Corporate Criminal Liability – An Indian Perspective

A.   INTRODUCTION CONCEPT & RATIONALE OF CRIMINAL LIABILITY OF CORPORATION

Corporate bodies are more corrupt and profligate than individuals, because they have more power to do mischief, and are less amenable to disgrace or punishment. They neither feel shame, remorse, gratitude nor goodwill Hazlitt. [1]

The evolution of the concept of criminal liability of corporations is characterized by the judiciary™s relentless struggle to overcome the problem of assigning criminal blame to fictional entities. As advancement in information and communication technologies has made the world borderless, corporate activities have become global through network systems, thus making commission of corporate crime more sophisticated and complicated. This is particularly relevant in a legal system based on the moral accountability of individuals.[2] Corporation is a body that is granted a charter, recognizing it as a separate legal entity having its own rights, privileges and liabilities distinct from those of its members. With the onset of the new trade regime, national laws are being changed to empower corporations with the right to hire and fire at will, to get the first right over natural and community resources. Under the prevailing legal rule in federal court and in most states, corporations can be held criminally responsible for any act committed by an employee as long as that act is committed within the scope of employment and with some intent to benefit the employer. The principle of corporate criminal liability is based on the doctrine of respondent superior which is commonly known The rationale for imposing criminal liability upon corporations  is often  expressed in terms of justifications  for punishing corporations for their actionsThe basic rule of criminal liability revolves around the basic Latin Maxim actus non facit reum, nisi mens sit reat. Historically, the criminal law has been the vehicle for deterrence and since  Corporations are increasingly significant actors in our economy and, to the extent their actions can victimize society, they too should be deterred. Corporations have their own identity, separate from their members, and this fact alone makes it possible to attach blame and censure to them.[3] Thus Corporate Criminal Liability is indeed an necessity in today™s world since It communicates to offenders the censure or condemnation that they deserve for their crime and thereby makes  it clear to society what are its values and the way it is being protected. The second consists in retribution and reflects the society™s duty to punish those who inflict harm in order to affirm the victim™s real value. The first step in determining the applicability of corporate criminal liability is delineating the types of entities that it applies to.. Although the corporation did not actually gain from the action or the agent violated a company policy, liability may still be imputed to a corporation. [4] The benefit need not be real, yet potential. The requirement that an employee must be acting within the scope of his or her employment is met if the employee has actual or apparent authority to engage in the act in question.  When the organs or representatives have the required mens rea and actus reus of the crime, the corporation is automatically liable. A corporation™s liability can be extended to acts performed within the agent™s apparent authority. 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. Thus while considering the conditions of such liability and possible changes in the law, it is essential to keep the objectives of the legal regime clearly and adhere to it.

B. FRAMEWORK OF CORPORATE CRIMINAL LIABILITY

With industrialization and globalization, corporations acquired the capacity to influence societies for better or worse. Yet, corporations are not traditional objects of criminal law. Justified by notions of personal moral guilt, criminal norms have been judged inapplicable to fictional persons who think and act through human beings .One of the unique features of the Indian Constitution is that, notwithstanding the adoption of a federal system and the existence of Central and State acts in their respective spheres, it has generally provided for a single integrated system of courts to administer the laws of both the Union and the States. The Supreme Court of India is at the apex of the entire judicial system. Below it are the High Courts in each State, below which lies a vast hierarchy of subordinate courts. Large multinational corporations have come to dominate the national and global economic scene.

Corporations are increasingly significant actors in our economy and, to the extent their actions can victimize society, they too should be deterred. Two major issues which were of dominance, during the phase of evolution of the doctrine of Corporate Criminal Liability were:

  • One is the failure to identify or prove corporate intent. Traditionally, the criminal law has been reserved for intentional violations of the law. Yet, our prosecutions of corporations have been marked by floundering efforts to identify the intent of intangible, fictional entities.
  •  A second issue is regarding sanctions. In addition to proof of intent, a major distinguishing characteristic of the criminal law has been the threat of imprisonment. It was said that a corporation cannot be imprisoned; the criminal law is not an appropriate vehicle for controlling corporate behavior. Current Supreme Court™s decision have made the stand apparently clear in India that the Corporation can be prosecuted as a separate legal entity even in the offences where the punishment is imprisonment. This article explains the present status of India on Corporate Criminal Liability and how judicial decision is inconsistent with the legal provisions. It further provides the current situation about the corporate criminal liability in the International scenario. The apex court™s decision under various matters reflects the gravity of the concerned problem i.e being faced by the aggrieved parties.

Although some earlier cases took the position that a Corporation is not indictable, but the particular members of it are liable, the rule is now well established that a corporation may be held criminally liable . Generally, corporations may be held criminally responsible for the illegal acts of its employees if such acts are [5]related to and committed within the course of employment, committed in furtherance of the business of the corporation and its imbibed culture; for example, if the corporate structure is so organized as to deprive senior managers of the information they need to exercise such powers, this would indicate a corporate culture that is designed to elude law enforcement.  A corporation is accountable for its employee™s conduct if it motivated, at least in part, by desire to serve the Corporation but this need not be the sole motivation. And even if, the employees were acting in their own interests when they committed a crime, the corporation may still be criminally liable for the failure of its supervisors to detect and stop the wrongdoing, either in intentional disregard of the law or in plain indifference to its requirements.

C.    CORPORATE CRIMINAL LIABILITY IN INDIA

Just as India is seeking to battle the scourge of corruption in its governance, it is being hit by a spate of large-scale corporate corruption scandals, which have brought into sharp focus the role of India’s corporate sector in the problem of corruption in India. In this context, to fix liability for corruption and bribery offences, it becomes relevant to examine criminal liability, not just of individual directors or agents of a corporation, but also of the company itself. 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.[6] The Indian Penal Code, 1860 which, although not exhaustive, is the general substantive criminal legislation of the land. It applies to all persons having a certain territorial connection with India.  Instances of  Criminal liability of Corporations can be found in Sections. 45, 63, 68, 70(5), 203, etc of the Indian Companies Act wherein only the officials of the company are held liable and not the company itself; it is also reflected through the Takeover Code. The various sections of the IPC that direct compulsory imprisonment does not take a corporate into account since such a sanction cannot work against the corporation.

These are the major statutes in their respective field that are devoid of necessary legal aspects. On the other hand, law has also developed to an extent with regard to certain other statutes and their respective penal provisions wherein a fine has been imposed on the corporations when they are found to be guilty. Some such examples are:

  • Section 141 of the Negotiable Instruments Act, 1862[7]
  • Section 7, Essential Commodities Act[8]
  • Section 276-B of the Income Tax Act[9]

Under statutory provisions of the Indian law, the liability prescribed, at least for economic or strict liability offences committed by a company is threefold, as per the express provisions of the statutes .Firstly, the person who was in charge of and was responsible to the company for the conduct of its business is held liable, unless he can prove that the offence was committed without his knowledge or despite his exercising due diligence to prevent the offence. Secondly, if it is proved that an offence under such statutes has been committed with the consent or connivance of, or is attributable to neglect on the part of a director, manager, secretary or other officer of the company, such individual shall also be held liable. Lastly, the company of course, is held liable, irrespective whether any individual is pinned with liability too. 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.

Mens rea is an essential element for majority, if not all, of offenses that would entail imprisonment or other penalty for its violation.  Zee Telefi lms Ltd. v. Sahara India Co. Corp. Ltd.,[10]the court dismissed a complaint filed against Zee under Section 500 of the IPC. The complaint alleged that Zee had telecasted a program 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. Recently, the Supreme Court of India, through a landmark judgment Iridium India Telecom Ltd v Motorola Incorporated & ors (2010), has added a new dimension to the jurisprudence relating to corporate criminal liability in India with respect to offences requiring mens rea or criminal intent, holding that despite being a legal fiction, a company can be said to possess mens rea required to commit a crime.   Further in India, Confusion prevails as to whether a company can be convicted for an offence where the punishment prescribed by the statute is imprisonment and fine. However after few cases, The 41st Law Commission gave a report suggesting amendment in the penal provisions and providing for substitution of imprisonment with fine in case of offender being a body corporate. But the authorities are, till date sitting on that report and no such changes have been made to the penal legislation.[11] In Standard Chartered Bank & Otrs. Vs. Directorate of Enforcement and Otrs ppellant filed a writ petition before High Court Of Bombay challenging various notices issued under section 50 read with section 51 of Foreign Exchange Regulation Act, 1973 & contended that the appellant company was not liable to be prosecuted for an offence under section 56 of FERA Act, 1973, against the decision of High Court appellant filed a special leave before Supreme Court, contended that no criminal proceeding can be initiated against appellant company under section 56(1) of FERA Act, 1973 as the minimum punishment prescribed under section 6(1) (i) is imprisonment for a term which shall not be less than six months and with fine. The court held that the legislative intent should be considered and all penal provisions should be construed like all other statutes fairly to bring out the legislative intent expressed in the enactment. The courts have followed this judgment and have denied any blanket immunity to corporations from criminal liability . As Indian companies set to expand globally, with increasing cross-border transactions and foreign investments, there is a need for them to be aware of the extraterritorial reach of foreign anti-corruption legislations, and to implement adequate compliance measures. In light of the growing power corporations in India today it has become necessary to regulate the moral behavior of such corporations. As the influence of multinational corporations increases, questions relating to their accountability are also raised more frequently and hence  accordingly law of Criminal liability of Corporations and such other has been evolved by both judicial interpretation and legislation.

D.    MODEL PENAL CODE PROVISIONS FOR CORPORATE CRIMINAL LIABILITY

The Model Penal Code provides that a corporation may be convicted of an offence if:

1. the offence is a violation or defined by a statute other than the Code in which a legislative purpose to impose liability on corporations plainly appears and the conduct is performed by an agent of the corporation acting in behalf of the corporation within the scope of his office or employment.[12]

2. the offence consists of an omission to discharge a specific duty of affirmative performance imposed on a corporation by law, or

3. the commission of the offence was authorized, requested, commanded, performed or recklessly tolerated by the board of directors or a high managerial agent acting in behalf of the corporation within the scope of his office or employment .[13]A corporation duly dissolved under the laws of the state of its incorporation may thereafter be subjected to criminal prosecution under a dissolution provision of the state authorizing any action, suit or proceeding against the corporation within a specified period after the dissolution and the words action and proceeding as used in a statute continuing corporate existence include criminal proceedings. The company can prove that it has established corporate policies in an effort to reduce crime, but this does not prevent a court from finding it criminally liable. The existence of an effective compliance policy will not provide an absolute defence from criminal liability,[[14]

Corporations can be held criminally responsible for a wide variety of crimes:

  • Contempt in disobeying decrees and other court orders, directed to it.
  •  Conspiracy.
  • Bribery or conspiracy to bribe public officials.
  • The illegal practice of medicine.
  •  Maintaining public nuisance.
  • Violations of licensing and regulatory statutes.
  •  Violations of consumer protection laws.
  • Antitrust law violations.

Punishments

A corporation may be punishment by fine, indeed the only punishment that can be inflicted on a corporation for a criminal offence, is a fine or seizure of its property which can be levied by an execution issued by the court. A corporation cannot be imprisoned and is not amenable to prosecution for a criminal offence which is only punishable by death or imprisonment. However, the fact that the penalty provided for the violation of a statute is a fine or imprisonment, or both in the discretion of the court, does not render it inapplicable to a corporation, and the same rule applies where the statute creating the offence provides for imprisonment if the fine imposed not paid. As per the jurisprudence evolved till then, under the present Indian law it is difficult to impose fine in lieu of imprisonment though the definition of ˜person™ in the Indian Penal Code Includes ˜company.™ It is also worthwhile to mention that our Parliament has also understood this problem and proposed to amend the IPC in this regard by including fine as an alternate to imprisonment where corporations are involved in 1972. However, the Bill was not passed but lapsed. Such a fundamental change in the criminal jurisprudence is a legislative function and hence the Parliament should perform it as soon as possible by also considering the following arguments that the author has brought about. 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

E.     RECOMMENDATIONS & CONCLUSION

It is now for the legislature to evolve new forms of punishments and incorporate them in the criminal justice system of the land. The Court also referred to the recommendations made by the Law Commission which had noticed the legal conundrum arising out of the aforementioned situation. The legislature may take the following suggestions.

  • These other forms (including fine), can be classified into the following major heads Economic Sanctions and Social Sanctions
  • There is the need for alternative forms of punishment. In reality, many other options are there awaiting exploration, ranging from drastic measures like corporate dissolution through compulsory winding upto other actions like probation, adverse publicity, direct compensation orders etc.that are less severe, but effective nonetheless
  • In sentencing a corporation, a court, in addition to or instead of imposing a fine, should be able to make one or more other orders that it considers will best achieve the objectives of sentencing.
  • In ordering the dissolution of a corporation a court should have the power to order that shareholders and directors cannot reincorporate in certain circumstances, including where the new corporation is intended to carry on the same activities as the dissolved corporation.
  • In cases where professional assessment of a corporation™s characteristics is required, a court should have the power to appoint a suitable person or persons to prepare a report on the corporation.
  • The court should be able to require the attendance at the sentencing proceedings of any of the officers of a corporation it considers appropriate in the circumstances.
  • Corporate crime is a global problem. Therefore, international co-operation, in terms of international agreements as well as of co-operation and co-ordination through formal and informal channels, is important and should be strengthened

With industrialization and globalization, corporations acquired the capacity to influence social life for good or for ill. In the corporate context, the state can, and generally   should, deter crime by inducing firms to undertake optimal prevention and policing  measures. To achieve this goal, the state usually must impose corporate liability structured to induce both optimal corporate policing and prevention. Changing the current vicarious liability rules will promote effective compliance programs within companies, and redirect to a more condign track a legal doctrine that has gone far off course. Our country has several hazardous activities going on as part of the development process and often these are being conducted in residential areas which can be termed as ˜potential high risk areas™. However even in this state of affairs the government seems to be in deep slumber and is not reacting as it should be. The government is concentrating only on the financial aspect of development. So it is high time the government attends to the wake-up call that has been ringing for years now and more stringent laws and regulations should be made on this aspect It is 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 and only such kind of transparency has lead our country in to paths of development.

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[1] Celia Wells,Corporations and Criminal Responsibility.

[2] Shouvik Kr. Guha & Abhyudaya Agarwal, Criminal Liability Of Corporations: Does The Old Order Need To Change? .

[3]The Economic Inefficiency of Corporate Criminal Liability (1982) 73 The Journal of Criminal Law & Criminology at 583-85.

[4] United States v. Bainbridge Mgmt., 2002 U.S.

[5] US v. Jorgensen, 144 F3d 550; US v. Route 2, Box, 60 F3d 1523 (CA11 1995); Tippecanoe Beverages, Inc. v. S.A. El Aguila Brewing Co., 833 F2d 633 (CA7 1987); The proper standard for jury instruction is that the corporation may be held criminally responsible for antitrust violations committed by its employees if they were acting within scope of their authority, or apparent authority, and for benefit of corporation. United States v. Basic Const. Co., 711 F2d 570 (CA4 1983).

[6] Corporate Criminal Liability-An Analysis, Sowmya Suman,5th Year, Faculty of Law, Jamia Millia Islamia, New Delhi.

[7]  Balaji Trading Company v. Kejriwal Paper Ltd. and Anr., 2005CriLJ3805.

[8] State of M. P v. N. Singh.

[9] M. V. Javali v. Mahajan Borewell & Co.

[10] (2001) 3 Recent Criminal Reports 292.

[11]KA Pandey, Corporate Criminal Liability: Rethinking the Law.

[12] Dharm Veer Singh, Corporate Criminal Liability: A Jurisprudential and Comparative Approach.

[13] Richard S. Gruner,  Corporate Criminal Liability And Prevention.

[14] Dan K. Webb et al., Understanding and Avoiding Corporate and Executive Criminal Liability, (1994) 49 Bus Law 617 at 624 cited in Matthew E. Beck & Matthew E. O™Brien, Corporate Criminal Liability (annual white collar crime survey) (2000) 37 American Law Review 261 at 268, n.37.

Tags: Corporationcriminal lawIndiaLawLegal liabilityLegal personalitySupreme Court of IndiaUnited States

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