Muskan Dadia, Government Law College, Chruchgate
CRIMINAL LIABILITY OF CORPORATE FIRMS IN INDIA
A corporation is defined as a ‘group of persons who are deemed in law to be a single legal entity. The corporate entity is legally distinct from its members; it has a legal personality and can hold property, sue and be sued in its own name as if it were a natural person.’ [i] It is a unique entity, separate from its owners. It enjoys the rights and freedoms of an individual, i.e. enter contracts, hire employees, own property etc. Corporate firms are known to possess an essential element called limited liability which enables shareholders to enjoy profits through dividends and stock appreciation but dissolves their personal liability for the company’s debts.
Criminal liability arises when an act, forbidden by law , is committed voluntarily. A crime consists of two important facets- Actus Reas and Mens Rea. While actus reas signifies the physical aspect of the crime, mens rea, deals with mental state and intentions of the criminal. Actus reus has been defined as ‘such result of human conduct as the law seeks to prevent. An act may be positive or negative (omission).’[ii] Mens rea is defined as ‘the intention or knowledge of wrongdoing that constitutes part of a crime, as opposed to the action or conduct of the accused.’ Therefore , for any act to have a criminal liability , it must be proven that the act was committed voluntarily with a guilty mind.
Corporate criminal liability can be defined as ‘a crime which has been committed by individual or association of individuals who for pursuing a common purpose or make business gain in course of their occupation commit such acts or omission which is forbidden by law and with guilty mind where it is for the benefit of the corporation or any individual out of the association of individuals.’ [iii] Corporate crime is “the conduct of a corporation or of its employees acting on behalf of the corporation, which is prescribed and punished by law.”- J. Braithwaite
Earlier, a firm could not be held liable under the pretext that it was an artificial legal person that lacked mens rea and could not be imprisoned. However, many developments took place thereafter and the criminal liability of corporate firms advanced as a concept .
Development Of The Concept Of Criminal Liability In India
One of the earliest landmark cases relating to criminal liability in India was Zee telefilms Ltd. Vs. Sahara Co. Corp. Ltd. ( 2004 Cri LJ 1576) , wherein a complaint was filed against Zee under section 500 of the Indian Penal Code. It was alleged that Zee had defamed Sahara by telecasting a program which was based on falsehood. The court however ruled that mens rea was an essential element of committing a crime and that a corporate body like zee , being an artificial legal person, lacked the same.
Due to the same concept of not attributing mens rea to an artificial legal person ( in this case corporate firms) a lot of complex legal issues started springing up. Therefore, it was suggested by the Law Commission Of India to amend section 62 of the Indian Penal Code which stated ‘Forfeiture of property in respect of offenders punishable with death, transportation or imprisonment.’[iv] Unfortunately, the bill was not passed. However, the courts changed their perspective on this concept which was proven in the landmark case of Standard Chartered Bank and Ors. v. Directorate of Enforcement. The bank was prosecuted for violating the provisions of the Foreign Exchange Regulation Act, 1973. The Supreme Court in its Judgement, did not go by the strict penal provisions and decided instead that the corporation can be held liable irrespective of the mandatory punishment under the statute.
In the case of Iridium Vs Motorola , Iridium filed a complaint against Motorola under the sections 120 and 420 of the Indian Penal Code for conspiracy and cheating respectively. The high court ruled that a company is incapable of having malafide intentions and so it lacks mens rea, thereby stating that there was no case of cheating. When Iridium appealed to the Supreme court, a new dimension to the case was discovered. The supreme court decided on two issues, first , whether mens rea can be attributed to companies for criminal liability and second, what is the criminal liability for misstatements in the context of securities offerings made to specific investors on a private basis.
The question of attaching mens rea to corporate firms was solved by way of the principle of attribution, which is invoked to decide whose mental element shall be taken into consideration while foisting criminal liability on the company. In this judgement , the court also ruled that, the person who is in direct control and in charge of the affairs of the company and the intensity and degree of the control is so high that the company is said to act through the person, is instrumental in attributing criminal liability to the company. It also ruled that rigid test of identification of the directing mind of the company has to be followed in determining the requisite mental element.
In another similar case of State Of Maharashtra Vs Syndicate Transport Company , the Bombay High Court held that a corporate body ought to be liable for the omissions of its directors and agents, whether or not mens rea is involved.
Requirements For Establishing Corporate Liability
Ø Acting within scope of employment- The employee must be acting under the scope of his employment, i.e. performing acts authorized by the parent company.
Ø Benefit to the corporation- The second requirement is that the agent’s behaviour must, in some way, benefit the corporation. The corporation need not actually directly receive the benefits nor must the benefit be enjoyed completely by the company, but the illegal act must not be contrary to corporate interests. This has been elaborated on because it is extremely rare that an employee commits an illegal act selflessly, with no intention to make any personal gain.
Ø Mental culpability of a corporation – The following are methods by which mental culpability of a body is established :-
· The collective blindness doctrine- Corporations have been found to be liable without a single individual being at fault. The sum knowledge of the employees is taken into consideration in this case. The reasoning behind this is to prevent corporations from compartmentalizing their duties in such a way to escape criminal liability when prosecuted, defending themselves under the pretext of ignorance.
· Willful blindness doctrine- Corporations are made criminally liable if they knowingly turn a blind eye to ongoing criminal activities. If a corporate agent becomes suspicious of some ongoing illegal acts but to avoid culpability, he takes no action to mitigate the damage or investigate further or bring the offender to book, the corporation becomes liable.
· Conspiracies- Criminal conspiracy is defined in law as ‘ When two or more persons agree to do, or cause to be done,
(1) an illegal act, or
(2) an act which is not illegal by illegal means, such an agreement is designated a criminal conspiracy:
Provided that no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless some act besides the agreement is done by one or more parties to such agreement in pursuance thereof.’ [v]
Corporate firms can be made liable for criminal conspiracies amongst its employees or by one of the employees accompanied by others who are not on a payroll by the company .
· Mergers, dissolutions and liability – Corporate bodies can be made liable for the criminal wrongs and violations of another company with which it has merged or consolidated. It will have to defend itself against the predecessor company’s charges . It is not necessary that a corporation can evade charges by performing dissolution before the filing of charges. Sometimes even defunct corporations have to defend themselves against the charges , subject to the law of the land .
· Misprision of felony – A corporation can be held liable if it misprisions felony, that is conceals or fails to report a felony. The following four elements are required to form misprision of felony:-
1. That the principal committed a felony
2. That the defendant knew about said felony
3. That the defendant failed to notify the concerned authorities at the earliest, and
4. That the defendant took proactive steps for the concealment of the felonious act.[vi]
Failing to notify the authorities or merely having the intent to conceal the felony does not count as misprision of felony.
· Doctrine Of Vicarious Liability – According to the doctrine of vicarious liability , the master is held vicariously liable for the acts of his servant. Similarly, in in the case of Ranger v. The Great Western Railway Company it was held that the company is held vicariously liable for the acts committed by its employees if it is done in the course of its employment. Furthermore, the act and intent of the employee has to me imputed.
· Doctrine of identification – This doctrine emphasizes on the concept of the corporate firms taking responsibility for the decision making authority and not the employees implementing them. The main purpose of the doctrine is to detect the guilty mind.
· Doctrine of attribution – As mentioned earlier, the doctrine of attribution in imprisonment or sentencing someone for omission or violation of an act, attributes mens rea ( a guilty intent) to the directing mind of the corporation . Although the doctrine was formed in the United Kingdom , it is widely used in India today.
· Doctrine of Alter ego- Doctrine of alter ego means a personality hidden or latent to others. Under this doctrine, the owners, directors and people who manage the affairs of the business are criminally liable for the wrongs the company because the directors become the mind and will of the company that does not have its own body, mind or soul.
Corporate Criminal Liability As Recognised Under The Companies Act, 2013.
The Companies Act of India has recognized corporate criminal liability . The Companies Act 1956, was replaced by the Company’s Act 2013. The latter, deepened the charges on not just directors but also on the officers in default, who are instructed by the directors and key managerial personnel and carry out tasks without raising any objections.
Section 53-Prohibition of shares at a discount.
Section 118(12)-Minutes of proceedings of General Meeting, Meeting of Board of Directors and other meetings and resolutions passed by Postal Ballot.
Section 128(6)-Books of Account, etc, to be kept by Company.
Section 129(7)- Financial Statement.
Section 134- Financial Statement, Boards report, etc.
Section 188(5)- Related Party transactions.
Section 57-Punishment for personation of Shareholder.
Section 58(6)- Refusal for registration and appeal against refusal.
Section 182(4)- Prohibitions and restrictions regarding Political Contributions.
Section 184(4)- Disclosure of Interest by Director.
Section 187(4)- Investments of the Company to be held in own name.
Section 447- Punishment for fraud.[vii]
Models of Corporate Criminal Liability
§ The Identification Doctrine- This English doctrine tries to identify the directing mind and will of the company to attribute to its conduct.
§ The Organisation Model – India mainly follows this model. Corporate cultures many a times provide an environment that would incite commission of crime.
§ The Derivative Model – The liability foisted on the corporation is called derived liability in cases where the individuals committing the crime are related to or in connection with the company.
Criticism Faced By The Prevailing Concept Of Corporate Criminal Liability
On numerous occasions , the concept of corporate criminal liability is questioned. There is no general answer for how the issue of ‘corporate criminals’ should be dealt with because each case has to be examined differently in order to decide upon the liability .
Critics normally bring up the following two issues of contention to buttress their point of view. One , that fining the corporation for the crime committed is futile because the act is performed by the persons working in the firm and the not the firm itself and second, the punitive damages are borne by the shareholders and consumers by decreasing the price of shares and increasing the price of the goods respectively.
The rationale behind the first point of contention is that in today’s mind boggling complexity of corporations it is difficult to pin point individual responsibility. Moreover, individual responsibility would only encourage the ‘ don’t ask, don’t tell’ attitude and the top tier managers would continue making profits through illegal acts.
In the second point of contention, the critics fail to understand that the shareholders are aware of the risks involved with investing in a company and themselves enjoy the huge profits reaped through illegal means and so it is only fair to have the shareholders bear a part of the loss by paying the fines duly imposed. Moreover, most companies are unlikely to pass the burden of the fine to the consumers by increasing the prices of the products as this would only lead to the consumers switching to other brands, thus reducing the former company’s profit. This could be in most cases a gateway to irreparable harm and bankruptcy.
The concept of corporate criminal liability has fast advanced in India. Corporate governance is now being enough thought and understanding to prevent criminal liability on corporations. Lord Reid’s words truly sum up the concept of corporate criminal liability :-
‘A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these; it must act through a living person, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his act is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persons of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent. In that case the liability of the company can only be a statutory or vicarious liability’[viii]
[i] Available at :- https://legal-dictionary.thefreedictionary.com/corporation, last accessed on 2nd April, 2021.
[ii] Available at :- .legalserviceindia.com/legal/article-2506-general-principles-of-criminal-liability-mens-rea-and-actus-reus-mens-rea-in-statutory-offences-joint-and-constructive-liability.html#:~:text=Criminal%20liability%20arises%20when%20a,acts%20which%20amount%20to%20offences, last accessed on 2nd April, 2021.
[iii] Available at :- http://www.legalserviceindia.com/legal/article-521-corporate-criminal-liability-white-collar-crime.html#:~:text=Corporate%20criminal%20liability%20can%20be,for%20the%20benefit%20of%20the , last accessed on 2nd April, 2021.
[v] Available on :- https://www.indiacode.nic.in/show-data?actid=AC_CEN_5_23_00037_186045_1523266765688§ionId=45856§ionno=120A&orderno=126#:~:text=1%5B120A.,1)%20an%20illegal%20act%2C%20or, last accessed on 3rd April, 2021.
[vi] Available at :- lawctopus.com/academike/corporate-criminal-liability/#:~:text=This%20doctrine%20states%20that%20a,their%20actual%20or%20apparent%20authority, last accessed on 3rd April, 2021.
[vii] Available at :- http://www.legalserviceindia.com/legal/article-521-corporate-criminal-liability-white-collar-crime.html, Last accessed on 3rd April, 2021.
[viii] Available at – https://www.lawctopus.com/academike/corporate-criminal-liability/#:~:text=This%20doctrine%20states%20that%20a,their%20actual%20or%20apparent%20authority., last accessed on 4th April, 2021.