Need of initiating Criminal Prosecution against Corporations

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Author: Richa Srivastava

There is a strong need for prosecuting corporations in the interest of society. The old jurisprudence considered corporations incapable of been prosecuted. However, as the need aroused slowly, the courts around the world developed important theories in order to hold corporations liable for their acts, omissions and forbearances. The Indian courts after going through a series of cases have now adapted the rational approach of prosecuting the corporations.

The company law provisions in India successfully create the principle of “lifting the corporate veil” in situations explicitly mentioned by the Companies Act, 1956. The growing reach of corporations and their effect on society as well as growing corporate crimes have made it pertinent for the legal systems to initiate criminal prosecution against the mind behind the corporate crime. The essay elaborates on above-mentioned aspects as well as traces out the growth of the law behind it.

A corporation is an artificial or fictitious person constituted by the personification of a group or a series of individuals. The individuals who form the corpus of a corporation are called its members. It could be a corporation sole or a corporation aggregate. A corporation consists of a group or body of human beings associated for certain purposes with organs through which the body or the group acts.

Legal fiction attributes will to a corporation. It is distinguished from the individuals who constitute it. It can sue and be sued. Liability basically arises form breach of duty or wrong. Salmond stated it as the bond of necessity that exists between the wrongdoer and the remedy of the wrong. A liability can arise on an act, omission or even on forbearances. The journey of attribution of criminal liability on corporations has been historical.

It can be traced since the old jurist’s point of view to the emerging company law aspects as well as the growing criminal jurisprudence through case laws. Corporate criminal liability is a part of an important public policy bargain. The bargain balances privileges granted upon the legal recognition of a corporation such as limited liability of corporate shareholders and the capability of a group of investors to act through a single corporate form with law compliance and crime prevention pressures on the managers of the resulting corporate entity.

An alarming number of environmental, antitrust, fraud, food and drug, false statements, worker death, bribery, obstruction of justice, and financial crimes involving corporations have raised the need of criminal liability of corporations.

As regards old jurisprudence, regarding criminal liability of a corporation, it was not supposed to have a guilty intention necessary for a crime, as a corporation has no mind of its own. Corporations were exempted from criminal liability, but this is not the case today. They can now be punished for the offence of non-feasance and even misfeasance. This is so when a corporation do not perform a statutory duty or the same is performed badly. In such cases, punishment is usually by way of fines.

In civil law countries, the doctrinal issues heavily influenced the laws and judicial decisions. Moreover, the tradition has been that corporations cannot commit crimes. The common law legal systems have not struggled with doctrinal issues at the same level of intensity. With the changing time, English and American systems have easily incorporated the criminal liability of corporations[1].

The major theories devised for determining corporate liability are the agency theory, identification theory and the aggregate theory. The agency theory was first developed in tort law and gradually was carried over into the criminal arena. According to this theory, the corporation is liable for the intents and acts of its employees.

The agency theory is based on the premise that criminal violations normally entail two elements, actus reus and mens rea. Since, corporations are considered purely legal entities, they do not possess any mental state and the only way to impute intent to a corporation is to consider the state of mind of its employees.

Three steps to determine it are that firstly, employee must be acting within the scope and course of employment secondly, the employee must be acting at least in part, for the benefit of the corporation thirdly the act and intent must be imputed to the corporation[2].

The identification theory on the other hand is the traditional method by which companies are held liable in most countries under the principles of common law. It is a direct liability theory. Viscount Haldane in Lennard’s Carrying Co. Ltd[3] fashioned a model of primary corporate criminal liability for offences that require mens rea. A 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 purpose may be called an agent, but who really is the directing mind and will of the corporation, the very ego and center of the personality of the corporation.

Underlying principle of the identification theory is the detection of the guilty mind. In Tesco Supermarkets[4], Lord Reid stated that normally the board of directors, the managing directors and perhaps the superior officers of a company carry out the functions of management, speak, and act as the company.

Lastly, the aggregation theory is a result of the growth of modern corporations, which have multiple power centers that share in controlling the organization and setting its policy. The corporation aggregates the composite knowledge of different officers in order to determine liability. The company aggregates all the acts and mental elements of the important or relevant persons within the company to establish whether in toto they would amount to a crime if one person had committed them all. The U.S. courts follow this theory but sometimes it turns out to be over deterring and costly.

Until the case of Standard Chartered Bank[5] the Indian courts were of the opinion that corporations could not be criminally prosecuted for offences requiring mens rea. They believed that corporations could not be prosecuted for offences requiring a mandatory punishment of imprisonment as they could not be imprisoned.

The Supreme Court in Velliappa textiles[6] took the view that corporations did not have a physical body for imposition of punishment for imprisonment. Moreover, they are a juristic person not capable of possessing mens rea[7] . Similarly in Motorola Inc.[8] the Bombay High Court did not prosecute the company under Section 420 of the Indian Penal Code, the court reasoned that it was impossible for a corporation to have the requisite mens rea.

Finally in the Standard Chartered Bank case the bank was prosecuted for violation of certain provisions of the Foreign Exchange Regulation Act 1973 (“FERA”). Ultimately the Indian Supreme Court held that the corporation in the case could be prosecuted and punished with fines regardless of the mandatory punishment of imprisonment required under the respective statute.

Oswal Vanaspati[9] was referred in which the court had said that the award of fine is very much possible in cases where both imprisonment and fine is given for natural persons and juristic persons jointly. It also referred to the United States Supreme Court in the U.S. v. Union Supply[10] in which Justice Holmes stated that when a statute prescribes two independent penalties, is that it means to inflict them so far as it can and that, if one of them is impossible, it does not mean, on that account, to let the defendants escape.

However, the court held that corporations liable for criminal offences could be prosecuted and punished at least with fines. By implication it is said that post Standard Chartered decision corporations are capable of possessing the requisite mens rea. As in prosecution of other economic crimes, intention could very well be imputed to a corporation and may be gathered from the acts and/or omission of a corporation.

Section 11 of the Indian Penal Code too includes any company, association, or body of person whether incorporated or not as person thus enabling prosecution of corporations under it.

The major law relating to corporations in India is codified in The Companies Act, 1956 (“Act”) 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. When a company is incorporated, all dealings are with the company and all persons behind the company are disregarded, however important they may be. Thus, a veil is drawn between the company and its members.

Normally, the principle of corporate personality of a company is respected in most of the cases. 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”.

In other words, the benefit of separate legal entity will not be available and the court will presume the absence of such separate existence. The Act contains certain provisions, 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 like[11];

  • where the doctrine conflicts with the public policy,
  • where corporate veil has been used for fraud or improper conduct,
  • where the corporate facade is only an agency instrumentality, for determining the real character of the company,
  • where the veil has been used for evasion of taxes, in quasi-criminal cases, for investigating the ownership of the company, for investigating the affairs of the company,
  • where the company is used as a medium to avoid various welfare and labour legislations, in case of economic offences,
  • where the company is used for some illegal and improper purpose, etc.

There are provisions of the Act which provide that the Members or the Directors/officer(s) of a company will be personally liable if, firstly[12] 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 months.

Secondly[13], 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, and then the Directors shall be jointly and severally liable to repay that money with the prescribed interest.
Thirdly[14], 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 liable.

Fourthly[15], the court refuses to treat the subsidiary company as a separate entity and instead treat it as only a branch of the holding company. Fifthly[16], 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 liability.

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 act. Not less recently, in the landmark judgment of Kapila Hingorani[17] , the Apex Court analyzed 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 be pierced or lifted in certain situations. 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 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 entities.

The past decades have seen cases of extreme corporate malfeasance like the Bhopal gas tragedy in which thousands of people lost their life, mysterious disappearance of corporations is another crime causing serious economic losses to investors as well as internal oppression of their own employees like the Mumbai textile mills case or the Enron scandal of U.S.

The corporations have have an influential role in our lives and are very important in the nation building process. Lately the governments of almost all the countries have given a lot of freedom and rights to them for economic reasons including the exploitation of natural resources.

The Coca-cola bottling plant in Kerela had complaints that they overexploited the ground water, which has led to decrease in water in the nearby areas. Therefore we can see when the task and rights of corporations has increased manifold there is strong requirement of responsibility which they should feel.

In order to balance the interest of the society it is pertinent that the corporations should be prosecuted criminally as well so that the sheer notion of profit making of corporations does not hamper the society and put an obstruction to the noble concept of sustainable development. They should realize that interests of society could not be compromised with their rich balance sheets.

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  1. www.law.msu.edu/king/2006/2006_Pop.pdf
  2. United States v. One Parcel of Land965 F. 2d 311, 316 (7th Cir. 1992) (stating agent’s knowledge of illegal act may be imputed to corporation if agent was “acting as authorized and motivated at least in part by an intent to benefit the corporation [citing Zero v. United States, 459 U.S. 991 (1982)]
  3. Lennard’s Carrying Co. Ltd v. Asiatic Petroleum Co. Ltd [1995] AC 705
  4. Tesco Supermarkets vs. Nastrass [1971] 2 WLR 1166
  5. Standard Chartered Bank &Ors v. Directorate of Enforcement AIR 2005 S.C. 2622
  6. (2004) 1 Comp. L.J. 21
  7. A.K. Khosla v. T.S. Venkatesan (1992) Cr. LJ.1448
  8. Motorola Inc. v. Union of India (2004) Cr. LJ.1576
  9. Oswal Vanaspati & Allied Industries v. State of U.P. (1993)1 Comp. L.J. 172
  10. 215 U.S. 50(1909)
  11. Sections 45, 147, 212, 242, 247, 239 of the Companies Act 1956
  12. Section 45 of the Companies Act 1956
  13. Section 69 of the Companies Act 1956
  14. Section 147 of the Companies Act 1956
  15. Section 212, 214 of the Companies Act 1956
  16. Section 542 of the Companies Act 1956
  17. Kapila Hingorani v State of Bihar 2003 (4) SCALE 712

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