Stealing from Your Own Company: The Defence of Consent in Criminal Prosecution of Controllers of Collapsed Companies.

Stealing from Your Own Company: The Defence of Consent in Criminal Prosecution of Controllers of Collapsed Companies.

1.Introduction

It is trite that companies are separate from their shareholders, directors and key management personnel (“controllers”).[1] A company’s property does not belong to its shareholders or directors – even if the company has a single shareholder who is also the sole director.[2] Even though these principles are basic and have been consistently applied by the courts, it appears controllers in closely-held companies mostly ignore these hallowed legal principles. There are too many stories of controllers applying company’s assets as if the assets were their private properties. The controllers usually rely on the excuse that the necessary internal authorisations were obtained. The questions however remain – are the internal authorisations being used as a shield for fraud and dishonest dealings against the interests of the company? And should such internal authorisations allow the controllers to get away with the fraud and dishonest dealings?

2.Purpose and structure of this article

In this article, I will examine the proposition that controllers of companies cannot be charged with offences involving dishonest appropriation when they have obtained internal authorisation, and conclude by taking a position on whether the controllers can rely on the suggested defence. The article is structured as follows:

  • first, I will make a statement on the relevance of lack of consent in criminal offences involving dishonest appropriation;
  • second, I will discuss the legal principle around how acts of controllers of a company are attributed to the company itself (the principle of attribution);
  • then, I will discuss the exception to the principle of attribution and how it impacts criminal prosecutions for dishonest acts of controllers of companies;
  • finally, I will conclude that controllers of the collapsed companies cannot rely on the principle of attribution as a defence.

3.Why is the issue of consent important?

Under Ghanaian law, most crimes involving dishonesty are premised on the concept of dishonest appropriation.[3] Dishonest appropriation requires proof that the accused took something (she does not own) with the intention to defraud or without a claim of right and with the knowledge that the accused does not have the consent of the owner.[4] An accused person is likely to walk free if she can prove that she had the consent of the owner of the property which is the subject of the alleged crime. A key issue in such cases would therefore be whether or not controllers of collapsed companies had the consent of their companies to deal with their properties in the manner that they did.

4.How do companies act – the principle of attribution?

Acts of certain organs[5] of a company are deemed to be acts of the company itself.[6] Business decisions, including how the company’s assets should be deployed, are taken by these organs and become the decisions of the company itself. The rationale is not difficult to appreciate. Although a company is treated in law as a separate person, it is an artificial person which has no physical existence. It needs natural persons to act on its behalf.

From the above, on the face of it, it may appear that if the organs agree to use the company’s finances and property in a particular way, then it is the company that took that decision (even if objectively such a decision was for selfish and dishonest reasons that benefitted controllers of the company but was detrimental to the interest of company). That argument would mean that it cannot be said that the individuals who make up the organs of the company have appropriated the company’s finances without the “consent” of the company. Thus, the individual who took, and acted on, those decisions cannot be made criminally liable for those decisions and their actions even if they were dishonest.

5.Can certain decisions of the organs of a company be rejected as acts of the company – Hampshire Land principle’?

The principle of attribution is only one face of the coin. Another equally well-established principle is the exception to the general rule of attribution – often called the ‘Hampshire Land principle’ or the ‘fraud exception’ (albeit the principle is not restricted to instances of fraud). The common law courts have consistently held that where controllers of a company commit fraud or dishonest acts against a company, knowledge of, or consent to, the fraud or dishonest acts cannot be attributed to the company. In  re  Hampshire  Land[7], the court refused to impute knowledge of the irregularity of a loan granted by a building society to a company, when the individual with knowledge of the irregularity acted as secretary of the two companies. Vaughan Williams J stated[8] – “I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company.

I have not come across Ghanaian case law that discusses the Hampshire Land principle. However several other common law countries have considered the issue extensively in both civil and criminal proceedings:

a. In Gluckstein v Barnes[9], the House of Lords rejected an attempt by directors to rely on the principle of attribution. The Earl of Halsbury LC indicated[10]My Lords, I decline to discuss the question of disclosure to the company. It is too absurd to suggest that a disclosure to the parties to this transaction is a disclosure to the company of which these directors were the proper guardians and trustees”. Lord Macnaghten[11] described the argument by the directors as “absurd” and “mere farce”.

b.In Houghton and Co v Nothard, Lowe and Wills Ltd.[12], Viscount Dunedin[13] stated as follows: “But what if the knowledge of the director is the knowledge of a director who is himself particeps criminis, that is, if the knowledge of an infringement of the right of the company is only brought home to the man who himself was the artificer of such infringement? Common sense suggests the answer, but authority is not wanting.”

c.In the South African case of S v De Jager[14], the Appellate Division upheld the conviction of the defendant and rejected the defence there had been no theft from the company because the defendant (a director of the company) and the other director, the sole beneficial shareholders, agreed to the siphoning of the funds, and therefore, in effect the company was a consenting party. Holmes J A stated: “De Jager cannot be heard to say that the fact that he and Shahan were sole beneficial shareholders enabled him as director to use company funds for his own purposes.”

d. In Belmont Finance Corp Ltd v Williams Furniture Ltd[15], directors (who were also shareholders) used the company’s funds to buy shares of another company at an excessive price. A receiver appointed for the company sued them for damages for breach of trust and misfeasance. The High Court dismissed the claim but the Court of Appeal reversed the High Court’s decision for the reason that since the directors knew it was an illegal transaction, their knowledge could not be attributed to the company which was a victim of the conspiracy. Buckley LJ speaking for the English Court of Appeal explained as follows[16] – “But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company…

e.In Attorney General’s Reference (No. 2 of 1982)[17], the accused persons were charged with theft of money from a company totally owned and controlled by them. The trial judge held that they had no case to answer at the end of prosecution case and directed the jury to acquit them. The Attorney General referred the following question to the Queen’s Bench comprising Watkins and Kerr LJ[18] – “whether a man in total control of a limited liability company (by reason of his shareholding and directorship) is capable of stealing the property of the company; and whether two men in total control of a limited liability company (by reason of their shareholdings and directorships) are (while acting in concert) capable of jointly stealing the property of the company.” Kerr LJ, after reviewing a number of cases on the subject, relied on Belmont case to hold that the judge was wrong to decide that there was no case to answer at the end of the prosecution case. He further indicated that his position was  supported by Professor Glanville Williams in Text Book of Criminal Law (2nd edn, 1983).

f.In Canadian Dredge & Dock Co. The Queen[19], the Supreme Court of Canada indicated as follows – “Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts cannot be attributed to the corporation under the identification doctrine…”

g.The Australian courts took a different turn from England, Canada and South Africa in the case of R v Roffel[20], where the defendant was charged with stealing from a company of which he and his wife were sole shareholders and directors. The Supreme Court of Victoria held that Roffel’s consent could be attributed to the company. Crockett J was of the opinion that, “by the instrumentality of the only person through which it could effectively act, [the company] consented to entry into the impugned transactions.

h.Shortly after the Roffel decision, R v Philippou[21] was decided by the English courts. Two directors withdrew monies from a company account. They used it to buy properties, which they then transferred to another company which they controlled. The English Court of Appeal questioned the decision in Roffel and upheld the conviction of the directors for theft. The court rejected the argument that, as the directors were the mind and will of company, the company had consented to the transfers.

i.In DPP v Gomez[22], the House of Lords considered both Philippou and Roffel. The court affirmed Philippou and rejected Roffel. Lord Browne-Wilkinson stated[23]I am glad to be able to reach this conclusion. The pillaging of companies by those who control them is now all too common. It would offend both common sense and justice to hold that the very control which enables such people to extract the company’s assets constitutes a defence to a charge of theft from the company. The question in each case must be whether the extraction of the property from the company was dishonest, not whether the alleged thief has consented to his own wrongdoing“.

j.In Yap Sing Hock and Another v Public Prosecutor[24], the Malaysian Supreme Court relied on Attorney General’s reference (No. 2 of 1982) and held that under Malaysian Law, controllers of a company can be guilty of stealing from the company. The court stated[25] – “The consent or knowledge of a sole shareholder and director of even a one-man company cannot be treated as the consent or knowledge of the company itself when the company is a victim of fraud or of any illegal deprivation of its assets. The concept of a person, eg. a director of a company being the company’s directing mind cannot apply when the company is such a victim of offences against the company… We are prepared to say without hesitation that the said primary principle applies inviolably in cases in which a company is a victim of fraud or wrongful deprivation and in criminal offences against the property of the company. A simple illustration will make it clear. Supposing a managing director of a public company draws a tremendously large sum of special remuneration for himself so as to clearly amount to cheating the company, and if he is charged, it will be unthinkable for him to set up a defence that he is the company’s directing will and controlling mind. We think the said primary principle applies to criminal offences…”

k.In R(A) v Snaresbrook Crown Court[26], Lord Woolf ruled that a director can be guilty of theft even where the taking of company property had been authorised by all the company’s directors, if the taking was dishonest.

l.In Macleod v R[27], the Australian High Court departed from the Roffel case and followed the decision in Attorney General’sreference (No. 2 of 1982). The court was of the view that[28] – “…The ‘consent’ of a single shareholder company did not cure what otherwise would be a fraudulent taking or application of the company’s property and a breach of s 173 of the Crimes Act 1900 (NSW). The self-interested ‘consent’ of the shareholder, given in furtherance of a crime committed against the company, did not represent the consent of the company…

m.Finally in the more recent case of Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd[29], Baroness Hale speaking for the United Kingdom Supreme Court stated[30]By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to “denude the duty of any value in cases where it is most needed” (para 184)…This would be a retrograde step’

It is obvious from the discussion above that the common law position on the subject is quite clear. Controllers of companies can be liable for fraud against the company even in cases where all internal authorisations were obtained. The rationale for these long line of case is not hard to find. Controllers of companies (no matter their stake in the company) do not own the assets of the company.[31] The powers given to these persons are only meant for them to act for the benefit of the company. Thus, where these controllers use their power to intentionally and consciously act against the interest of the company (be it through fraud, misappropriation or theft) it cannot be said that they consented on behalf of the company. That would absurd and against every notion of equity and good conscience.

6.Conclusion

In my view, there is no good reason for Ghana to depart from the consistent position taken by the various common law jurisdictions on the issue. It would be absurd for controllers of the collapsed companies to be allowed to defend their actions by saying that because they controlled the companies, they gave themselves consent to pillage the company’s resources. If it is proved that such controllers basically treated monies belonging to the companies as their own, and dissipated same, it should not matter that they obtained internal authorisations.

It is very important for shareholders of companies to note that once they set up a company under Ghanaian law, the company is separate from them. It does not matter that they may be the sole shareholders or that the shareholders are closely related. A shareholder does not own the company’s assets, and therefore cannot take assets from the company with impunity. It does not matter that in taking the assets, the shareholders went through the motions, and directors (who they control) acquiesced in the dishonest acts. Such shareholders can be punished under both civil and criminal law.

 

Photocredit: Photo by Josh Appel on Unsplash

[1] See the judgment of Akuffo JSC (as she then was) in Morkor v Kuma (No.1) [1999-2000] 1 GLR 721 at 733 endorsing the oft-cited case of Salomon v Salomon & Co Ltd [1897] AC 22 (HL) which first discussed the concept in detail

[2] Macaura v Northern Assurance Co [1925] AC 619 (HL)

[3] S. 120 of the criminal offences act, 1960 (Act 29)

[4] Supra

[5] Directors in board meetings, shareholders in general meetings and the managing director

[6] s. 147 of the Companies Act, 2019 (Act 992) and Lennard’s Carrying Co. Ltd. v Asiatic Petroleum Co Ltd [1915] AC 705

[7] [1896] 2 Ch 743

[8] Supra at 750

[9] [1900] AC 240

[10] Supra at p. 247

[11] Supra at p. 249

[12] [1928] AC 1

[13] Supra at p.14

[14] 1965 (2) SA 616 (A)

[15] [1979] Ch. 250

[16]Supra at 261 to 262

[17]  [1984] 2 All ER 216

[18] Supra at 218

[19] [1985] 1 S.C.R. 662

[20] [1985] VR 511

[21] (1989) 5 BCC 665

[22] [1993] AC 442 (HL)

[23] Supra at page 40

[24] [1993] 4 LRC 378

[25] Supra at page 391

[26] [2001] EWHC Admin 456

[27] [2003] HCA 24

[28] Supra at pg. 10 of the judgment

[29] [2019] UKSC 50

[30] Supra at para. 35 of the judgment

[31] Macaura case, supra

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COMMENTS

Wordpress (7)
  • comment-avatar
    Christine Asimani 4 weeks

    This is very well written and thorough. Looking forward to reading more from you.

  • comment-avatar
    Gavivina 4 weeks

    Prior to reading your piece, the logic that directors of companies cannot steal from the company was something that I was mightily convinced about. But you make very cogent and solid points that point otherwise. Directorship should not provide or offer a cloak for a person to rip off a company. Well done

  • comment-avatar
    Dina Dzifa 4 weeks

    Good article, very straight to the point. I enjoyed reading it.

  • Frederick Gurah Sampson

    Great piece. maaa mehn

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