Corporations have separate legal entity and have an entity different from a natural person, therefore its criminal liability is different from the criminal liability of its members. The evolution of the concept of corporate criminal liability in India can be classified as a long processing effort of the judiciary to fix responsibilities on non-fictitious persons. Basic rule of criminal liability is ‘actus non facit reum nisi mens sit rea’ which means an act is not wrongful unless accompanied by guilty state of mind. Companies may be convicted in a criminal court for acts that violate the penal law of the jurisdiction in which it is tried. Companies should be subject to criminal liability for offences that occur in the course of their business operation for which they must bear responsibility.
Models of Corporate Criminal Liability
There are twin models of corporate criminal liability in India which are discussed below –
- Derivative Model – As the name suggests under this model of corporate criminal liability in India the liability of an organization is a derived liability which means that the liability of a corporation is derived from the actions of an individual who has been employed or connected with the organization and commits a wrongful act. The liability is put on the organization because of the connection of the individual with it. The derivative model of the corporate criminal liability is further subdivided into two categories – Vicarious Liability and
- Vicarious Liability – The doctrine of vicarious liability is based on the two legal latin maxims the first maxim mean that he who acts through another shall be deemed to have acted on his own, and second, respondent superior which means let the master answer. Vicarious liability is the concept which is generally applicable in the cases of civil liability but the Courts have said that because a corporation is an artificial person and a separate legal entity thus it is necessary to bring the applicability of vicarious liability in the case of corporate criminal liability.
- Identification Doctrine – This doctrine is an English law doctrine which tries to identify certain key persons of a corporation who acts in its behalf, and whose conduct and state of mind can be attributed to that of the corporation. As to the liability of these key persons who act on behalf of a company, it was held in Moore v. Brisler 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 unauthorized. The scope of identification doctrine is narrower than that of the vicarious liability.
- Organizational Model –This model of corporate criminal liability in India focuses on the model of the organization while defining the corporate liability of an organization in criminal cases. A crime is said to be committed when there is a presence of mens rea (intent to commit a crime) and actus reus (criminal act or omission) but the problem which arises while holding a corporate criminally liable is that how an artificial person can have a mental intent to commit a crime. The culture of the corporate 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 allowed the commission of the offence.
Interpretation with IPC
Section 11 defines that a ‘person’ would include “any Company or Association or body of persons, whether incorporated or not". Hence, corporations can be prosecuted under IPC for the crimes they commit. It is an undisputed fact that the corporations cannot be prosecuted for crimes done by human beings like rape, where the only punishment as contemplated in IPC, is imprisonment. Corporations can be held liable where the IPC demands a mandatory punishment of both imprisonment and fine.
Jurisprudence around Corporate Criminal Liability
- In the case of Assistant Commissioner v. Velliappa Textiles Ltd. the Supreme Court by a majority of 2:1 held that since an artificial person like a company could not be physically punished to a term of imprisonment, such a section, which makes it mandatory to impose minimum term of imprisonment, cannot apply to the case of artificial person. However, the dissenting judge observed that just because a corporation cannot be imprisoned can never be a reason for an observation that the corporation can not at all be prosecuted in that case. The judge further added that the court had two functions to perform. The first one is to determine whether the accused is guilty of having committed the crime and this conclusion has to be made on the basis of the evidence produced before the court. And the second function is to award a sentence for the offence for which the accused is found guilty. He explained
“Companies are growing in size and have huge resources and finances at their command. In the course of their business activity they may sometimes commit breach of the law of the land or endanger others’ lives. More than 4,000 people lost life and thousands others suffered permanent impairment in Bhopal on account of gross criminal act of a multinational corporation. It will be wholly wrong to allow a company to go scot-free without even being prosecuted in the event of commission of a crime only on the ground that it cannot be made to suffer part of the mandatory punishment.”
- The same issue was heard in the case of Standard Chartered Bank v. Directorate of Enforcement where the Supreme Court overruled the Velliappa case and held that there is no blanket immunity for any corporation from the prosecution of offences just because the prosecution demands a mandatory imprisonment. The court decided that in cases of offences which mandate both imprisonment and fine, the corporations should be punished with a fine.
MENS REA FOR CORPORATE CRIMINAL LIABILITY
- In the case of Iridium India Telecom Ltd. v. MotorolaIncorporated, 2004 Iridium IndiaLimited filed a criminal complaint against Motorola Inc. alleging offences under section 420 (cheating) read with section 120B (Criminal 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 project was represented as being “… the world’s first commercial system designed to provide global digital hand held telephone data … and it was intended to be a wireless communication system through a constellation of 66 satellites in low orbit to provide digital service to mobile phones and other subscriber equipment locally.” On the basis of the information contained in and representations made through the PPM, several financial institutions invested in the project. The project turned out to be unviable and resulted in massive losses to the investors which was alleged by Iridium India Limited to have been caused as a result of Motorola Inc.’s false representations in the PPM. The Court held that the corporations can be punished for both the common law offences and statutory offences including those which require 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 body of persons or any person.
What does the common law says..
In the case of H.R. Bolton (Engg.) Co. Ltd. vs. T.J. Graham,  it was accepted that “A company may in many 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.”
Fixing the Liability
- In the case of U.P Pollution Control Board v. Modi Distillery, the respondent- industrial unit has been discharging its highly noxious and polluted trade effluents into the river through a local drain. This discharge, done by the industrial unit, composed a breach of the Water (Prevention and Control of Pollution) Act of 1974. The Court held that the managers and the persons responsible for the company’s act could be prosecuted even if the company was not prosecuted. The court also added that there was a “technical fault on the part of the company to furnish the requisite information called for by the Board directed for making a formal amendment by the applicant and substitute the name of the owning industrial unit”. The complaint was defective but was curable and the persons responsible for the conduct of the corporation should be prosecuted. This ratio was reaffirmed in Anil Hada v. Indian Acrylic Ltd. In the case of Aneeta Hada vs M/S Godfather Travels & Tours, the Supreme Court overruled the decision held in Anil Hada case and stated that the decision which was given in the Modi Distillery case was decided on its own factual matrix. After stating so, the court held that if the company is an accused then the proceedings against the director or the company cannot be maintained. In other words, there can be no vicarious liability unless there is any prosecution against the company.
- HDFC Securities Ltd. & ors. v. State of Maharashtra & Anr., 2016
The Supreme Court held that the Indian Penal Code, 1860, does not provide for vicarious liability for any offence alleged to be committed by a company. The court relied on the judgment in Maksud Saiyed v. State of Gujarat, wherein it is held as follows: “Vicarious liability of the managing director and director would arise provided any provision exists in that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability”
REQUIREMENTS FOR ESTABLISHING CORPORATE CRIMINAL LIABILITY
- Act within the scope of employment: the employee committing the offence must be acting within the scope of his employment, i.e. he must be performing duties authorized by his parent company. But not all agents of a corporation are considered worthy of representing a corporation for the purpose of establishing liability. In a House of Lords Judgment, Tesco Supermarkets Limited v. Nattrass(“Tesco”),1972 it was held that the person whose mens rea is to be attributed must be the directing mind and will of the company.
- Benefit to the Corporation: The second requirement is that the agent’s behaviour must, in some way, benefit the corporation. The corporation need not actually directly receive the benefits nor must the benefit be enjoyed completely by the company, but the illegal act must not be contrary to corporate interests. This has been elaborated on because it is extremely rare that an employee commits an illegal act selflessly, with no intention to make any personal gain.
Corporate Criminal liability under Companies Act, 2013
- Section 53 – Prohibition on an issue of shares on discount. The company will be fined for the amount not less than one lakh but which may extend up to five lakhs. Further, the officer in default may be imprisoned for up to six months or fine of minimum one lakh which may extend to five lakhs or both.
- Section 118(12) –Minutes of proceedings of general meeting, meeting of Board of
Directors and other meeting and resolutions passed by postal ballot- If a person is found tampering with the minutes of meeting then such an officer in default may be imprisoned for the term which may extend to 2 years or with fine of not less than twenty-five thousand but may extend to one lakh.
- Section 128(6) –Books of account, etc., to be kept by Company- Officer in default-
Maximum imprisonment of 1 year or Fine- Not less than Rs. 50,000 and may extend to Rs. 5 lakhs or with both.
- Section 129(7) -Financial statement – Officer in default- Maximum imprisonment of 1 year or Fine-Not less than Rs. 50,000 and may extend to Rs. 5 lakhs or with both.
- Section 134 -Financial statement, Board’s report, etc- Company-Fine- Not less than Rs. 50,000 and may extend to Rs.25 lakhs and Officer in default- Maximum imprisonment of 3 years or Fine- Not less than Rs. 50,000 and may extend to Rs. 5 lakhs or with both.
- Section 188(5) – Related party transactions- In case of unlisted Company, be punishable with fine which shall not be less than 25,000 rupees but which may extend to 5 lakh rupees.
- Section 57 -Punishment for personation of shareholder- Such person in default- Minimum 1 year to maximum 3 years imprisonment or Fine- Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs.
- Section 58(6) – Refusal of registration and appeal against refusal- Such person in default- Minimum 1 year to Maximum 3 years imprisonment or Fine- Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs.
- Section 182(4) – Prohibitions and restrictions regarding political contributions.- Company-Fine- 5 times of the amount of contribution in contravention and Officer in default- Maximum imprisonment of 6 months and Fine- 5 times of the amount of contribution in contravention.
- Section 184(4) – Disclosure of interest by the director – Such person in default- Minimum 1-year imprisonment or Fine- Not less than Rs. 50,000 and may extend to Rs. 1 lakh or both.
- Section 187(4)- Investments of Company to be held in its own name – Company-Fine- Not less than Rs.25,000 and may extend to Rs.25 lakhs and Officer in default- Maximum imprisonment of 6 months or Fine- Not less than Rs. 25,000 and may extend to Rs. 1 lakh or with both.
- Section 447- Punishment for fraud – Any person who is found to be guilty of fraud- Maximum imprisonment of 6 months may extend to 10 years. Such person also liable to fine which may extend up to 3 times the amount involved.
Law Commission recommendations
- Law Commission in its 41st report 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 imprisonment and fine and the offender is the 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 47th Law Commission Report has recommended various solutions to deal with such problem, such as: Some discretion is to be given to judges to impose penalties as they deem fit for the case.
- Para 8(3) of the 47th law commission report recommended that, “in every case in which the offence is punishable with imprisonment only or with imprisonment and fine, and the offender is the corporation, it shall be competent to the court to sentence such offender to fine only.”
Emerging trends to impose liability without ‘mens rea’
There has been a gradual and structural shift in stance taken by courts. Indian courts, like western courts, now recognise criminal liability of a corporate. A company has a distinct legal personality. It can sue or be sued, can own and sell assets, or commit an offence that is of civil or criminal in nature
In India, there is uncertainty over whether a company can be convicted for an offence where the punishment prescribed by the statute is imprisonment and fine.
MV Javali vs Mahajan Borewell & Co and Others, 1997 was the first of its kind in which the Supreme Court held that mandatory sentence of imprisonment and fine is to be imposed where it can be imposed, but where it cannot be imposed namely, on a company fine will be the only punishment.
In the case of Assistant Commissioner v. Velliappa Textiles Ltd. the Supreme Court by a majority of 2:1 held that since an artificial person like a company could not be physically punished to a term of imprisonment, such a section, which makes it mandatory to impose minimum term of imprisonment, cannot apply to the case of artificial person. The court opined that where the statute provides for imprisonment or fine, it is not a problem, but where the statute provides for imprisonment and fine, the court is not given the discretion to impose fine in lieu of imprisonment.
The same issue was heard in the case of Standard Chartered Bank v. Directorate of Enforcement where the Supreme Court overruled the Velliappa case and held that there is no blanket immunity for any corporation from the prosecution of offences just because the prosecution demands a mandatory imprisonment. The court decided that in cases of offences which mandate both imprisonment and fine, the corporations should be punished with a fine.
In the case of Iridium India Telecom Ltd. v. Motorola Incorporated, 2004 Iridium India Limited filed a criminal complaint against Motorola Inc. alleging offences under section 420 (cheating) read with section 120B (Criminal 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 project was represented as being “… the world’s first commercial system designed to provide global digital hand held telephone data … and it was intended to be a wireless communication system through a constellation of 66 satellites in low orbit to provide digital service to mobile phones and other subscriber equipment locally.” On the basis of the information contained in and representations made through the PPM, several financial institutions invested in the project. The project turned out to be unviable and resulted in massive losses to the investors which was alleged by Iridium India Limited to have been caused as a result of Motorola Inc.’s false representations in the PPM. The Court held that the corporations can be punished for both the common law offences and statutory offences including those which require mens-rea.