CORPORATE CRIMINAL LIABILITY

INTRODUCTION

Corporations are as much part of our society as are any other social institution. Corporations
represent a distinct and powerful force at regional, national and global levels and they wield
enormous economic powers. Besides governments and governmental agencies, it is the
corporations that are the more and more effective agents of action in our society. But,
corporations, as we understand today, have not been same in the past. The multitude of roles
the corporations play in the present day human life have been necessitated by the demands of
the society, as it kept on „developing‟. The development of the society, at various points of
time, has had a direct influence on the structure and functions of the corporation. This had led
to an ever increasing demand for the law to recognise the change and suit its applications,
accordingly1. Over the last few decades nature and form of a corporate sector has grown
complex. In last two decades of 20th century, we saw globalization and privatization of every
type of business entities all over the world and this globalization further paved the way for
“Global Village”, which considerably made the changes in the form of business organisation.

Today, a corporation is an artificial entity that the law treats as having its own legal
personality, separate from and independent of the persons who make up the corporation 2.
This means, for example, that a corporation can own and sell property, sue or be sued, or
commit a criminal offence because; a corporation is made up of and run by people, acting as
agents of the corporation. A corporation has an existence separate from the shareholders
constituting it and they cannot be held liable for the wrongs committed by the corporation.
The corporations are run by natural persons and these peoples‟ actions can be criminal in
nature and can sometimes even result in great economical as well as human loss to the
society. Hence, for a better understanding of the concept of corporate criminal liability, it is
necessary to trace the origin and meaning of corporation first.

Corporate criminality “challenges or nags at our sense of reality.” It is this characteristic that
makes corporate crime a tricky issue. The development of corporate criminal liability has

1
Balakrishnan. K; “Corporate Criminal Liability - Evolution of the concept” (1998) Cochin University Law
Review p.255.
2
Salomon v. Salomon (1897) AC 22.

Electronic copy available at: http://ssrn.com/abstract=1446669

become a problem which a growing number of prosecutors and courts have to deal with at the
present time. In the common law world, following standing principles in tort law, English
courts began sentencing corporations in the middle of the last century for statutory offenses.
On the other hand, a large number of European continental law countries have not been able
to or not been willing to incorporate the concept of corporate criminal liability into their legal
systems. The fact that crime has shifted from almost solely individual perpetrators only 150
years ago, to white-collar crimes on an ever increasing scale has not yet been taken into
account in many legal systems. At the same time, crime has also become increasingly
international in nature.

Courts are especially likely to impose criminal liability on a corporation when the criminal
act is requested, authorized, or performed by the board of directors, an officer or another
person having responsibility for formulating company policy or high level administrator
having supervisory responsibility over the subject matter of the offence and acting within the
scope of his employment.

ORIGIN OF CORPORATIONS

In simple language, corporation means a group of individuals coming together to carry on a

business. Corporation is a creation of law, a business entity recognised by law. Though,
English law establishes the origin of modern corporation in the fourteenth century or so, yet
some authors3 are of the view that the origin of corporation could be sought in the twelfth
century or perhaps in the Roman law where, juristic person was said to have been recognized.

Generally, the common law did not allow a corporation to be convicted of a crime. There
were exceptions and these exceptions were based on the doctrine of respondent superior or
vicarious liability – the master is liable for the conduct of his servant in the course of
employment. The doctrine of vicarious liability was created in the law of tort in the
seventeenth century in order to provide compensation to third parties and justified on the
ground that since the master acquired the benefits of the servant‟s work, he should also carry
the burdens.
While the common law recognized the appropriateness of vicarious liability for tort
compensation, it rejected vicarious liability for crimes since crimes required mens rea or

3
Gross, Edwards; “Organization structure and organization crime”, in Gilbert Geis and Ezra Scotland (Eds.)
“White collar crime, theory and research” Sage Publications (1980) p.53.

Electronic copy available at: http://ssrn.com/abstract=1446669

guilty mind. The mere existence of the master-servant relationship was not considered to be a
sufficient criterion for imputing personal fault to the master. However, there were three
common law crimes which did not require mens rea. These include public nuisance, criminal
libel and contempt of court. In these categories of offences, the courts applied vicarious
liability, allowing the master (which could be either an individual or a corporation) to be
convicted for offences of his servant. Apart from these vicarious liability exceptions,
corporations were immune from liability under the criminal law.
The courts in early twentieth century began to dismantle the corporate immunity from
criminal law by holding that words like everyone in criminal statutes could include
corporations. Courts also rejected the argument that corporations cannot be held criminally
liable for offences committed by their officers for reasons of being ultra vires unless those
employees were expressly ordered to commit the act in question.
However, the most challenging obstacle to imposing criminal liability on corporations was
the difficulty of attributing mens rea to an artificial person - a corporation. The breakthrough
came in 1915 when the House of Lords in Lennard’s Carrying Co. Limited, v. Asiatic
Petroleum Co.4 layed down the general principle of directing mind (identification theory). In
this case Viscount Haldane stated that “corporation is an abstraction. It has no mind of its
own any more than it has a body of its own; its active and directing will must consequently be
sought in the person of somebody who for some purposes may be called an agent, but who is
really the directing mind and will of the corporation, the very ego and centre of the
personality of the corporation”. Subsequently, in R v. Fane Robinson Ltd 5, the Canadian
Court applied the principle of directing mind and held that there is no reason why a
corporation which can enter into binding agreements with individuals and other corporations
cannot be said to entertain mens rea when it enters into an agreement which is the gist of a
conspiracy and a false pretence.

Over the past century, the concept of a corporation has shifted from the notion of an
enterprise headed by one entrepreneur, who both owns and runs the going concern, to that of
an organisation where stock ownership becomes separated from the control of the
corporation‟s affairs, the latter being managed by a professional, hired and self-perpetuating
bureaucracy. Further, the individual shareholder‟s role has changed from part-owner to
investor, and its importance has diminished in large corporations where the most significant

4
(1915) AC 705 at 713 (H.L.)
5
(1941) 76 CCC 196 at 203 (Alla C.A.)

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shareholders are collective entities. The attachment of the shareholder to the corporation is
becoming secondary and indirect, reflecting the fact that corporations serve a variety of
interests besides those of shareholders, including those of their employees, customers and the
community at large. And hence, it has been observed that “the corporation can no longer be
identified with a single homogeneous group of individuals. Its decisions and activities are the
resultant of and are responsive to a complicated set of interests and conflicting claims”6. This
is the more significant change for the purposes of the criminal law and for imputing corporate
criminal liability on the corporations.

The law recognized the system of small independent corporations7. Corporations are of two
kinds:

(a) Corporation Aggregate, and

(b) Corporation Sole.

Corporation Aggregate is an incorporated body having membership of several persons. It is

formed by number of persons known as share holder who pool their resources to create a fund
known as capital to start with and it works for common interest of all the share holder and
prime being profit making8.

CORPORATE CRIMINAL LIABILITY IN INDIA

Criminal Liability is attached only those acts in which there is violation of Criminal Law i.e.
to say there cannot be liability without a criminal law which prohibits certain acts or
omissions. The basic rule of criminal liability revolves around the basic Latin maxim actus
non facit reum, nisi mens sit rea. It means that to make one liable it must be shown that act or
omission has been done which was forbidden by law and has been done with guilty mind.

Hence every crime has two elements one physical known as actus reus and other mental
known as mens rea.9 This is the rule of criminal liability in technical sense but in general the

6
M. Dan-Cohen; “Rights, Persons and Organizations” 1986 Berkeley, University of California Press, p.27.
7
Maine, Henry; “Ancient law”, John Murray, London (1930), p.143.
8
Salmond; “Salmond on Jurisprudence”, Fitzgerald P.J. (Edt.), Universal Law Publishing Pvt., New Delhi, 2002
p. 305-328.
9
Actus reus connotes those result of human conduct which is forbidden by law and hence constitutes of Human
action; result of conduct and act prohibited by law. One other hand mens rea is generally taken as blame worthy

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principle upon which responsibility is premised is autonomy of the individual, which states
that the imposition of responsibility upon an individual flows naturally from the freedom to
make rational choices about actions and behaviour.10

Although the general rule as stated above is applicable to all criminal cases but the criminal
law jurisprudence has seen one exception to the above said concept in form of doctrine of
strict liability in which one may be made liable in absence of any guilty state of mind. This
happens in cases of mass destructions through pollution, gross negligence of the company
resulting in widespread damages like in the Bhopal Gas tragedy, etc.11

Recently, The Supreme Court in Standard Chartered Bank & Others v. Directorate of
Enforcement & Others12, considered the issue as to whether a company, or a corporation,
being a juristic person, could be prosecuted for an offence for which mandatory sentence of
imprisonment and fine is provided; and when found guilty, whether the court has the
discretion to impose a sentence of fine only. The Supreme Court held that there is no dispute
that a company is liable to be prosecuted and punished for criminal offences.

Although there are earlier authorities to the effect that corporations cannot commit a crime,
the generally accepted modern rule is that except for such crimes as a corporation is held
incapable of committing by reason of the fact that they involve personal malicious intent, a
corporation may be subject to indictment or other criminal process, although the criminal act
is committed through its agents.

Corporations play a significant role not only in creating and managing business but also in
common lives of most people. That is why most modern criminal law systems foresee the
possibility to hold the corporation criminally liable for the perpetration of a criminal offence.
The doctrine of corporate criminal liability turned from it's infancy to almost a prevailing
rule.13 But, because a corporation is not a natural person and cannot be subject to one of the

mental condition: Russell, W.O., Russell on Crime p.17-51 (J.W.C. Turner Ed., New Delhi; Universal Law
Publishing Pvt., 2001).
10
A. Ashworth, Principles of Criminal Law p. 79-81 (Oxford: Clarendon Press, 1991) cited by Fisse,
Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault, and Sanctions, 56 S. Cal. L. Rev. 1141
11
Assn. of Victims of Uphaar Tragedy v. UOI, 104 (2003) DLT 234, Rylands v. Fletcher, (1868), L.R. 3 H.L.
330.
12
(2005) 4 SCC 530.
13
Thiyagarajan, T. Sivanathan; “Corporate Criminal-concept”, available at:
http://www.manupatra.com/Articles/artlist.asp?s=Corporate/Commercial (last visited on May 7, 2008 at 3.00
P.M.)

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most important sentencing options, namely, imprisonment, it requires special consideration in
an inquiry into sentencing law. Punishing a corporation undermines the theoretical
foundations of criminal law, which presupposes that crimes involve an act and a culpable
mental state. Corporate criminal liability or corporate crime is very difficult to define because
this phrase in present day scenario covers wide range of offences. However for understanding
purpose it can be defined as illegal act of omission or commission, punishable by criminal
sanction committed by individual or group of individual in course of their occupation14. It can
be even defined as socially injurious acts committed in course of occupations by peoples who
are managing the affairs of the company to further its business interest 15.Corporate
criminality also represents a kind of instrumentalities through which the trust of the people
continues to be betrayed by persons in positions of responsibility, authority and power in the
business sector. Corporate crime has been defined as “the conduct of a corporation or of
employees acting on behalf of a corporation, which is proscribed and punishable by law”16. In
this sense, “Corporate criminal Liability” refers to the imposition of criminal liability on
either the corporation or its employees and agents. The latter is also referred to as white-
collar crime.

The development of the law relating to corporate criminal liability in India is not only similar
to that in English law, but also greatly influenced by the English Law. At one point of time,
„corporations‟ were viewed as a convenient shield to evade liability. However, under our
present penal structure, for an offence by the corporation, both the corporation and its officer
can be made liable. The law on corporate criminal liability is however, not confined to the
general criminal law in the penal code but it is, in fact, scattered over a plethora of statutes
with specific provisions for the same. The need for proper law relating to corporate criminal
liability in a legal system, specially in the developing countries like India was observed by
the Supreme Court in the following terms:

“In India, the need for industrial development has led to the establishment of a
number of plants and factories by the domestic companies and under-takings as well as by
Transnational Corporations. Many of these industries are engaged in hazardous or inherently
dangerous activities which pose potential threat to life, health and safety of persons working

14
Williams, K.S.; "Text Book on Criminology", Universal Law Publishing Pvt., New Delhi, 2001, p.64
15
Siegal, L.J.; "Criminology" , Wadsworth/ Thomson Learning, London, 2000, pp.398-99
16
Braithwaite, John ; Corporate Crime in the Pharmaceutical Industry, 1st Edition, Routledge and Kegan Paul,
London, 1984, p.6.

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in the factory, or residing in the surrounding areas. Though working of such factories and
plants is regulated by a 614 number of laws of our country, there is no special legislation
providing for compensation and damages to outsiders who may suffer on account of any
industrial accident.”17

The major law relating to Corporations in India is codified in The Company Act, 1956
and the definition of “Corporation" as given in the Act under Section 2 (7) includes a
company. Hence under Indian law the liability of the corporation is essentially liability of the
company only. Further, under Indian law as well as under the English law, a Company is a
creation of the law. It is not a human being but is an artificial person. On incorporation, the
company acquires a separate legal entity distinct from and independent of its members. When
a company is incorporated, all dealings are with the company and all persons behind the
company are disregarded, however important they may be.

The separate personality of the company is, however, a statutory privilege; it must be
used for legal and legitimate business purposes only. Where a fraudulent, dishonest or
improper use is made of the legal entity, the concerned individual will not be allowed to take
shelter behind the corporate personality. The court will break through the corporate shell and
apply the principle of “Lifting of the corporate veil”. The court will look behind the corporate
entity and take action as though no entity separate from the members existed. In other words,
the benefit of separate legal entity will not be available and the court will presume the
absence of such separate existence18. The Companies Act, 1956 contains certain provisions19,
which empower the courts to lift the veil to reach the persons who are in fact responsible for
the culpable or wrongful act. The corporate veil can be lifted in the following cases:

(1) Where the doctrine conflicts with the Public policy,

(2) Where corporate veil has been used for fraud or improper conduct,

(3) Where the corporate facade is only an agency instrumentality,

(4) For determining the real character of the company,

17
Singh.K.N.J, in Charan Lal Sahu v U.O.I, AIR 1990 SC 1480.
18
Dalal Praveen, “Corporate Entity in existing legal system-Its rights and liabilities under the Constitution and
other enactments”, (2004) 61 CLA 96 (Mag).
19
Sections 45, 147, 212, 242, 247 etc, Companies Act, 1956.

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(5) Where the veil has been used for evasion of taxes,

(6) In quasi-criminal cases,

(7) For investigating the ownership of the company,

(8) For investigating the affairs of the company20,

(9) Where the company is used as a medium to avoid various welfare and labour legislations,

(10) In case of economic offences,

(11) Where the company is used for some illegal and improper purpose, etc.

The following provisions of the Companies Act, 1956 provide that the Members or the
Directors/officer(s) of a company will be personally liable if:

(1) A company carries on business for more than six months after the number of its members
has been reduced below seven in the case of a public company and two in the case of a
private company. Every person who was a member of the company during the time when it
carried on business after those six months and who was aware of this fact, shall be severally
liable for all debts contracted after six months21,

(2) The application money of those applicants to whom no shares has been allotted is not
repaid within 130 days of the date of issue of the prospectus, then the Directors shall be
jointly and severally liable to repay that money with the prescribed interest 22,

(3) an officer of the company or any other person acts on its behalf and enters into a contract
or signs a negotiable instrument without fully writing the name of the company, then such
officer or person shall be personally liable23,

(4) The court refuses to treat the subsidiary company as a separate entity and instead treat it
as only a branch of the holding company24,

20
Section 239, Companies Act, 1956.
21
Section 45, Companies Act, 1956.
22
Section 69, Companies Act, 1956.
23
Section 147, Companies Act, 1956.
24
Section 212, 214, Companies Act, 1956.

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(5) In the course of winding up of the company, it appears that the business of the company
has been carried on with intent to defraud the creditors of the company or any other person or
for any fraudulent purpose, al those who were aware of such fraud shall be personally liable
without any limitation of liability25.

Thus, the protection of separate legal entity cannot be claimed in these cases and the
limited liability of the shareholder becomes unlimited if he is engaged in these activities. The
concept of “limited liability” restricts the liability of a shareholder to the nominal value of the
shares held by him. If he has paid the entire amount which is payable towards his shares, he
cannot be held liable for the debts of the company, even if he holds almost the entire share
capital of the company. This rule, however, does not apply if the court lifts the corporate veil
and finds the shareholder responsible for the wrongful act26. Not less recently, in the
landmark judgment of Kapila Hingorani v State of Bihar27, the Apex Court analysed the
rights and liabilities of a company vis-à-vis the Fundamental rights and Human Rights of the
individuals. The Court observed:

“A company incorporated under the Companies Act is a juristic person and has a distinct and
separate entity vis-à-vis its shareholders. The corporate veil, however, can in certain
situations be pierced or lifted. Whenever a corporate entity is abused for an unjust and
inequitable purpose, the court would not hesitate to lift the veil and look into the realities so
as to identify the persons who are guilty and liable thereof. The veil can indisputably be lifted
when the corporate personality is found to be opposed to justice, convenience and interest of
the revenue or workman or against public interest”. It has also been observed that a
corporation deemed to be “State” within the meaning of Article 12 of the Constitution and
acting as agency of the government, would be subject to the same limitations in the field of
Constitutional or administrative law as the government itself, though in the eyes of law they
would be distinct and independent legal entities28.

25
Section 542, Companies Act, 1956.
26
Dalal Praveen, “Corporate Entity in existing legal system-Its rights and liabilities under the Constitution and
other enactments”, (2004) 61 CLA 96 (Mag).
27
2003 (6) SCC 1.
28
R.D.Shetty v. International Airport Authority, AIR 1979 SC 1628.

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CORPORATE CRIMINAL LIABILITY - THE NECESSITY

In the modern day world, the strong effect of activities of corporations is incredible on the
society. In the day to day activities, not only do the corporations affect the lives of the people
as a blessing but also many a times proves disastrous which then falls under the category of
crimes. For instance, the Uphar Cinema tragedy or thousands of scandals especially the white
collar and organized crimes can come within the category that requires immediate concern.
Despite so many disasters, the law was unwilling to impose criminal liability upon
corporations for a long time. This was for basically two reasons that are29:

I. That corporations cannot have the mens rea or the guilty mind to commit an offence; and
II. That corporations cannot be imprisoned.

These two obstacles were managed to survive till late 20th and very early 21st century.

There is no obstacle in the criminal law jurisprudence whatsoever to impose criminal

sanction on a corporation since it can have a mind of its own and also an environment
wherein crime is nurtured. However, this concept still not contemplated in the statutes in
India.

In India, certain statutes like the Indian Penal Code talk about kinds of punishments that can
be imposed upon the convict and as per Section 53 include death, life imprisonment, rigorous
and simple imprisonment, forfeiture of property and fine. In certain cases the sections speak
only of imprisonment as a punishment like in case of offence under Section 420. Thus the
problem arises as to how to apply those sections on the companies since a criminal statute
needs to be strictly interpreted and in such statutes there is no scope for corporations to be
imprisoned.

Going with the above viewpoint and with the growing trend of corporate criminality, the
Courts in India have finally recognized that a corporation can have a guilty mind but still
were reluctant to punish them since the criminal law in India does not allow this action

29
Zee Telefilms Ltd. v. Sahara India Co. Corporation Ltd., 2001 (3) Recent Criminal Reports (Criminal) 292;
Motorola Inc. v. UOI, 2004 Cri LJ 1576.

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In The Assistant Commissioner, Assessment- II, Bangalore and Ors. v. Velliappa Textiles Ltd.
and Ors.30, B.N. Srikrishna J. said that corporate criminal liability cannot be imposed without
making corresponding legislative changes. For example, the imposition of fine in lieu of
imprisonment is required to be introduced in many sections of the penal statutes. The Court
was of the view that the company could be prosecuted for an offence involving rupees one
lakh or less and be punished as the option is given to the court to impose a sentence of
imprisonment or fine, whereas in the case of an offence involving an amount or value
exceeding rupees one lakh, the court is not given a discretion to impose imprisonment or fine
and therefore, the company cannot be prosecuted as the custodial sentence cannot be imposed
on it.

The legal difficulty arising out of the above situation was noticed by the Law Commission
and in its 41st Report, the Law Commission suggested amendment to Section 62 of the Indian
Penal Code by adding the following lines:

“In every case in which the offence is only punishable with imprisonment or with
imprisonment and fine and the offender is a company or other body corporate or an
association of individuals, it shall be competent to the court to sentence such offender to fine
only.”

The Court decided that as the company cannot be sentenced to imprisonment, the court
cannot impose that punishment, but when imprisonment and fine is the prescribed
punishment the court can impose the punishment of fine which could be enforced against the
company. Such discretion is to be read into the section so far as the juristic person is
concerned. Of course, the court cannot exercise the same discretion as regards a natural
person. Then the court would not be passing the sentence in accordance with law. As regards
company, the court can always impose a sentence of fine and the sentence of imprisonment
can be ignored as it is impossible to be carried out in respect of a company. This appears to
be the intention of the legislature and we find no difficulty in construing the statute in such a
way. We do not think that there is blanket immunity for any company from any prosecution
for serious offences merely because the prosecution would ultimately entail a sentence of
mandatory imprisonment.

30
AIR 2004 SC 86.

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Fine is the most common punishment in every part of the world and it is a punishment the
advantages of which are so great and obvious that we propose to authorize the courts to inflict
it in every case… Imprisonment, transportation, banishment, solitude, compelled labour are
not equally disagreeable to all men. With fine the case is different. In imposing a fine it is
necessary to have regard to the pecuniary circumstances of the offender, as to the character
and magnitude of the offence.

Presently, all the penal provisions of various statutes include only fine as a form of
punishment that can be imposed on a company. So is the case with judicial pronouncements
on the aspect of sentencing. In addition to this, the Law Commission in its 41st Report also
speaks of introducing only fine as an additional punishment to be imposed upon corporations
in lieu of fines. This restrictive thinking, according to Courts is based on the maxim lex non
cogit ad impossibilia, which tells us that law does not contemplate something which cannot
be done.31 This reasoning in itself shows that the law lacks in a non holistic viewpoint in the
concept of corporate criminal liability. The Courts have no doubt been efficient in evolving
the concept of criminal liability of corporate and have imposed the same on the convicts but
the only way of punishing them that has been thought of is by way of fines. It is now for the
legislature to evolve new forms of punishments and incorporate them in the criminal justice
system of the land.

CONCLUSION

In the case of corporate criminal liability, the approach has changed over the years from there
being no concept of a liability for criminal acts for corporations to liability based on the
identification of some persons as the alter ego of the company.

Today, corporate criminal liability is a subject of concern for a wide range of groups
campaigning on issues including human rights, environment, development and labour.
Corporate crimes committed on all continents across a range of industrial activities in various
sectors (e.g. chemicals, forestry, oil, mining, genetic engineering, nuclear, military, fishing,
etc.) clearly point towards the need for greater control, monitoring and accountability of
corporate activity in a globalised economy.

31
Kartick Chandra v.Harsha M. Dasi, AIR 1943 Calcutta 35 at 354; Edmund N. Schuster v. Assistant Collector
of Customs, New Delhi, AIR 1967 Punjab 189; State of Maharashtra v. Syndicate Transport, AIR 63 (1966)
Bom 197; Knightsbridge Estates Trust Ltd. v. Byrne and Ors. 1940 (2) All ER 401.

12
Corporate criminal liability is complementary to individual liability. The present liability
regime that makes both corporate and individual prosecutions available to regulatory
authorities has undeniable advantages over one that does not. Where crime arises from intra-
organisational defects, the dismissal or discipline of a few individuals is clearly an inadequate
response. Further, where individual liability is difficult to determine, prosecution of the
corporation is an attractive alternative. There are many other situations where the prosecution
of the corporation may be the only way to allocate responsibility for white-collar crime.
Where both a corporation and its officers can be prosecuted, the prosecution of one over the
other, or both, is a matter that is largely left to the discretion of the prosecuting authority. The
prosecution‟s choice should be aimed at achieving the effective regulation of corporate
activities, as well as the general objectives of sentencing.

The criminal law jurisprudence relating to imposition of criminal liability on corporations is

settled on the point that the corporations can commit crimes and hence be made criminally
liable. However, the statutes in India are not in pace with these developments and the above
analysis shows that they do not make corporations criminally liable and even if they do so,
the statutes and judicial interpretations impose no other punishments except for fines. Apart
from fines, punishments such as winding up of the company, temporary closure of the
corporation, heavy compensation to the victims, by stepping on the weakness of the
corporation i.e., its goodwill, etc. Such means of punishment would have a deterrent effect on
the corporate and the sole aim of punishment under criminal jurisprudence would be
achieved.

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