The board of directors of a company is responsible for helping shareholders to maximize recoveries, reduce reputational damage and prevent fraud from being committed by others against the company.
While some companies may be able to write-off any loses if they so wish, regrettably, small and medium companies may find themselves on the brink of insolvency as a consequence of corporate fraud.
This article discusses the legal options for dealing with corporate fraud and concludes with a recommendation for arriving at a decision on the best option.
Alternative 1: Criminal prosecution
The purpose of a criminal prosecution is to punish the accused if found guilty by a competent court of law. The burden of proving the guilt of the accused rests on the state.
Recent structural changes aimed at delivering enhanced capacity to discharge criminal prosecution powers and duties include the conferment of independence and mandate over all criminal prosecutions to the National Prosecutions Service (NPS).
Pros of a criminal prosecution
Pursuing a criminal prosecution brings the likelihood of retributive justice, especially if the accused person is indigent. When it comes to cost, the cost to the company of a criminal prosecution is considerably less than the cost of a civil proceeding.
Another advantage is that although the victim of corporate fraud may not opt for civil action, criminal prosecution may still result in compensation since the court has powers to award compensation under section 348(1) of the Criminal Procedure Act, Cap 20.
Further, criminal investigators have wide powers to obtain documents and information and to arrest suspects by executing search and arrest warrants.
Cons of a criminal prosecution
Prior to the start of a criminal prosecution, it is the police that set the investigation strategy and make all decisions about the investigation.
Also, the complainant is not a party to the subsequent criminal prosecution conducted by the NPS, creating a feeling of being outside of the process.
But, magistrates and judges do not often find that the victim has told untruths; rather they find that the prosecution has not met the high standard of proof beyond reasonable doubt.
Alternative 2: Civil proceedings
The purpose of civil proceedings is to provide compensation for harm done to a plaintiff. There is a lower burden of proof—the plaintiff needs only to prove their case on a balance of probabilities.
Courts have the discretion to grant temporary injunctive relief pending trial and failure to comply with an injunction may result in being held in contempt of court.
In some cases, such relief can be obtained within 48 hours or soon if the risk that the defendant is about to abscond or dissipate or hide his/her assets is clear.
Pros of civil proceedings
In civil proceedings, the plaintiff has a great degree of control over the process, the timing of proceedings and decision-making. The lawyer engaged takes instructions from the plaintiff.
There is also the lower burden of proof i.e. balance of probabilities, and the opportunity to be compensated for damages and future loss of profits—which criminal courts are unlikely to award.
Cons of civil proceedings
Civil fraud proceedings are costly because the plaintiff, initially, incurs the costs of investigation and proceedings, including court filing fees.
Even though not as high as the standard of proof for criminal proceedings, civil fraud proceedings require a high standard of proof.
If the plaintiff finally wins the case, the court may order the defendant to pay the plaintiff’s costs—but this is at the court’s discretion.
Alternative 3: Concurrent criminal and civil proceedings
Although criminal and civil proceedings are not mutually exclusive, fighting on these two fronts is challenging.
There is a possibility of the defendant in civil proceedings claiming that he/she will be prejudiced by defending those proceedings simultaneously and, on that basis, seek to stay the civil proceedings pending the outcome of the criminal proceedings.
This prejudice might arise from say, the self-incrimination privilege being dented by evidence produced in the civil proceedings.
In conclusion, the choice of whether to go for civil or criminal proceedings or both as a response to a corporate fraud is seldom direct. It is prudent, therefore, that complainants engage with their experienced lawyers on the best way to navigate the civil, criminal proceedings, and the interaction between them.