How we do business is changing at a faster rate than ever before. As our local businesses evolve into global corporations, the law, too, must change.
In previous decades, the traditional view of corporations has been that they are non-existent entities that have no individual features and that can, therefore, bear no legal liability. This has informed the way that the criminal and civil courts have dealt with cases in which there is corporate involvement, of course, and has often limited the ability of lawmakers to deal with complex issues or cases in which the crux is poor or negligent corporate governance.
Increasingly, however, there has been a legal and theoretical shift towards the view that corporate entities, or persons, have their own, distinct identities under the law. This drastically changes the scope of corporate liability and is changing the way that legal representatives on both sides must undertake their work. Helping our clients to understand what their legal liabilities and responsibilities are, whether they work in a small business or are active on the board of a large corporation, is what we at MA Law Africa do as a full-service law firm.
The ‘Corporate Person’ in the Past and in Kenya Today
The term ‘Corporate Person’ is an unusual one that understandably confuses many people. To boil it down to the simplest form, however, is to say that the corporate person or corporate entity is a fictional individual who exists in law but not in real life. This precedent was set by the Salomon V Salomon case in 1897 – this was a fairly complex case, however, the basic details are this – the individual boot maker Salomon incorporated his previously individual business to include himself and members of his family.
When this incorporated business, this corporate entity, went into liquidation, unsecured creditors sought to have Salomon rendered legally liable for the corporate entity’s debts on the basis that they believed he had created this corporate person to avoid paying these debts. While the court of appeal was initially in agreement, the House of Lords overturned this decision stating that the company was duly incorporated and, as such, this corporate person was an individual with rights and liabilities – they solidified the notion of the separation of the corporate person and all individual agents involved with it, thereby freeing Salomon of individual Liability.
This theoretical precedent is all fine and well, of course, but it must be translated into real life if it is to have the appropriate impact upon those in business and, of course, those involved in the commercial side of the law in particular. So, what does the incorporation of a business, and the creation of a corporate person mean in ‘real world terms’?
What Incorporation Means in the Real World
There are several differences in the way in which unincorporated and incorporated businesses are treated in law, and each has its benefits, legal responsibilities, and liabilities to consider. A sole trader or non-incorporated business of any size has several advantages over an incorporated business or limited company of any size.
The main benefits of being a sole trader, or running a single-owner business, are the speed and simplicity of the set-up, the lower amount of paperwork, and the proportionally fewer tax responsibilities that an unincorporated business has when compared to an incorporated business. The disadvantages of this, however, are equally straightforward – the owner of an unincorporated business is legally and financially liable for all assets and debts of the business, and the owner has all responsibility for any issues that arise as a result of bad products or services gone wrong.
The process of incorporating a business requires the involvement of two or more legal persons (excluding an unincorporated trust). In coming together in this way, the legal persons that create a corporation essentially make a new legal person who exists on paper and in the legal system, but not in the real world. This legal person or entity is on record at the company’s registry and has legal and financial duties and responsibilities as well as a certain level of liability that is separate from those of the agents and individuals involved in its creation.
In short, if you own an unincorporated business that becomes unprofitable you will be liable for the costs, debts, and any legal issues that may be attached to it. Your personal belongings, therefore, could be at stake. If you incorporate your company as a limited liability company however, this new legal person has the brunt of the financial and legal liability – your liabilities, and the liabilities of any other stakeholders, will be seriously limited.
Redefining Corporate Liability: The Corporate Person and its Agents
Despite there being a legal precedent of the separation between the corporate person and its stakeholders, the legal liabilities of this person, and the realistic responses to the ‘crimes’ that a corporate person may commit, are less clear-cut. The law has, traditionally, had trouble with establishing culpability and deciding on a fitting punishment for proven legal breaches. This is not an issue with evidence, usually, but of the framework. The issue is that section 9 (1) of the Penal Code, Chapter 63 Laws of Kenya), requires that an individual can understand as well as commit a crime to be legally liable. For the corporate person, this presents an unusual predicament in that there are a few schools of thought.
Traditionally, there have been those, like Hallis (1930), who state that while a corporate person may be legally separate, they are an intangible, invisible entity that is only truly present in the law, and this, as such, places a corporation outside this legal precedent. Because a corporation has no individual will or mind, the corporate person cannot choose to break the law and as such is not able to display men’s rea (in short, criminal intent).
This view states that in the absence of animate existence, a corporation cannot act alone with intent and as such there are some crimes that a corporate person cannot commit. Furthermore, they argue that a corporate person cannot undertake unlawful conduct either intentionally or negligently except through their agents. Likewise, the logic holds, they cannot be punished except through their representatives. This view has traditionally held sway and is partly responsible for the legal cycle by which corporate crime and negligence are punished only when there is evidence of direct culpability that leads to a singular agent, or several agents.
More recently, there has been a development or evolution in theories surrounding the liability of a corporate person in Kenya. A school of thought that is coming to be known as the Realist view maintains that corporate persons are not only separate legal entities, but separate real-world entities that are made up of individuals, institutionalized relationships between these individuals, and the procedures and processes, and yet that are more than the total of these parts.
Corporate persons may have knowledge, resources, and influence that are not available to any single agent or stakeholder of the corporation. As such, an unlawful act that requires access to the total knowledge, resources, influence, or decision-making process of the corporate person cannot be attributed to a single agent or stakeholder. As corporate persons have the same rights and responsibilities as natural persons, therefore, the realists hold that corporate persons can and should be held accountable for unlawful acts committed either via negligence or through intentional actions.
Models of Corporate Liability
Like most new and highly involved government agreements, the African Continental Free Trade Area Agreement has been designed to roll out in phases. Bringing all goals together
The idea that a corporation can be held criminally responsible can be found, and most importantly, held responsible for criminal acts arose recently, particularly out of innovations within the twentieth century judicial system. One such innovation was the removal of the need for an accused person to appear in court – this condition previously exempted corporations from legal liability because corporate persons cannot, for obvious reasons, appear in court.
The twentieth century innovations spawned the nominalist theory of corporate personality, and its derivative models of vicarious and identification liability. The nominalist theory of corporate liability, alongside the derivative models of liability, share one feature. That is the belief that corporate liability exists where it can be traced to the fault of an individual or individuals. If no individual fault can be found, no criminal act can be established and, furthermore, no punishment can be ascertained. This theory has fallen largely out of favor as people seek ways to properly deal with corporate harm and negligence, particularly where they result in disasters and loss of life.
For example, the case of the Herald of Free Enterprise disaster in 1987 that caused 192 deaths, total, was found to be the result of oversights from the board of directors, the captain, the senior master, as well as various servants and agents of the corporate entity. Because no single individual was directly responsible, the derivative view of corporate liability was at a loss. A new theory was needed. In this case, the company as a whole was prosecuted for manslaughter along with the senior staff members on board the ferry and two representatives of senior management. Cases like this have, in part, been a driving force for the formulation of new models like the aggregation model (which has been widely resisted in some parts of the word) as well as the realist theories and direct liability model.
The realist theory of corporate liability, in short, states that the responsibilities and liabilities of a corporation rest entirely on the corporate person and cannot be ascribed to an individual in many cases. As such corporate persons can act and be at fault in the same way that natural persons can – when this theory is put to work in actuality, the direct liability model is the result.
This model was first proposed in 1944 and has gained serious traction because of its potential to ensure that corporate crimes, unlawful acts, or criminal negligence do not go unpunished because they cannot be attached to a single person. Of course, cases of corporate negligence, like the 1987 Herald of Free Enterprise disaster, are markedly easier to prosecute than offences that require intent to commit an unlawful act (for example, tax evasion or fraud). The realist view, of course, states that corporate persons have a state of mind, made up by the corporate governance, procedures, processes, and ethics that rule its general direction and day to day functioning. This is hard to prove in a court of law, of course.
There are some radical forms of the direct liability model, the most notable of which is that advanced by the Australian Model Criminal Code. This code states that a corporation may be held responsible for both negligent and intentional acts, and that intentional acts can be proven if the corporate person allows, authorizes, or permits the commission of the offence. This may sound overly complex and vague, but it can be broken down into two main tenets.
Firstly, the unlawful act can be deemed intentional if it was committed by some of the key agents or personnel of the corporate person as a result or within the scope of their regular duties. For example, if a corporation permits security agents to carry weaponry and instructs forceful action to remove trespassers, the responsibility for the injury or death of an individual as a result of this agent carrying out their duties may also be placed on the corporate person. This is connected to the second tenet – an intentionally unlawful act may be attributed to a corporate person if the culture of the corporation allows for, encourages, tolerates, or logically leads to it. For example, if a corporate culture can be proven to be homophobic, the corporate person may also be held responsible for unlawful harm, injury, or prejudice on the basis of sexual orientation. However, it must be said that while corporate liability can often be proven, it remains true that punishments are most often individual unless they are financial in nature.
The Role of a Commercial Law Firm in Kenya
The state of corporate criminality and liability is not the same the world over. This is in part due to its complexity, no one truly has the answer right now, but also because of the varying focus and priorities of the world’s democracies. Young democracies in particular often favor derivative models of corporate liability, either because the matter of corporate crime is not a priority for them or because their legal framework does not yet allow for the effective implementation of non-derivative models of corporate liability.
In Kenya, the situation inhabits a middle ground; since pre-independence days, it has been common for Kenyan law and courts to recognize the possibility of corporate liability for both intentional and negligently criminal acts. As such, corporate persons have often been indicted for crimes. Unfortunately, Kenyan courts have also proceeded as if the corporate person is no different from the natural person and, as such, have acquitted or convicted corporate persons without the development of a consistent and clear set of principles on which to find their decisions. At the moment, the Kenyan legislature seems unwilling to allow corporate persons to bear the responsibility of unlawful actions alone – in fact, the net of responsibility is cast so wide that a person must be able to show that the offense was committed with no knowledge, foreseeability, or involvement on their part to be relieved of responsibility.
This heavy-handed and somewhat cumbersome initial approach means that the role of a full-service law firm in Kenya, like MA Law Africa, can be complex and varied. Establishing the presence or absence of knowledge, intent, due diligence or negligence, understanding, and even the ability to foresee the occurrence of an unlawful act for every person touched by the current precedents for corporate liability in Kenya represents a huge task for both prosecutors and defense lawyers alike. This drag-net approach may seem valuable on the surface, but it has flaws. Namely, this approach does not balance the need for justice with the need for social utility, nor does it acknowledge the purpose of legal punishment in society.
This, in itself, presents an issue for any law firm in Kenya that becomes involved in such a case. At the moment, corporate punishments are based around deterrence and scarcely focus, or even touch upon, justice for the victims of negligence or intentional unlawful acts from corporations. Just as only natural persons can be harmed by certain corporate acts, only natural persons can be truly punished in a scope that exceeds the financial. This is a predicament for which there is currently no remedy. Balancing the human and purely legal elements of any corporate disaster has always been, and will always be a complex and evolving process. Here in Kenya, at the moment, no matter how much of the responsibility is corporate, the damage and punishments for criminal negligence or harm are overwhelmingly placed on individual, natural persons and it remains the primary responsibility of law firms and legal agents to represent the interests of these human parties.
What is the future of Corporate Responsibility?
This is the question that everyone involved in commercial law in some way asks themselves regularly. The current model of corporate responsibility and accountability in Kenya is unfit for the complexity of the task it faces – this much is clear. While some favor the most direct model of liability, we have concerns about what this means for effective punishment, equitable justice, and proper deterrence.
The fact remains that punishing a corporate person is very hard unless there is a natural or ‘real world’ person directly attached to the unlawful act in question. Where the primary victim of this unlawful act is the state, for example, in the case of fraud or tax evasion, then a fine may be an acceptable and just result. Financial punishment, of course, is one of the few legal responses or punishments that can be levied against a corporate person directly. The other options, of course, are the revocation of trading licenses, where appropriate, or the disbanding of the corporate entity (which would be a very serious and unusual response with few, if any, benefits).
In all of this, few ask the most important question: what does the future of corporate responsibility and liability look like for human victims? We believe that an effective model of corporate liability must have in place procedures that are focused on justice and support for human victims, should they be present. Therefore, it must not only be possible for the legal system to find corporate persons responsible for human injury, illness, or harm but also create a response that elevates the needs of human victims above the purely legal need to ‘punish’ this non-tangible corporate person. Corporate entities found guilty of causing injury or death, therefore, must be held to account in a way that benefits the primary, living victims.
Please note that this legal article is for information purposes only and should not be relied upon without legal consultation. Should you have any questions, please feel free to contact us.
