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DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,


LUCKNOW

CORPORATE LAWS - I

Project ( Final Draft)

Criminal Corporate Liability in India: An Overview

Submitted To: Submitted By:

Dr. Manish Singh Ravi Gangal(Roll No. 96)

Associate Professor (law) V Semester ( Section B)


ACKNOWLEDGEMENT
I am profoundly thankful to my teacher Dr. Manish Singh for providing me with this wonderful
opportunity to work upon this project after doing which I feel to have enlightened myself in this
regard and for the precious time they spent guiding me for the completion of this project. I also
thank the members of the library staff for their cooperation in making available the research
material and allowing me to access the internet even during the free time and whenever I
required to do so. Last but not the least I would like to thank my friends it was only because of
their excellent help that I had been able to complete my project.
CONTENTS
ACKNOWLEDGEMENT .............................................................................................................. 2

INTRODUCTION .......................................................................................................................... 4

HISTORICAL BACKGROUND ................................................................................................... 5

INDIAN PERSPECTIVE AND EVOLUTION.............................................................................. 6

CORPORATE CRIMINAL LIABILITY AND INDIAN COMPANY LAWS ............................. 8

CONCLUSION AND SUGGESTIONS ....................................................................................... 10

BIBLIOGRAPHY ......................................................................................................................... 12
INTRODUCTION
The evolution of the concept of criminal liability of corporations is characterized by the
judiciarys relentless struggle to overcome the problem of assigning criminal blame to fictional
entities. This is particularly relevant in a legal system based on the moral accountability of
individuals. This article outlines the broad range of principles governing the law related to
corporate criminal liability and the essential elements required to incur such liability in a
comparative perspective. A balance is sought to be achieved between the goals of criminal law
and the socioeconomic inefficiency resulting from indiscriminate application of criminal liability
to corporations. The article also seeks to highlight the dilemma inherent in the contemporary
attitude toward the so-called whitecollar crimes. A rise in corporate crimes signifies an
apparent failure of corporate governance that in turn necessitates more effective law
enforcement. The appropriate standard has been suggested to be achievable successful
enforcement of behavioral norms within the corporate framework by a combination of internal
governance structures and criminal prosecution.
HISTORICAL BACKGROUND
A corporation is a separate legal entity established through some legislation or registration
process. They have rights and liabilities separate from that of their shareholders. Some of these
corporations have assets and facilities in other countries apart from their home country as well
and such corporations are known as multinational corporations (MNCs). Multinational
corporations have come to play a huge role in most aspects of human life today. Their powers
have grown at an astonishing rate over the last couple of centuries, so much so that they are often
compared to entire nations. Therefore, imposing some sort of means of accountability and
control over these multinationals and corporations is of paramount importance and should be
extremely high on the list of priorities for every nation.

This room for exercising checks and balances over these international players, the courts all
around the world have evolved and applied the doctrine of "corporate criminal liability". Simply
put, this doctrine provides for fixing criminal liability on corporate entities. The law
of corporate criminal liability has traditionally adopted a nominalist theory
of corporate personality, under which corporations are viewed as fictional entities and
individuals are treated as the only true subjects of the criminal law. 1Through ages, this doctrine
has been subject vast evolution. The first stint at fixing corporate criminal liability was
undertaken by Courts in England and United States, in cases involving non-feasance of quasi-
public corporations such as municipalities, that resulted in public nuisances. 2 Eventually, this
doctrine was incorporated in mainstream criminal law, however the same was restricted to "strict
liability" offences, i.e. offences that do not require mens rea as an essential ingredient to be
proved.3 The main inhibition behind restricting the import of this doctrine to mainly strict
liability offences could have been the prevalence of the doctrine of actus reus non facit reum
nisi mens sit rea, whereby mens rea is indispensable in fixing criminal liability and corporations
being fragments of legal fiction i.e. merely legal ad real entities cannot form the requisite mens
rea. However, with the advent of time the courts also overcame the aforementioned inhibitions
i.e. incorporated this doctrine even in offences, where criminal intent forms an important pre-

1
Baudh Sumit, Corporate Criminal Liability: A Review in Light of Tata-Ulfa
<http://14.139.237.40:2055/Members/SearchResult2014.aspx#FN0001> as visited on 7/6/2015
2
R. v. Inhabitants of Lifton, 101 ER 280 (KB 1794)
3
Queen v. Great North of England Railways Co. 115 ER 1294 (QB 1846)
requisite.4 The motivating factor of this result was the need for effective enforcement of law
against corporations. Creation of corporate personality had otherwise created too large a vacuum
vis-a-vis application of criminal law to corporations.5 This marked the advent of criminal
penalisation of corporate entities under criminal statutes of various countries all over the world.

INDIAN PERSPECTIVE AND EVOLUTION


Corporate criminal liability has been interpreted to comprise of two models of fixing liability.
First, it is necessary to consider the principles of attribution, whereby the actus reus and/or mens
rea of a corporate officer is attributed to that of the company. In other words, the action or state
of mind of a corporate officer is treated as if it is that of the company so as to make the company
liable in criminal law. The essence of the principle of attribution is that the company (which is a
legal fiction and a separate legal personality) is held liable for the act and/or state of mind of its
corporate officers (who, through their human intervention, are therefore able to act on behalf of,
or even as, the company). 6

Second, it becomes necessary to consider the converse scenario, which is where a corporate
officer may be made liable under criminal law for an offence committed by the company. This
scenario usually arises when such an officer is the directing mind and will of the company.
The principle of attribution is not appropriate in this context. Courts have, however, sought to
apply the principle of vicarious liability, which can be invoked only if the state expressly
provides for criminal liability of one person (such as a corporate officer) for the acts of another
(such as the company).

In Indian context, the main issues that cropped up once the courts started incorporated this
doctrine in crimes requiring an intent, was the fact that the Indian Penal Code of India provides
for mandatory imprisonment in and a corporation simply being a legal fictional entity, the law
cannot to be interpreted to such an extend so as to fix imprisonment on corporate entities. 7 The
Law commission in its 41st report proposed an amendment to the As far as punishment is
concerned, the Law Commission suggested that Section 62 of IPC be amended to read in every

4
Anath Bandhu v. Corn. of Calcutta AIR 1952 Cal 759
5
Supra note at 1
6
State Of Maharashtra vs Syndicate Transport Co. (P) Ltd. AIR 1964 Bom 195
7
Asst. Commr. v Velliappa Textiles Ltd. (2003)11 SCC 405
case in which the offence is punishable with imprisonment only and not any other punishment,
and the offender is a corporation it shall be competent for the court to sentence such offender to
fine. This view was forwarded by the apex court in the case of Standard Chartered
Bank v. Directorate of Enforcement8, held that fine could be imposed on the corporation even
where the sentence stipulates mandatory imprisonment. The abovementioned result was achieved
by interpreting the word and in the expression shall be punished with imprisonment for a
period ofyears (or months)and fine in penal provisions as or. This view again reverberated
in the judgment of the apex court in another landmark case in this regard i.e. the case of Iridium
India Telecom Ltd. v. Motorola Incorporated & Ors.9, in the instance case Iridium India Limited
filed a criminal complaint against Motorola Inc. alleging offences under section 420 (cheating)
read with section 120B (conspiracy) of the Indian Penal Code (IPC). The complaint alleged that
Motorola Inc. had floated a private placement memorandum (PPM) to obtain funds/investments
to finance the Iridium project. The criminal complaint alleged that the representations were
false and that the project turned out to be commercially unviable resulting in significant loss to
the investors. The court again reiterated that there was no doubt companies could be held
criminally liable, as they could no longer claim immunity from prosecution. In that sense, a
company could be treated in the same manner as an individual for being convicted of an offence,
including one that requires mens rea. Relying upon its decision in Standard Chartered, the
Supreme Court found that a company cannot escape liability simply because the offence requires
mandatory imprisonment. However, it is pertinent to realise, that liability cannot be fixed upon
the company for offences which require specific state of mind and attributing the same to the
corporation would be stretching the interpretation of the law to illogical extremes and it is
precisely for this reason that the High Court of Delhi did not hold the Indraprastha Medical Corp.
Ltd. liable for the medical negligence purported by its doctors.10

Therefore, it is evident from the abovementioned discussion that, the doctrine of criminal
corporate liability has found prominence in the mainstream penal laws and the incapacity of the
justice systems to impose mandatory imprisonment terms is no bar since the same pursuant to the

8
(2005)4 SCC 530
9
AIR 2011 SC 20
10
Indraprastha Medical Corp. Ltd. v State nct of Delhi and Ors. (2010) 171 DLT 198
abovementioned verdict of the apex court be substituted with a monetary fine being imposed
upon the corporation.

CORPORATE CRIMINAL LIABILITY AND INDIAN COMPANY LAWS


With the enactment of the Companies Act, 2013, the role of the Directors in the functioning of
the company and the subsequent liabilities accruing to them from the same have been revisited
and altered according to the contemporary changes in the society. The 2013 Act has introduces
several measures which have the effect of considerably enhancing the duties and liabilities of
directors and imposition of stringent penal liabilities of directors and imposition of stringent
penal provisions in case of breach of any statutory provisions. While some of the requirements
already existed for listed companies as part of the Listing Agreement, the new requirements
under the 2013 Act and the practical measures which may be adopted by them, for complying
with these duties. The civil and criminal liabilities are not just on directors but includes Officers
in Default. There is heightened corporate governance requirements even for startups and
unlisted companies, even though there is no public money invested. This act has incorporated at
various instances, provisions specifying the liability for both i.e. the corporation and the officer
in default.

Being fiduciaries, directors are exposed to liabilities as a consequence of a breach of their duties.
While liabilities may arise under various statutes, the focus here is on liabilities arising under
company law. The first set of liabilities is statutory in nature, being specifically set forth in the
Companies Act, 2013 (the 2013 Act). These could be either civil liability requiring directors to
make payments to victims or the state, or they could be criminal liabilities resulting in fines or
imprisonment. The approach in the new regime has been to impose stiffer penalties in case of a
criminal offence so as to constitute a strong deterrent on director conduct that falls short of the
desired standards.

The second set of liabilities could arise from claims made against the directors either by the
company or the shareholders for breaches of directors duties. Since directors owe the duties to
the company, at the outset it is the company that can bring a claim. Where the company is unable
(or does not wish) to do so, it is open to the shareholders to bring a derivative claim on behalf of
the company to recover monies for breach of directors duties. These claims are quite robust in
theory, but are riddled with tremendous difficulties in practice. At a substantive level, there are
obvious inadequacies regarding the types of remedies that can be exercised for breaches of
directors duties. Others relate to the speed and cost-effectiveness of bringing these actions.
Given the jaw dropping rates of docket explosion before the Indian courts, the ability of
shareholders or the company to bring a suit, and even more, to enforce a successful claim against
directors, is highly doubtful. It is not surprising that India displays a rather meagre track record
of civil claims against directors that have resulted in payouts by them.

In order to obviate the difficulties (particularly on the procedural count) under the pre-existing
law, the 2013 Act institutes mechanisms that are novel in the Indian context. The first is the
establishment of a class action mechanism that allows a group of shareholders (constituting a
minimum of 100 shareholders or those holding 10% shares in the company) to bring an action on
behalf of all affected parties, which includes claims for compensation from directors for any
fraudulent, unlawful or wrongful act or omission or conduct on their part. More importantly, the
2013 Act devices a mechanism to sidestep the regular court system by enabling such actions to
be brought before a yet-to-be-constituted National Company Law Tribunal (NCLT) that is
expected to be speedier, more efficient and cost-effective. Once these remedial mechanisms are
in place, it is likely that directors may be subject to greater scrutiny through the use of civil
liability suits by companies and shareholders. Only time will tell whether the directors liabilities
regime in India would transform itself from a scenario where directors face almost no lawsuits
for company law duties to one where they might face too many lawsuits, and as to what impact
that might have on their willingness to serve on corporate boards as well as on their conduct.
CONCLUSION AND SUGGESTIONS
While considering the above mentioned it can be settled that the Indian judiciary and the law
makers have realised the importance of incorporating this doctrine in fixing the liability on both
the corporations and well the officers in default as far as flouting of national laws are considered.
As already stated, it is pertinent upon the courts to incorporated the instant doctrine in order to
curb the contravention of laws caused by such corporations and the minds behind them solely for
their own satiation. The new Act is a testament to the amalgamation of the judiciary and the law
makers in filling up the grey matter that existed in this area of law which invariably provided
such corporations with opportunities to flout the existing laws. However, it should not be
forgotten that, the incorporation of the instant doctrine cannot be stretched to illogical extremes
therefore it is of immense importance to test as to whether the impugned action was committed
with the intention of gain as the result for the individual and subsequently the corporation within
the framework of that individual's affiliation to the corporation.

Except in the case of regulatory offences where a duty is directly imposed on the corporation, the
indiscriminate application of vicarious corporate criminal liability shall result in a corporation
being held liable for agents irrespective of their position in the corporate chain of command and
regardless of corporations efforts to discourage such conduct. While determining the appropriate
standard of punishment applicable to a company, the effects it could have on innocent parties
have to be borne in mind. It must additionally be remembered that whereas an individual has
complete control over his own acts, a company cannot physically have the same level of control
for the acts of each and every employee. Additionally, this capability of exercising control over
ones acts is an essential precondition for assigning liability under the criminal law as is evident
from the acceptability of insanity as a complete or partial defense to the commission of an
offence. The other extreme positing that a company can never be criminally liable is also
unacceptable for reasons which are self-evident. The goals of criminal law being to deter and
punish unlawful conduct, if the corporation has already undertaken all reasonable measures to
conform its employees conduct to the law, then there no longer exists any rationale for corporate
prosecution. It is asserted that while determining the sentence for a corporation certain aspects of
causation which exacerbate the corporate offence such as causing death, failure to heed warnings
and taking risks to maximize profits, and mitigating circumstances such as prompt admission of
responsibility, timely guilty plea, evidence of having taken steps to remedy the deficiency and
previous safety record should be as propounded in R. v. Howe and Son (Engineers) Ltd.11 Lastly,
the authors believe it to be necessary to incorporate different forms of punishment which shall
induce voluntary self compliance of legal processes and deter corporations generally from
indulging in criminal conduct.

11
7 [1999] 2 All ER 249
BIBLIOGRAPHY