THE SCOPE OF CORPORATE CRIMINAL LIABILITY

This article was written by Radhika Maheshwari, a student of School of Law, Bennett University, Greater Noida, U.P. 

ABSTRACT

The cynosure of this article circumvents around the drastic evolution of corporate criminal liability from its raw form into a settled principle of law today. Several complexities pertaining to independent corporate personality and separate legal entity hindered in determining whether a company can possess the requisite mens rea, which the sine qua non of a criminal offence. The separate legal entity of a company independent from its members makes it rather difficult to censure them.

The corporates are undeniably involved in what we categorize today as the white-collar crimes for the benefit of the corporation, the perpetrators often being the key managerial persons and other high-ranking officers. On the economic front, the consequences of such crimes are devastating majorly involving fraudulent transactions and accounting frauds. The Satyam scandal is once such instance of corporate crimes whereby the issues relating to corporate governance raised immense concern. The environmental deterioration caused due to the companies’ activities which lead to industrial pollution, and the human rights violation due to unsafe industry environment cannot be ignored and are some of the important aspects which fall under the ambit of corporate criminal liability. There is an immediate need to regulate white collar crimes and economic offences which is an area of prime and immediate concern.

This research paper talks about the historical developments in corporate criminal liability and the various principles on the basis of which the directors, employees, officers and other agents can be made criminally liable for the acts of the company. An analysis with respect to the concept of special vicarious liability has also been done, which is much of a controversy in today’s time. The last leg of this paper pertains to the jurisprudence of the Indian Courts as regards the imposition of punishment on corporates, and the landmark judgements which immensely contributed to the developments of corporate criminality in India.

The Historical Background: Emergence of Corporate Criminal Liability

“Corporate bodies are more corrupt and profligate than individuals, because they have more power to do mischief, and are less amenable to disgrace or punishment. They neither feel shame, remorse, gratitude nor goodwill.”[1]

The conceptualization of corporate criminal liability has its roots in the common law countries like Canada, England and USA, where industrial revolution hit the economy at a rather early stage than the rest of the world. Such developments were obscure in the civil law countries where the importance given to corporate criminality was minimal or negligible.  The earlier notion amongst the legal historians was that corporations in their corporate capacity were incapable of committing crimes such as felony, treason or perjury, rather, only the individual members were capable of doing so and could be held liable for the same. This idea remained stagnant for many years, until the concept of corporations as a juristic person came up for consideration. The members of the company increasingly began pooling in resources for initiating business ventures as well as to safeguard themselves for any future losses. Thereafter, “once these corporations began owning property and engaging in business, they came to be recognized in law as persons.”[2] There was further deliberation that whether these legal persons can be held criminally or civilly liable for their acts. Though there was an earlier reluctance to punish the corporations, the very first instance of imposing corporate criminal liability was seen in the English Courts in 1842, when a corporation was fined for failing to fulfil a statutory duty.[3] The abstraction of corporate criminality unfolded from the common law doctrine that masters were criminally liable for the acts of public nuisance caused by their servants, which is basically the principle of vicarious liability. The budding of this very doctrine to its full expansion into corporate criminal liability was particularly “the result of judicial interpretation of common law and the existing statutory laws.”[4]

However, the concept of corporate criminality developed at a yet slower pace than civil liability of corporations. As for the civil law countries, due to the tradition of limited judicial interpretation of statutes, corporate criminal liability failed to develop.

Attributing Criminal Intent to the Corporations

The concept of corporate criminal liability has been a controversial one over the past few decades. The circumstances under which the corporations operate have drastically changed giving rise to a number of crimes being committed by the ones who run such companies. In an effort to keep a check on corporate criminality, the scope of statutory interpretation has been broadened to punish the perpetrators committing offences under the corporate veil.

As per the Cambridge Business English Dictionary, criminal liability means “imparting responsibility to a person for any kind of illegal behaviour for having caused a harm or damage to somebody or something.”[5] According to the basic principles of criminal law, criminal liability can be imputed only to someone who has a ‘body’ and ‘soul’ of its own. The two essential elements to hold a person liable for a crime is actus reus, i.e. the physical act which is committed, and mens rea, i.e. intention or knowledge with which the act is done. Ironically, corporations do not have a body and mind of their own so as to criminate them. Therefore, to impart criminal liability to a corporation would rather be dichotomous to the very principle of criminal law on which the imposition of liability and the awarding of punishment is based. This is for the very reason that a corporate body is incapable of being imprisoned. Nevertheless, with changing times and developments, corporations have emerged as an exception in this case, and it is now a settled principle that mens rea can be attributed to the corporations.

The whole idea of holding corporations criminally liable is, nevertheless, contradictory to the doctrine of ultra vires. As per the doctrine, a company cannot perform any act which is beyond the scope of a company, or beyond what is endowed upon those people who run the company. This dichotomous relation initially served as an obstacle for promulgating corporate criminal liability in the developing stages, as “the courts were reluctant to hold the corporations accountable for their acts which were not mentioned in their charters.”[6]

However, several principles have been laid down over time by the English courts for the purpose of affixing criminal liability to corporations and the same have been elucidated hereinafter.

Identification Principle:

The Identification Principle evolved in England and propounds that the state of mind and the acts of people carrying out the affairs of the company must be imputed and attributed to that of the corporate. The prime reason underlying this theory is that a company being a fictitious entity, cannot have a mind of its own. Hence, the imputation. This theory has been profusely reflected in the prominent case of Director of Public Prosecutions v. Kent & Sussex Contractors Ltd., wherein the Hon’ble court observed that “a company is capable of forming its intentions through its agents running the company, and the guilty mind of the directors or employees will ultimately render the company guilty.”[7] Thereafter, knowledge and intent on part of the directors implies knowledge and intent on part of the company.

Principle of Attribution:

Many a times, the identification principle is used synonymously with the principle of attribution, wherein the state of mind and the acts of the company are attributed specifically to a certain class of persons, “such that the mental state and actions of the directors is deemed to be the mental state and action of the company.”[8]

Doctrine of Respondeat Superior:

The doctrine of respondeat superior[9], which is essentially the principle of vicarious liability primarily evolved from the American Courts and was later replaced by other doctrines. For the purpose of holding a corporation vicariously liable, certain essential elements must be fulfilled.

1. Firstly, the act done by the employee should be within the scope of his employment.[10] This implies that the acts performed by him must have been authorized by the company. However, the American jurisprudence in this regard is flexible enough to hold a “corporation liable for the actions of its employees even if they have not been approved by the directors or other high managerial agents.”[11]
2. Secondly, the employee’s conduct was undertaken, at least in part, to benefit the corporation. If the employee’s actions are in contradiction to the interests of the company and account for no benefits, then the company cannot be held criminally liable to the acts so committed.

As it can be clearly seen that the “courts have borrowed the principle of respondeat superior from tort law and applied it to criminal law”[12] for developing the paradigm of criminal liability of corporations.

Special Vicarious Liability

The general disposition is that the persons holding the managerial positions shall be held liable for the acts committed by the company, the jurisprudence of which has been more or less recognized in the Indian legal system. However, several complexities arise when the above disposition is reversed, i.e. to say can the directors of the company be held criminally liable for the crimes committed by other agents of the company? This proposition has been conceptually coined as special vicarious liability, the jurisprudence of which is yet to develop in India, and it rather poses numerous challenges before us. This issue was also put forth in the infamous case of Sunil Bharti Mittal v. Central Bureau of Investigation,[13] whereby certain provisions of Prevention of Corruption Act, 1988 were violated and the special court imputed the acts of Bharti Cellular Ltd. to the Chairman-cum-MD, Sunil Bharti Mittal. The Supreme Court held that “without any statutory backing, there is no concept of special vicarious liability in criminal law, and therefore, Sunil Mittal could not be criminally responsible for the acts of the company.”[14] The principle of identification imputes a one-way attribution, but considering the above dilemma, it can be argued that there may be a requirement of two-way attribution between the company and their directing minds. This has the possibility of altogether challenging the principle of attribution which was clearly dealt with in the Iridium case. Furthermore, the principle is applied for the purpose of imputing criminal intention to the company on the basis of the alter ego and cannot possibly be applied in a reverse scenario.

Imposition of Criminal Liability Under the Companies Act:

 The Companies Act provides for offences whereby both the company as well as its directors and other officers can be made criminally liable. “Section 2(60) gives a description about the ‘officers who are in default’ and categories the person upon whom the liability can be imposed,”[15] which includes the whole-time Managing Director, key managerial persons and agents among others. The Act imposes special vicarious liability as also discussed above upon the officers who are in default for all the offences which contemplate the company as a perpetrator.

The imposition of criminal liability on corporates does is not limited to the Companies Act, and also exists independently through various other legislations like the Income Tax Act, Prevention of Corruption Act, Negotiable Instruments Act, which provide for the prosecution of companies in India.

Alternative Model of Liability:

“A standard for corporate criminal liability was proposed in the United States, known as the corporate ethos standard, for the purpose of identifying and imparting criminal intent.”[16] The assumption put forth by this standard is that a corporate body has its own personality and identity or rather its own ‘ethos’, and unless it is established that it is the corporate ethos which induced the agent to commit the crime, the company will not be held liable. Thereafter, it can be construed that the criminal conduct or behaviour of a company is in alignment with the policies, ethos and objectives of the company. This approach is a step towards a novel development in the field of corporate criminality, in the sense that there is a shift in the source of the liability from individual members to the company ethos.

Jurisprudence of the Indian Courts on Corporate Criminal Liability

The trend of holding the corporates criminally liable was not recognized in the Indian legal system. The Indian Courts for a long time were reluctant to adopt the concept of corporate criminality and the idea of prosecuting companies for crimes of intent. The prime factor for this delay was based on the notion that culpability for an offence circumvents around the Latin maxim actus non facit reum, nisi mens sit rea, which in essence means that in order to impart liability, the act should be committed with a guilty mind, and companies being a legal entity were incapable of possessing a criminal mind as opposed to natural persons. The other obstacle in this regard was the impossibility of holding the corporations liable in a scenario where the mandatory punishment prescribed was both imprisonment and fine. Both these issues were posed before the court in the case of AK Ghosla v. S. Venkatesan[17], wherein two corporations were accused of committing acts of fraud under the provisions of the IPC. A plethora of cases were dismissed by the courts on grounds of the impossibility to impart the requisite mens rea to a company which is the sine qua non of a criminal offence. This, coupled with the unfeasibility of prosecuting companies for offences with a mandatory term of imprisonment led to the exoneration of liability of the corporates on a very large scale. This outcome was majorly due to the strict and literal interpretation of the statues by the Indian judges, who followed the strict letter of the law, which rather acted as an impediment in determining the criminal liability of corporations. “The courts opined that a company cannot be held criminally liable until and unless the necessary changes are made in the legislative text with amendments to the relevant statutes.”[18] In this regard, Law Commissions’ 41^st Report had suggested the requisite changes in Section 72 of the IPC, primarily to make the imposition of fine the sole punishment for offences which have a mandated term of imprisonment and fine in case of indictment of corporations. Nevertheless, this Bill failed to be passed.

The landmark case of Standard Chartered Bank & Ors. v. Directorate of Enforcement, changed the position and perspective of the Indian courts as regards the corporate criminal liability. In this case, the company was charged for violating the provisions of Foreign Exchange Regulations Act. The court instead of a literal interpretation of the statute, went on to state that in a situation where “the punishment prescribed is both imprisonment and fine, and if the company is found guilty, the punishment of fine can be imposed on them.”[19] Further, there is no ambiguity in the fact that it was never the intention of the legislature to let the corporates escape criminal liability. This is clearly portrayable from the definition of ‘person’ as provided for in Section 11 of the IPC, which includes “a company, or an association, or a body of persons whether incorporated or not.”[20] Therefore, as far as juristic persons are concerned, the courts have the discretion of imposing a fine in cases where there is mandatory punishment of both imprisonment and fine, since the sentence of imprisonment cannot be possibly awarded.

However, the question whether a corporation can be imprisoned for the commission of a crime poses different challenges altogether. It is a settled fact that a company is only a fictitious entity and cannot be put behind bars in a real sense. But, the directors, shareholders, and the employees who are categorized as natural persons running the company are undoubtedly capable of being imprisoned. There is no existing statutory legislation which explicitly provides for imprisoning a corporation, even though in its capacity it is capable of committing grave offences mentioned in various Acts. “The sole objective behind imprisonment as a form of punishment is to deter the offender from committing crimes in the future.”[21] The juristic character of a company defeats this very purpose.

Yet another renowned case which extensively dealt with the dilemma of the possibility of corporations having the requisite mens rea was Iridium India Telecom Ltd. v. Motorola Incorporated & Ors.[22] The Supreme Court relied upon the ratio which was propounded in the Standard Chartered Bank case, and conclusively observed that the dictum of corporate bodies capable of committing offences which required the presence of mens rea cannot be rebutted. Furthermore, a corporation can very well be held criminally liable for committing crimes within the scope of its business by a person who has some control over the affairs of the company. “This degree of control is such that the corporation may be considered to be thinking and acting through the mind of that person or a body of persons.”[23] This notion was also linked by the “court with the ‘identification principle’, which was imported into the Indian legal system from common law, and is almost certainly the established law on the subject.”[24] “Ultimately, there is no hinderance in imposing a criminal sanction on a corporate, since it can have both, a mind of its own, and an environment wherein crime is nurtured.”[25]

ANALYSIS AND CONCLUSION

The above analysis conclusively portrays that the jurisprudence pertaining to criminal liability of corporations has extensively evolved over a period of time, though at a slower pace than corporate civil liability. This slow development is justified due to the numerous complexities involved, which have encompassed the test of judicial interpretation beyond the scope of the bare legislative text. Corporate bodies can no longer take the vague defence of lacking a personality as regards attribution of mens rea. Further, a major portion of corporate criminal liability circumvents around the imposition of fines as the sole punishment and remedy, irrespective of the offence committed. The impossibility of imprisoning juristic persons is an undeniable truth, which falls as a rather major obstacle in the imposition of punishment.

My views are coherent with the American approach which saw the principle of respondeat superior as the fundamental premises for determining the criminal liability of a company. In my opinion, this doctrine has also been accepted by the Indian courts and has been applied in a number of cases as the basis of prosecuting the corporations. Nevertheless, the doctrine of identification proposes a broader set of rules and is more specific, in the sense that it identifies and attributes the actions of the directing minds as the actions of the company itself, and can therefore be seen as a more accurate theory when compared with the principle of vicarious liability. This principle was well enunciated in the landmark case of Iridium India Telecom Ltd. As develops the concept of special vicarious liability, which does not have any legislative backing, it can be concluded that there is a dire need of a series of amendments which are required to be made, which if not undertaken shall lead to miscarriage of justice and a violation of the principle of equity. The Sunil Bharti Mittal case was much of a controversy for the very reason that the principle of vicarious liability cannot be applied in its reverse form.

A graver complexity lies in the fact that companies cannot possibly be imprisoned, which is the prime reason why a number of corporates go unpunished for the crimes they commit. My opinion in this regard is that if the directing minds are capable of paying fines on the basis of the attribution of mens rea, then they are also capable of being imprisoned, keeping in mind the proportionality of the offence committed. It is of extreme importance that the Indian Judiciary deliberates upon the issues revolving around the new developments and challenges in this arena which still suffers from pinning loopholes and anomalies, so as to conclusively determine the position on this subject.

BIBLIOGRAPHY

1. https://heinonline.org/HOL/Page?collection=sccjournals&handle=hein.journals/crim22&id=10&men_tab=srchresults.
2. http://www.commonlii.org/in/journals/NALSARStuLawRw/2011/5.html
3. https://www.academia.edu/6415279/Criminal_Liability_of_Corporation_An_Indian_Perspective.
4. https://heinonline.org/HOL/Page?collection=sccjournals&handle=hein.journals/mnlr75&id=1116&men_tab=srchresults
5. http://www.sascv.org/ijcjs/angira.html.
6. https://dictionary.cambridge.org/dictionary/english/criminal-liability
7. http://www.mondaq.com/india/x/826930/Directors+Officers/Corporate+Criminal+Liability+DirectorToo
8. https://acadpubl.eu/hub/2018-119-17/1/63.pdf
9. heinonline.org
10. googlescholar.com
11. http://www.legalservicesindia.com/article/488/Corporate-Criminal-Liability—Doctrine-of-Identification.html
12. manupatra.in
13. mondaq.in

[1] Celia Wells, Corporations and Criminal Responsibility, 1993.

[2] The historical Development of Corporate Criminal Liability, By Thomas J Bernard, Page 4, (Aug 12, 2019, 8:30 PM),

https://heinonline.org/HOL/Page?collection=sccjournals&handle=hein.journals/crim22&id=10&men_tab=srchresults.

[3] Re-Birmingham & Gloucester Railway Co. (1842) 3 Q.B. 223.

[4] The historical Development of Corporate Criminal Liability, By Thomas J Bernard, Page 3. Available at https://heinonline.org/HOL/Page?collection=sccjournals&handle=hein.journals/crim22&id=10&men_tab=srchresults.

[5] Available at: https://dictionary.cambridge.org/dictionary/english/criminal-liability, last visited on 13.08.19.

[6] Angira Singhvi, Corporate Crime and Sentencing in India: Required Amendments in Law, IJCJS, Vol 1 Issue 2, July 2006, available at http://www.sascv.org/ijcjs/angira.html.

[7] DDP v. Kent & Sussex Contractors Ltd., (1944) KB 146.

[8] Nigam Nuggehalli, Vicarious Criminal Liability for Corporate Officers in India: Problems and Prospects.

[9] N.Y. Cent. & Hudson River R.R. v. United States, 212 U.S. 481 (1909).

[10] United States v. Potter, 463 F.3d 9, 25-26 (1st Cir. 2006).

[11] State v. Zeta Chi Fraternity, 696 A.2d 530, 534-35 (N.H. 1997).

[12] Supra note 6, at 1114.

[13] Sunil Bharti Mittal v. CBI, (2015) 4 SCC 609.

[14] Supra note 7.

[15] Section 2(60), Companies Act, 2013.

[16] Pamela H. Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, Minnesota Law Review, Vol. 75, 1991, Page1099, available at https://heinonline.org/HOL/Page?collection=sccjournals&handle=hein.journals/mnlr75&id=1116&men_tab=srchresults.

[17] A.K. Khosla v. S. Venkatesan, (1992) Cr.L.J. 448.

[18] The Assistant Commissioner, Assessment-II, Bangalore and Ors. v. Velliappa Textiles Ltd., (2004) 1 Comp. L.J. 21.

[19] Standard Chartered Bank & Ors. v. Directorate of Enforcement, (2005) 4 SCC 530.

[20] Section 11, Indian Penal Code, 1860.

[21] Manjeet Kumar Sahu, Criminal Liability of Corporation: An Indian Perspective, 2013, available at https://www.academia.edu/6415279/Criminal_Liability_of_Corporation_An_Indian_Perspective.

[22] Iridium India Telecom Ltd. v. Motorola Incorporated & Ors, AIR 2011 SC 20.

[23] Id., ¶ 38.  

[24] Prateek Andharia, Corporate Criminal Liability: Finding Unsettled Shores? – A Comment on Iridium India Telecom v. Motorola Inc., available at http://www.commonlii.org/in/journals/NALSARStuLawRw/2011/5.html

[25] Supra note 6.