DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY LUCKNOW

Law and Economics

TITLE:

Corporate Crimes: A nemesis of Developing Economies

Submitted by: Submitted to:

Amitayush Yadav Dr. Aditya Pratap Singh

190101019 Professor (Law)

X Semester
 TABLE OF CONTENTS

ACKNOWLEDGMENT ....................................................................................................... 3

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

HISTORICAL BACKGROUND........................................................................................... 4

TWIN MODEL OF CORPORATE CRIMINAL LIABILITY ............................................... 5

DERIVATIVE MODEL .................................................................................................... 5

Vicarious Liability ............................................................................................................ 5

Identification doctrine ........................................................................................................ 6

ORGANIZATIONAL MODEL ......................................................................................... 7

POSITION OF CORPORATE CRIMINAL LIABILITY IN INDIA...................................... 7

CONSTRAINTS OF CORPORATE LIABILILTY ............................................................. 11

IMPRISONMENT ........................................................................................................... 11

MENS REA..................................................................................................................... 12

CONCLUSION ................................................................................................................... 12

BIBLIOGRAPHY ............................................................................................................... 13
 ACKNOWLEDGMENT

I express my gratitude and deep regards to my teacher for the subject Dr. Shakuntala Sangam,
for giving me such a challenging topic and also for his exemplary guidance, monitoring and
constant encouragement throughout the course of this thesis.

I would also like to thank the librarians of Dr. Madhu Limaye Library who extended their
assistance to me by helping me out consult the relevant books and provided me with research
material and good books to work upon and the distinguished authors, jurists and journals for
providing in the public domain such invaluable information. I also thank all of my friends
and seniors who aided me along the way.

Lastly, I thank almighty, my family and friends for their constant encouragement without
which this assignment would not have been possible.

I know that despite my best efforts some discrepancies might have crept in which I believe
my humble Professor would forgive.

Thanking You All.

 INTRODUCTION

Corporations have now become an integral part of our society, and with development of
corporations they have become significant actor in our economy, our society runs in the risk of
getting victimized by these corporation, and therefore they should be punished too of they
commit any wrong. Imposition of punishment, upon offenders of any kind, can be understood
by various rationale of criminal law jurisprudence, but deterrence is the rationale that is
applicable to such economic entities as corporations. Corporations have their own identity, they
have separate legal personality and they are different from their members, and this is sufficient
to makes it possible to held them liable and censure them1.

Section 11 of Indian Penal Code, 1860 (the Code) define person. It reads "the word person
includes any Company or Association or a body of persons, whether incorporated or not."
Further section 2 of the Code provides that "Every person shall be liable to punishment under
this Code". Thus, Section 2 of the Code without any exception to body corporate, provides for
punishment of every person which obviously includes a Company. Therefore, by reading of
these two provisions concept of corporate criminal liability can be derived, though it is not the
sole legislation which provides for the punishment of corporate body, some other legislations
are Companies Act, 2013, Income Tax Act, etc.

Criminal Liability is the quality or state of being legally obligated or accountable; legally
responsible to another or to society which is enforceable by criminal punishment. And
therefore, Corporate Criminal Liability means the extent to which a Corporation as a legal
person can be held criminally liable for its acts and omissions and for those of the natural
persons employed by it. This project would examine various nuances related to corporate
criminal liability.

HISTORICAL BACKGROUND

The growth of Corporate criminal liability can be traced in the terms of the following four
stages. This is also a chronological count of how the courts overcame the following obstacles:

1. Public Nuisance - Courts in England and the United States first imposed corporate criminal
liability in cases involving non-feasances of quasi-public corporations such as municipalities,
that resulted in public nuisances.

1
John T. Byam, The Economic Inefficiency of Corporate Criminal Liability (Vol. 2), 1982
2. Crimes not requiring criminal intent - As the presence and importance of corporations grew,
courts extended corporate criminal liability from public nuisance to all offences that did not
require criminal intent. In the case of Queen v. Great North of England Railways Co2 Lord
Denman ruled that corporations could be criminally liable for misfeasance and American courts
soon began following this trend3. This development eventually encouraged courts to extend
corporate criminal liability to all crimes not requiring intent.
3. Crimes of intent -Courts were slow to extend corporate criminal liability to crimes of intent.
Not until New York Central and Hudson River Rail Road Co. v United States4 did the
Supreme Court clearly hold a corporation liable for crimes of intent. 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 visa-vis application of criminal
law to corporations.
4. Expansion of corporate criminal liability - Various historical developments in Western
Europe as well as United States further contributed to the growth and expansion of corporate
criminal liability. However, one of the most important factors favouring criminal liability over
civil liability was that the public civil enforcers did not possess as much enforcement power as
criminal enforcers did.

TWIN MODEL OF CORPORATE CRIMINAL LIABILITY

DERIVATIVE MODEL

This model is individual centred model. It derives to attach the liability to the corporation only
because an individual connected to the corporation incurred some liability for which the
individual is to be punished, but since it is connected to the corporation the liability is put on
the corporation to having that individual with it and letting it incurred some liability. Derivative
model can be understood in two sub-categorises: a) Vicarious Liability; b) Identification
Doctrine.

 Vicarious Liability

The concept of vicarious liability is based on two latin maxims- first, qui facit per alium facit
per se, it means that he who acts through another shall deemed to have acted on his own, and
second, respondeat superior which means let the master answer. In Bartons Hill Coal Co. v.

2
115 Eng Rep1294 (QB 1846).
3
State v. Morris & Essex Rail Road Co., 23 NJL 360 (1852);
4
522 U.S. 93 (1997)
McGuire'5, Lord Chelmsford LC said: "every act which is done by an employee in the course
of his duty is regarded as done by his employers orders, and consequently is the same as if it
were his employer's own act"

Vicarious liability generally applies to civil liability but Massachusetts court in

Commonwealth v. Beneficial Finance Co., held a corporation criminally liable for a
conspiracy to bribe, the first company, for the acts of its employee, the second, for the act of
its Director, and the third, for the acts of the Vice-President of a wholly owned subsidiary. The
Court seemed to believe that corporate criminal liability was necessary since, a corporation is
a legal fiction comprising only of individuals. US courts are not the only courts which have
incorporated the concept of vicarious liability in the cases of criminal liability. but now this
mode has been rejected considering it to be unjust to condemn one person for the wrongful
conduct of another.

 Identification doctrine

This doctrine is an English law doctrine which tries to identify certain key persons of a
corporation who acts in is behalf, and whose conduct and state of mind can be attributed to that
of the corporation. In case of Salomon v. Salomon & Co.6 House of Lords held that corporate
entity is separate from the persons who acts on its behalf. The Courts in England had in various
judgments like DPP v. Kent & Sussex Contractors Ltd7 ruled that the corporate entities could
be subjected to criminal liability and the companies were held liable for crimes requiring intent.
Judgment like these led to the promulgation of "identification doctrine"

As to the liability of these key persons who act on behalf of company, it was held in Moore v.
Brisler8 that the persons who are identified with the corporations must be acting within the
scope of their employment or authority. The conduct must occur within an assigned area of
operation even though particulars may be unauthorised. It will be wise to infer that
identification doctrine is narrower in scope than the vicarious liability doctrine, instead of
holding corporation liable for act of any employee, identification doctrine narrows it down to
certain persons.

5
(1858) 3 Macq 300.
6
Solomon v. Solomon & Co. 1897 AC 22
7
DPP Kent &Sussex Contractors Ltd., (1944) 1 All E.R.119
8
Moore v Brisler, [1944]2All ER 515
ORGANIZATIONAL MODEL

Unlike derivative model which focuses on individual, organizational model takes corporation
into consideration. Offences require mental state (mens rea) to commit a crime along with
physical act (actus reus), but the problem that arises while holding corporations criminally
liable is how a corporation which is juristic person could possess requisite mental state to
commit a crime.

Derivative model was one way to attribute mental state to corporation. Other way could be by
proving that there existed an environment in the corporation which directed, tolerated, led-on,
and even encouraged the non-compliance of specific law which made it offence. Moreover,
physical act that too is required to complete the requirement of commission of an offence can
be derived rather be proved from the act of its employees, officers, directors, etc. Thus, culture
of a corporation is to be seen while determining its criminal liability.

Corporate culture may help for commission of an offence requiring mental state by- firstly,
providing the environment or necessary encouragement that it was believed by the offender
working in the corporation that it was perfectly alright to commit that offence, or corporation
has psychologically supported the commission of offence; secondly, it is quite possible that the
corporation created an environment which led to commission of crime. Both ways it was the
corporation and its working culture that let the offence committed.

POSITION OF CORPORATE CRIMINAL LIABILITY IN INDIA

Initially, courts in India were hesitant to attribute criminal liability to a company for an offence
that required a criminal intent and they were of the opinion that they could not prosecute
companies for offences that entailed a mandatory sentence of imprisonment because the
corporations could not be criminally prosecuted for offenses requiring mens rea as they could
not possess the requisite mens rea. In A. K. Khosla v. S. Venkatesan9, two corporations were
charged for committing fraud under the Indian Penal Code. The Magistrate issued orders
against the corporations and the Court observed that in order to prosecute corporate bodies,
there were two prerequisites, the first being that of mens rea and the other being the ability to
impose the mandatory sentence of imprisonment. A corporate body could not be said to have
the necessary mens rea, nor can it be sentenced to imprisonment as it has no physical body.

9
A.K. Khosla v. S. Venkatesan (1992) CrLJ. 1448
In Oswal Vanaspati & Allied Industries v. State of U.P10, the Full Bench of the Allahabad
High Court held that a company being a juristic person cannot obviously be sentenced to
imprisonment as it cannot suffer imprisonment.

In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd11 , the court dismissed a complaint
which was filed against Zee Tele films under Section 500 of the IPC. In this case, it was alleged
that Zee had telecasted a program which was based on falsehood and thereby defamed Sahara
India. The court held that mens rea was one of the essential elements of the offense of criminal
defamation and that a company could not have the requisite mens rea. In Motorola Inc. v.
Union of India12, the Bombay High Court quashed a proceeding against a corporation for
alleged cheating and the court concluded that it was impossible for a corporation to form the
requisite mens rea, which was the essential ingredient of the offense Thus, the corporation
could not be prosecuted for cheating under section 420 of the IPC.

In the case of The Assistant Commissioner, Assessment-11, Bangalore & Ors. v. Velliappa
Textiles13, a private company was prosecuted for violation of certain sections under the Income
Tax Act. Sections 276-C and 277 of the Income Tax Act provided for a sentence of
imprisonment and a fine in the event of a violation. The Supreme Court held that the respondent
company could not be prosecuted for offenses under certain sections of the Income Tax Act
because each of these sections required the imposition of a mandatory term of imprisonment
coupled with a fine and the court could not only impose fine on the corporation. After strict
interpretation, the Court held that a corporation did not have a physical body to be imprisoned
and therefore could not be sentenced to imprisonment. The Court also noted that while
interpreting a penal statute, if more than one view is possible, the court is obliged to lean in
favour of the construction that exempts an accused from penalty rather than the one that
imposes the penalty.

The concept of alter ego was evolved in the aforementioned case to tackle with the problem.
The alter ego doctrine revolves around the concept of personification of the legal body. The
Corporation is considered to be the alter ego of the individual. Therefore, the corporation can
be rendered liable for the criminal act of the individual done in his scope of work. Mens Rea
of the individual is considered to be the mens rea of the corporation itself. Thus, this doctrine

10
Oswal Vanaspati & Allied Industries v. State of U.P 1993 1 Comp LJ 172
11
Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd (2001) 3 RCR (Cri.) 292.
12
Motorola Inc. v. Union of India,(2004) Cri.L.J. 1576
13
The Assistant Commissioncr, Assessment-l, Bangalore & Ors. V.Veliappa Textiles, AIR 2004 SC 86
of alter ego allowed the courts to frame corporate houses for the offences which had mens rea
as an essential ingredient, and it is now less tiresome for the court to hold a corporation
criminally liable.

In MV Javali v. Mahajan Borewell & Co and Ors14 the Supreme Court held that where
mandatory sentence of imprisonment and fine is to be imposed but it cannot be imposed namely
on a company then fine will be the only punishment. Thus the Indian courts never felt about
inclusion of company on certain criminal liability that entails imprisonment. The legal
difficulty arising out of the above situation was noticed by the Law Commission and in the 41st
Report of Law commission of India, 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."

But this bill prepared on the basis of the recommendations of the law commission lapsed and
it did not become law. However few of these recommendations were accepted by parliament
and by suitable amendment some of the provisions in the taxation statutes were amended. The
Law Commission has tried consistently to find a formula which would solve the problem of
fixing appropriate punishment for the Corporations which commit offences; this has been done
with a view to punish a corporation where mandatory minimum punishment is both punishment
and fine, in such a case it needs to be fixed as to how the law courts would advance if this
question comes up before them.

But the view of the courts on corporate criminal liability was changed in a landmark case of
Standard Chartered Bank and Ors. v. Directorate of Enforcement15. In this case, Standard
Chartered Bank was prosecuted for the alleged violation of certain provisions of the Foreign
Exchange Regulation Act, 1973 and the Supreme Court did not go by the literal and strict
interpretation rule required to be done for the penal statutes and held that the corporation could
be prosecuted and punished with fines, regardless of the mandatory punishment required under
the respective statute. After the decision of the Standard chartered bank case, the courts were
generally of the view that the companies won't be exempted from prosecution merely because

14
AIR 1997 SC 3964
15
[2005] 4 SCC 530
the prosecution is in respect of offences for which punishment prescribed is a mandatory
imprisonment.

In Iridium India Telecom Ltd.v. Motorola Incorporated and Ors16, the Hon'ble Supreme
court held that a corporation is virtually in the same position as any individual and may be
convicted under common law as well as statutory offences including those requiring mens rea.
The criminal liability of a corporation would arise when an offence is committed in relation to
the business of the corporation by a person or body of persons in control of its affairs. In such
circumstances, it would be necessary to ascertain that the degree and control of the person or
body of persons is so intense that a corporation may be said to think and act through the person
or the body of persons, In this case, it was also held that the corporations can no longer claim
immunity from criminal prosecution on the grounds that they are incapable of possessing the
necessary mens rea for the commission of criminal offences.

In CBI v. Ms Blue-Sky Tie-up Ltd and Ors.17, an appeal arose from criminal application
which was quashed by the Calcutta High Court. The Appellant filed criminal applications
against the respondents for committing criminal offences under the provisions of the Indian
Penal Code and under Section 13(2) read with 13(1)(c) and (d) of the Prevention of Corruption
Act, 1988. Pursuant to that, the Respondents filed applications under Section 482 of the
Criminal Procedure Code for quashing of the said proceedings. The Calcutta HC quashed the
proceedings against the Respondent No. I on the false premise that the company being a body
corporate cannot be prosecuted, but the Supreme Court held that the companies are liable to be
prosecuted for criminal offences and fines may be imposed on the companies. The criminal
intent of the 'alter ego' of the company or corporate body, i.e. the person or group of people
that guide the business of the company would be imputed to the corporation.

It is now an established legal position in India that a corporation can be convicted of offences
that require possession of a criminal intent, and that corporation cannot escape liability for a
criminal offence, merely because the punishment prescribed is imprisonment and fine.

But it is always a controversial issue that Corporations cannot be sentenced to imprisonment

and since, there is no explicit provision relating to it, the Supreme court have held in various
cases that it is better to impose fine upon the corporation even in the cases where there is a
punishment for imprisonment. The imposition of fines may be made in four different ways as

16
AIR 2011 SC 20
17
CBI v. M/s Blue-Sky Tie up Ltd. and Ors., Crl. Appeal Nos. 950 of 2004
provided in the IPC. It is the sole punishment for certain offences and the limit of maximum
fine has been laid down, in certain cases, it is an alternative punishment, but the amount is
limited; in certain offences, it is imperative to impose fine in addition to some other punishment
and in some it is obligatory to impose fine but no pecuniary limit is laid down.

Section 357, CPC, empowers a Court imposing a punishment of fine or a sentence of which
fine forms a part, to order payment of compensation, out of the fine recovered, to a person for
any loss or injury caused to him by the offence. Even the environmental degradation arising
out of industrial pollution in recent years has become a positive danger to social security. Thus,
Legal provisions have been incorporated in the Indian Penal Code to punish industrial and
business organizations which pose danger to public life by polluting water and District
Magistrate can initiate proceedings against them under Section 133 of the code of Criminal
Procedure, 1973. Section 16 of Environment (Protection) Act, 1986 and Section 47(2) of the
Water (Prevention and Control Pollution) Act, 1974 also explicitly lays down provision for the
offences by companies. It states companies can be prosecuted under certain circumstances and
thus, reflects the concept of vicarious criminal liability. Corporate criminal liability may appear
incompatible with the aim of deterrence because a corporation is a fictional legal entity and
thus cannot itself be deterred. In reality, the law aims to deter the unlawful acts or omissions
of a corporation's agents.

CONSTRAINTS OF CORPORATE LIABILILTY

IMPRISONMENT

As has been discussed above that a company is recognized as a juristic person, and being a
person it has to face the punishment that has been provided by the various acts. There are
various provisions in Companies Act, 2013 itself which hold a company liable for its
wrongdoing. However, there are provisions which provides mandatory imprisonment for a
person including company, such as Section 447 of Companies Act, 2013 Act, Section 420 of
The IPC, 276B of The Income Tax Act etc.

Therefore, the solution as of now is that a person is juristic person then punishment relating to
imprisonment would not apply to it instead he will be liable for fine, The court can do one thing
though, it cannot imprison a corporate body but it can charge greater amount of fine in such
cases in comparison to what it charges to the person who are capable of being imprisoned for
the same offence.
MENS REA

Another problem faced by the Judges was how to try a company for the offences where mens
rea was an essential. How can a juristic person have a mental element to commit a crime? The
trend was such that the company was only tried for cases where mens rea was not an essential
and it was accepted that it cannot be tried for offences where mens rea is required.

This problem was resolved to a great extent in the case of Sunil Bharti Mittal v. CBI.18
wherein it was emphatically held that a company may in may ways be likened to a human body.
They have a brain and a nerve centre, which controls what they do. They also have hands,
which hold the tools and act in accordance with directions from the centre. Some of the people
in the company are mere servants and agents who are nothing more than hands to do the work
and cannot be said to represent the mind or will. Others are directors and managers who
represent the directing mind and will of the company and control what they do. The state of
mind of these managers is state of mind of company and it treated by law as such. So you will
find that in case where the law requires personal fault as a condition of liability in tort, the fault
of the manager will be the personal fault of company,

CONCLUSION

At one point of time, the concept of a separate legal personality of a corporation was exploited
by individuals to evade personal liability. But now it is well established that a corporation
cannot escape liability for offences simply on the basis that they have no body or soul and
cannot possess any mental state. The statutes in India are not in pace with these developments
and they do not make corporations criminally liable and even if they do so, the statutes impose
no other punishments except for fines. The laws relating to corporate criminal liability in India
are vastly insufficient. The legislature needs to be active in this regard and form certain concrete
laws which would ensure that the corporations do not go unpunished and a better social order
needs to be established. Certain Provisions relating to procedural law also needs to be created
and modified so that the corporations can be adequately dealt with. It is therefore recommended
that amendments should be carried out by the legislature to avoid the judiciary from defining
the law and make certain provisions relating to procedural laws so that the corporations can be
adequately dealt with and the courts are also required to make the statutes fit for strict

18
Sunil Bharti Mittal v. CBI (2015) 4 SCC 609
interpretation by providing for infliction of criminal liability on the corporations as also
providing for various kinds of punishments apart from fines only.

BIBLIOGRAPHY

 Abhishek Anand, Holding Corporations Directly Responsible For Their Criminal Acts:
An Argument, Manupatra (2016),
 Thiyagarajan, T. Sivananthan; "Corporate Criminality-concept", Manupatra
 Braithwaite, John; Corporate Crime in the Pharmaceutical Industry, 1st Edition,
Routledge and Kegan Paul, London, 1984.
 V.S. Khanna, Corporate Criminal Liability: What Purpose Does it Serve?, 109 Harv. L.
Rev. 1477;
 Beck & O'Brien, Corporate Criminal Liability, 37 American Criminal Law Review
261;