Corporate Criminal Liability
Darcy MacPherson for the Lawyers Weekly
October 23, 2009
Corporate criminal liability isn't just for corporations anymore.
In R. v. Canadian Dredge & Dock Co. Ltd.,  1 S.C.R. 662, the Supreme Court of Canada set out the rules for, and limits of, corporate criminal liability at common law. In 2003, Parliament passed An Act to Amend the Criminal Code (Criminal Liability of Organizations) (Bill C-45), in response (albeit a slow one) to the 1992 Westray disaster in Nova Scotia.
Among the many changes made by this statute, two stand out. The first is that corporate criminal liability applies to all "organizations," defined as:
· a public body, body corporate, society, company, firm, partnership, trade union or municipality, or
· an association of persons that (i) is created for a common purpose; (ii) has an operational structure; and (iii) holds itself out to the public as an association of persons.
The statute also introduces the term "senior officer," meaning "a representative who plays an important role in the establishment of an organization's policies or is responsible for managing an important aspect of the organization's activities and, in the case of a body corporate, includes a director, its chief executive officer and its chief financial officer."
"Representative," in respect of an organization, means "a director, partner, employee, member, agent or contractor of the organization."
Finally, one of the relevant sections is s. 22.2 of the Code, stating that "in respect of an offence that requires the prosecution to prove fault - other than negligence - an organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officers... (a) is a party to the offence."
Many advanced corporate transactions use multiple vehicles, some of which are not corporations. Securitizations, for example, often use limited partnerships, trusts and corporations in a variety of combinations to achieve their ends. This may lead to criminal liability in some unexpected places.
An example might help here. In a securitization, the originator (usually a corporation) borrows money, usually from a bank. The originator then issues something that generates receivables (say, mortgages). Rather than holding the receivable until it is paid back, the originator sells the receivable at face value (the amount of the original mortgage) to a separate entity (say, a limited partnership).
If the receivable is interest-bearing (as mortgages generally are), the interest component is usually covered through the grant of a limited partnership interest. The limited partnership often has a shell company as the general partner. The other limited partners are often trusts, who issue securities to the public.
In order to pay for the mortgages, the partnership will usually make a cash call on the trusts. The trusts use the funds received from the issuance of the securities to pay the partnership cash call. The originator then receives those funds from the partnership. The originator typically uses the funds to pay down the loan from the bank. The originator then often enters into an agreement to manage the assets that were just sold, largely because the partnership often has no employees of its own.
From this, the originator receives a stream of income, often based on the value of the assets managed. If the mortgages perform well, the money that comes in will come to the partnership (as holder of the mortgages) and then be paid to the trusts to repay the holders of the securities issued by the trusts. Any excess would be paid to cover the limited partnership interest taken by the originator.
But what happens when a senior employee of the originator commits a crime in the business of the originator, say a fraud against the mortgagors? For the purposes of this example, let us assume that the employee is a "senior officer" of the originator. Clearly, s. 22.2(a) would apply, and the originator would be liable for the crime of the senior officer.
But could the same also be true of the partnership that receives the money from the mortgages? There is no case on this point yet. But, there is at least an argument that the answer is "yes." First, in managing the mortgages, the originator and its employees are agents for the partnership. As such, all of the individuals are "representatives" of the partnership.
The next question is whether the agent is also a senior officer of the partnership. The business of the partnership is the receipt of funds from the mortgages. It is pretty clear that, put in those terms, anyone who is involved in the management of the mortgages "is responsible for managing an important aspect of the organization's activities." Under these circumstances, the partnership would be liable as well.
To which type of lawyers could this prove important? Corporate and securities lawyers who are drafting a prospectus or an opinion on a transaction should be aware of this possible liability. Lawyers who represent the interests of the security holders and trustees may need to warn their respective clients that Bill C-45 creates these risks.
Corporate criminal liability isn't just for the litigators anymore either.
Darcy MacPherson is an associate professor in the Faculty of Law, University of Manitoba. He has taught courses in administrative law, agency and partnerships, constitutional law, contracts, corporations, criminal law and secured transactions.