ABSTRACT over time to prosecute directors along with the

ABSTRACT

In an era where scams have flooded the corporate world, it becomes imperative for an effective mechanism to battle the challenges faced by corporate entities. . The level of crime is exorbitant owing to the magnitude, powers and reach of such corporations as opposed to an individual committing one. Once if it is found that a corporation has committed a crime, the next question is whether corporations can be held liable for such crimes since they do not have an active mind. For a long time, corporations in India and all over the world were not held liable for criminal offences due to the requirement of mens rea or the intention to commit the offence and inability to award imprisonment or arrest, etc. However, corporations are no longer immune and the latest Companies Act has evolved over time to prosecute directors along with the company in India and around the world.

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“A corporation is not indictable but the particular members of it are.”1 – Lord Holt CJ

As time passed by and the methods of doing business transformed, there was a need for creating legislations to regulate the manner in which companies function and the liability of the directors regarding the act done by the company on its employees, environment as well as the general public. As technology progressed, newer version of corporate white collar crimes began to spring up which includes insider trading, corporate fraud as well as manipulation of balance sheets etc. and there are evidences to show the role of human minds behind such. This paper attempts to portray the overall journey of corporate criminal liabilities and gives suggestions for a fair system of doing business in the world.

 

 

 

 

 

 

 

 

 

 

INTRODUCTION

The 19th Century saw a tectonic shift in the rules applicable to corporate criminal liability as well as the liability of the members of a company.2 The Courts finally held corporations liable for the actions of their agents, acknowledging that acting against it would lead to incongruous results.3 The concept of vicarious liability was the precursor to holding corporations liable for acts committed by the members and employees of the company.

The jurisprudence with respect to corporate criminal liability has developed a long way- from the position that a corporation cannot possibly incur criminal liability because it isn’t a natural person, and hence, it cannot:

(1) Have a mens rea;

(2) Neither be indicted nor tried in person;

(3) Be punished corporally4;

Therefore, criminal acts of a corporation were considered ultra vires i.e. beyond the authority and thus void5. The law has rapidly moved and has taken a stance that a corporation can be guilty of most, if not all, crimes. The world has now moved to a time where a corporation can be held criminally liable for manslaughter since it has been recognized, that in certain cases, this is the most effective way of attaining economic success.6 The problem in the earlier non-liability of companies may be due to the characterization of penal provisions for such crimes like imprisonment etc. that corporations couldn’t undergo. However, the progress of the times has led to the implementation of the model code for companies and several other statutes that have recognized effective means of holding corporations liable.7 Interestingly, the civil law systems such as Germany never faced this problem.

They always regarded the systems of punishment for both corporations and individuals to be distinct8 due to which corporations were always held criminally liable till the advent of the industrial revolution9, which is when the doctrine of corporate criminal liability in the common law system developed. In status quo, the provisions for corporate criminal liability in the United States are fairly wide. The mode of piercing liability on a corporation is if the employee of the company had the criminal intent to commit an illegal act. This intent can also be determined through a collective mens rea of the employees. The company will be liable for the actions of an employee, irrespective of rank10. However, it must further be proved that the employee committed the illegal act within the scope of employment. There are only two situations in which corporate criminal liability cannot be imposed: i) when crimes cannot be punished by fines since they are the principle means for punishing a corporation and ii) when the crime, by its nature cannot be committed by a corporation (e.g. rape and murder). 11

The Model Penal Code has been enacted and adopted by the United States to limit the scope of corporate criminal liability through Section 2.0712. This provision limits liability of the corporation if high managerial personnel gave orders to an agent. Further, a corporation can be held liable for collusion but the liability is saved in case it may be proved that the managerial personnel acted with due diligence to prevent the crime. In strict liability case laws, the intent of the agent becomes irrelevant. However, post the Enron Scandal, the standards have been redefined through the Sarbanes–Oxley Act of 200213 that provides for a harsher punishment in cases of fraud and other corporate crimes.

Development of Corporate Criminal Liability in India

The Indian Legal System, being a colonial offshoot of the common law in the United Kingdom, did not recognize corporate criminal liability, till recently. There was a great emphasis on the requirement of mens rea and imprisonment to enforce liability for crimes due to which corporations could not be criminalized.14.

This position was reflected in A.K. Khosla v. T.S. Venkatesan15. Two big corporations were charged with fraud under the Indian Penal Code escaped liability on this two-fold narrow understanding of criminal law.

 In Kalpanath Rai v. State16 the Supreme Court held that a company could not be charged under Section 3(4) of the Terrorists and Disruptive Activities Prevention Act (TADA) since there was an implicit mens rea requirement, which remained unfulfilled in the case of a corporation. The Court, relying on precedent, determined that the establishment of mens rea is imperative to hold any person liable for an offense unless the requirement explicitly excluded. Thus, the threshold to determine culpability clearly excluded companies from criminal convictions. Similarly, the Bombay High Court’s judgment in Motorola Inc. v. UOI17 barred the former from being charged under Section 420 of the Indian Penal Code for cheating.

However, this position proved to be insufficient with the rise in corporate crimes, much like the case in Britain. Thus, in 2005, in Standard Chartered Bank and Others v/s Directorate of Enforcement18, the Supreme Court held that corporations could be held guilty of crimes committed and would be punished with fines instead of imprisonment. They analysed U.S. law on the same subject matter and Law Commission of India submitted that the legislature did not intend for corporations to be alienated or shielded from crimes committed and thus, their suffering can be attained by imposing fines on them.

More recently, in Iridium v. Motorola19 the Supreme Court of India held that a company could be held liable for statutory as well as common law offenses. Thus, the company was held liable for cheating and criminal conspiracy on the basis of alleged false representations made by its officers or ‘alter ego’. The Court justified its stance based on a contextual analysis by understanding the needs of current times and keeping in lieu, the development of the law in the U.K. and U.S. among other common law nations.

 

 

Corporate Crimes in India post 1991 era (LPG Reforms)

One was reminded of the corporate crimes when the Supreme Court of India ordered the government to pay a huge compensation to the victims due to Bhopal gas tragedy.20 The U.S. based Union Carbide Company, now owned by Dow Chemical Co., paid 470 million dollars in compensation to victims in 1989. The cause was extreme corporate malfeasance.

There are a number of corporate crimes that have come into light in the recent times. One of the major havoc that is created in present times is because of mysterious disappearance of corporations. Corporations also commit a number of crimes against their own workforce. With increasing globalization, workers find themselves being pushed against the wall and shrinking revenues for remunerations. The current debates and rage over corporate scams talks only of the interest of shareholders. Nowhere is there a mention of the employee who suffers the most. Take In the case of public sector undertakings where many irregularities can be seen in, factories were opened in some areas where the raw material was not available and where the location was correct, imported machinery was defective.

Satyam Computers Case (2009)

This can be regarded as one of the most well-known cases of corporate criminal liability where in the directors of the company including the promoter had duped investors worth millions of rupees. It is a classic example of corporate governance gone wrong and the Supreme Court of India came up with stringent laws to regulate the role of directors in a company. It is due to this modification in law that Satyam Computers was held culpable and thus the perpetrators of insider trading were held guilty even though there were loopholes in the Company Legislation in India.21 This case was very similar to the Enron scandal in the United States were a giant oil company and its board was dissolved on charges of fraud and duping the investors worth billions of dollars.

Role of the members of a company in corporate crimes (with Case Laws)

Vicarious liability as a concept of law has been with us since the development of the traditional doctrine of tort law relating to the liability of employers along with the employees.

An employer is liable for the torts committed by his employee within the course of his employment. Likewise, a principal is liable for the torts committed by his agent within the scope of the agency.

Recently, the Supreme Court in Iridium India Telecom Ltd. v Motorola Inc.22, considered the issue of a company being criminally responsible for the actions of its employees. Motorola’s arguments were rejected by the Supreme Court after it considered the modern approach to the problem of corporate criminal liability in the English courts. Of particular relevance to the discussion in this essay is the Supreme Court’s reference to the House of Lords decision in Tesco Supermarkets Ltd. v Nattrass23 where it was held that, in the absence of a specific statutory or common law exception, the principle of corporate criminal liability was not based on the vicarious liability of an employer for the acts of its agents and employees. Instead it was based on the concept of attribution. It was held that “A company cannot think and act on its own as it is a juristic personality. It thinks and acts through certain of its employees.” In other words, the mental states and actions of its employees are attributed to the company. This is a legal fiction but a necessary one in order to separate legal personality of the company to sustain itself over a period of time. Otherwise, the company would not be able to sign corporate contracts, acquire assets, negotiate with business partners, sue and be sued and make public disclosures and statements. This follows from Tesco Supermarkets that corporate criminal liability is not an offset of vicarious liability but is a species of attributing natural actions and states of minds to artificial entities.

Liability of corporate officers on the basis of attribution

The actions and mental states of a company’s directors are attributed to the company such that the actions and the mental states of the company’s directors are deemed to be the actions and the mental states of the companies. This aspect of vicarious criminal liability was in issue in the recent Supreme Court decision in Sunil Bharti Mittal v Central Bureau of Investigation.24 The special court investigating the licensing irregularities decided to attribute the actions of Bharti Cellular Ltd. to Sunil Bharti Mittal, its Chairman cum Managing Director, and made him an accused in them proceedings.

The special court’s directions to make the director of BCL the accused was challenged in the Supreme Court as a mistake of law. The Supreme Court held that without statutory backing, the persons in charge of a company cannot be held criminally liable for the actions of a company. The court was firm in applying the proposition that there is no special vicarious liability in criminal law without statutory exceptions in this regard.

The juristic basis for the attribution of the actions and mental states of the directing minds to their company is that the company cannot act otherwise. The legal fiction of a corporate person has made it implicit for another legal fiction of attribution for otherwise the first legal fiction would be meaningless. No such necessity arises in the case of the actions of the company being attributed to its directing minds. The directing minds are capable of thinking and acting on their own and do not need attribution as a matter of necessity. The best justification of the Indian Supreme Court’s decision is that attribution is not the appropriate mechanism of imposition of liability in order to hold the directing minds responsible for the actions of neither their company nor its employees.

Acne Markets Inc. case in the United States

In the United States, the courts have taken a much more stringent line towards persons in charge of companies that commit offences. In United States v Park25, the United States Supreme Court considered the case of Acme Markets Inc. (Acme). Acme was a food chain that operated throughout the United States. The US federal government detected a rodent infestation in some of Acme’s warehouses and warned the owner of potential legal liability arising out of the unhygienic conditions in which Acme stored its food. The owner who was also a promoter conferred with his legal team and referred the warehouse hygiene problem to his delegates. When this problem persisted, the federal government sued both Acme and the owner under a federal legislation that made liable any person who trades in adulterated food.

The U.S. Supreme Court stated that a person who has a responsible relationship to a business activity that leads to criminal liability is also liable under the relevant legislation. The liability of the responsible corporate officer is not vicarious liability whereas it is a species of primary liability. The liability arises out of a voluntary assumption of responsibility mixed with a failure to discharge the liability and resulting harm.

In this respect, the liability of the responsible corporate officer is equal to criminal negligence. It is interesting that a statutory offence has been converted, through prosecutorial zeal and juridical interpretation, into an offence similar to criminal negligence.

Vicarious criminal liability for the directing minds

Vicarious liability (referred to in this essay as special vicarious liability) is another legal option to hold the directing minds responsible for the actions of their company. Special vicarious liability does not require attribution; what it requires is a prescribed connection between the acts (with or without a relevant mental state) of a person or an entity (the employees of a company or the company itself) and the directing minds of the company. The prescribed connection must be a legal requirement arising out of common law or statutory law.  The most prominent example in the Indian context is the Income Tax Act of 1961, and it expresses the model that is followed in a plethora of Indian legislation concerning the prosecution of economic offences.

Corporate Mens Rea Doctrine

It is often asserted that companies themselves cannot commit crimes; they cannot think neither can they have intentions. Only the people within a company can commit a crime. However, once one accepts that the entire notion of corporate personality is a fiction but a well-established and highly useful one, there seems no reason why the law should not develop a concomitant corporate fiction. Most of the other doctrines such as identification and aggregation involve fictitious imputations of responsibility. The real question is not whether the notion of a corporate mens rea involves a fiction, but whether, of all the fictions, it is the one that most closely approximates modern-day corporate reality. While this inevitably will raise problems of how to assess policies and procedures to ascertain whether they reflect the requisite culpability, such a task is not impossible. The answers might not be easy, but at least this approach involves asking the right questions. The narrative is clearly about demarcating the minds of the corporations as well as to that of the members of the company. The Courts have to create effective mechanisms in order to sustain this doctrine and hold corporations firmly liable for the acts which are committed by the company on the directions of the top board members who wilfully try to shy away from the responsibilities in instances where things have gone wrong.

 

Legislations and legal mechanism to regulate role of the Board of Directors

Criminal Liability of directors under the Companies Act, 2013       

The issue of vicarious criminal liability for the directors and other key personnel of companies takes  somewhat alarming turn when it comes to the provisions of the Companies Act, 2013 (The Companies Act)26. The Companies Act approaches the issue of criminal liability in an all-embracing fashion when compared to the statutes noticed above. Much like the other legislation concerned with economic crime, the Companies Act also criminalises various kinds of activities in the course of the economic life of the company, chief among them being fraudulent activities committed by the company (through its employees). For all offences committed by the company, the Companies Act imposes special vicarious liability on officers (of the company) who are ‘in default’. Section 2(60) of the Companies Act specified the persons who would be considered as officers who are ‘in default’. The specifications closely follow the descriptions of the personnel considered in the predecessor legislation (Companies Act, 1956) as persons responsible to the company for the conduct of the business of the company. Four categories of personnel come within the ambit of officer ‘in default’. 27

The first category includes what the Companies Act helpfully terms as ‘key managerial personnel’ (KMP). KMP includes the managing director, whole time directors, Chief Executive Officers (CEO), Chief Financial Officers (CFO) and Company Secretaries (CS).28 The second category comprises those personnel who, while reporting to the KMP, are responsible for maintaining, filing or distributing accounts and records, and actively participate in, knowingly permit or knowingly fail to take active steps to prevent any default. The third category is extraordinarily wide in its amplitude. It covers anyone who is responsible for ‘maintaining accounts and records’. Further, the officer in question must have consented to taking on such a responsibility for the needs of the company. The third category also includes the role of independent directors as well as nominee directors who are not directly related to the company but have voting rights. Therefore, under section 2 of the Companies Act, even the directors are held to be persons who are members of the company.29

 

Conclusion and the Way Forward

Company legislation around the world has transformed over a span of last one century and it has evolved from cases such as Solomon v/s Solomon as well as Lee v/s Lee Air Farming Ltd. where the courts underlined a clear distinction between the company and its members. A company was considered to be an artificial person with legal sanctity and a juristic personality. There was a clear distinction in the role of the company as well as the role of the directors. This allowed the big corporations to bypass the laws and commit offences for which they were not liable. But as time progressed and the way of doing business evolved, the courts in India and all over the world began to realize the need for stringent laws to regulate the functioning of companies as well as corporations. Therefore, the Parliament came up with newer legislations in order to maintain better corporate governance in companies. The Enron scandal in the United States in the 90’s was a landmark case where a billion dollar corporation was held liable for corporate fraud and its employees were found to be guilty of committing the crimes.

The Union Carbide case in India is also a classic case where the city of Bhopal was destroyed by the actions of this chemical company but the Indian laws were not stringent in order to hold the promoters, Chairman and directors liable for the act. This loophole allowed the Chairman to escape liability and the company hushed it up by paying a nominal amount as compensation. Post 1991 when the Indian economy was liberalized and more emphasis was given to the private sector and thus there arouse a need for reforming the corporate legislations in India.

The current scenario in India is such that there is a proper mechanism in place to tackle cases where the courts can determine the role of directors in the criminal acts committed by the company. The Motorola case as well as the Airtel-Birla case is a classic example where the role of directors was made evident in the acts committed by the companies. The Companies Act, 2013 as well as the Insolvency and Bankruptcy Code, 2017 are some of the examples of how the mechanism are put in place and the government has formed institutions such as the National Company Law Tribunal (NCLT) in order to handle company law cases. These mechanisms will fast track the court’s ability to dispose cases and thus will bring all the mega corporations under its scrutiny. These steps indicate that work has been done by the Government in order to ward off the mistakes made in history and as technology and the thought process of human mind are mean to transform further in the future, it is the role of the Government, the NGO’s, the judiciary as well as the companies themselves to work in coherence in order to maintain a free and fair manner for doing business.30

 

 

1 Anonymous (1701) 88 Eng Rep 1518 (KB)

2 John C. Coffee, Jr., Making The Punishment Fit The Corporation: The Problems Of Finding An

Optimal Corporation Criminal Sanction, 1 N. Ill. U. L. Rev. 3, 3 (1980)

3 James R. Elkins, Corporations And The Criminal Law: An Uneasy Alliance, 65 Ky. L.J. 73, 91–92

(1976).

4 See 1 Blackstone, Commentaries 476, And Citations At 1 Burdick, Law Of Crimes 223 (1946).

5 Pollock, First Book On Jurisprudence 126 (6th Ed. 1929)

 

7 Hall, Criminal Law And Procedure 594 (1949).

8 Markus D.Dubber, Theories of Crime and Punishment in German Criminal Law, 53 AM. J.COMP.

L. 679 (2005).

9 Frederic William Maitland, Moral Personality And Legal Personality, 3 The Collected Papers of

Frederic William Maitland 304, 307 (H.A.L. Fishered., 1911).

10 See New York Cent. & Hudson River R.R. v. United States, 2I2 U.S. 48, 494-95 (1909);

11 See Bernd Schünemann, Unternehmenskriminalität und Strafrecht 194 (1979).

12 Section 2.07, Model Penal Code, 1956

13 Sarbanes, Sarbanes-Oxley act of 2002, The Public Company Accounting Reform and Investor

Protection Act, Washington DC: US Congress. 2002.

14 0ManjeetSahu, Criminal Liability of Corporation: An Indian Perspective, Available at SSRN 2192308

(2012).

15 (1992) Cr.L.J.1448.

16 (1997) 8 S.C.C 732

17 (2004) Cri.L.J. 1576.

18 A.I.R. 2005 S.C. 2622

19 A.I.R. 2011 S.C. 20

20 https://indiankanoon.org/doc/1344892/

21 http://www.srjis.com/pages/pdfFiles/147367354829.%20ARPIT%20KHURANA.pdf

22 (2010) 14 (ADDL) SCR 591

23  1971 1 ALL ER 127

24 Criminal Appeal No. 35 of 2015 (arising out of Special Leave Petition (Crl) No. 3161 of 2013)

25 421 U.S 658 (1975)

26 www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

27 A.I.R. 2005 S.C. 2622

28 Law Commission of India(47th Report: Trial and Punishment of Socio Economic Offences, para 8.1)

29 A.I.R. 2011 S.C. 20

30 Independent Analysis