspiracy as the cue for examining its applicability in the corporate context. It argues that the availability of the tort in that context would serve to strengthen rather than weaken company law precepts of separate legal personality and competence to enter into agreements with all comers. It would also provide a means of redress against a form of harm causation that is justified by reference to the dangers inherent in the use of collective power.
This is not to say that the application of unlawful means conspiracy within the company is free from difficulty. Current rules of attribution prove to be clumsy tools in determining intention and some courts have rejected the claim of conspiracy where the intention of a corporate decision-maker is the basis for finding intention in the company, because this would ostensibly subvert the need for two “independent minds”. Attribution rules are also open to manipulation where fraud has been committed by a corporate controller against the company. This paper argues that there is a need to reconsider the doctrine of attribution and suggests the use of a more objective form of intention.
Unlawful means conspiracy has been recognised to exist in the corporate context, but uncertainty surrounds the issue of what combinations will be sufficient to support a claim. However, it is clear that unlawful means conspiracy is no mere “barren iteration” of the doctrine of joint tortfeasance and that its attractions are that it is capable of extending liability beyond the person who has actually committed an unlawful act to those who entered into the agreement and did something to further it and that it allows for a liberal measure of damages, unconstrained by any rule of remoteness. For these reasons, unlawful means conspiracy presents an intriguing prospect in the small company and beyond.
