Analysis of Corporate Criminal Liability in India

Sibani Panda, Research Associate

A company can only act through human beings and a human being who commits an offence on account of or for the benefit of a company will be responsible for that offence himself. The importance of incorporation is that it makes the company itself liable in certain circumstances, as well as the human beings – Glanville Williams

Corporations are considered to be an integral part of the society. Besides the governmental agencies, the corporations are deemed to be the effective agents of action in our society.  But, corporations, as it is understood today, have not been same in the past. But over a period of time, the development of the society 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 recognize the change and suit its applications1. Over the last few decades, lot of complexities has evolved in the corporate sector because of globalization and privatization of different kind of business entities all over the world. The word ‘Corporation’ has no strictly technical or legal meaning2. It may be described to imply an association of persons for some common object. The purposes for which people may associate themselves are multifarious and includes economic and non- economic objectives. But in common parlance, the word ‘corporation’ is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain. 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 corporation3. A corporation has an independent existence which is separate from the shareholders constituting it. The corporations are run by natural persons and these people’s actions can be criminal in nature and can sometimes even result in great economical as well as human loss to the society.

CRIMINAL LIABILITY: THE CONCEPT

Criminal Liability is only attached to those acts in which there is violation of Criminal Law4. The basic rule of criminal liability revolves around the basic Latin maxim actus non facit reum, nisi mens sit rea which means in order to make a person or entity criminally liable, it is required to establish that an act or omission has been committed which is forbidden by law and it has been done with guilty mind. So every crime constitutes two elements5:

  • Actus reus: 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.
  • Mens rea. On the other hand, mens rea is generally considered as blame worthy mental condition.

CONCEPT OF CORPORATE CRIMINAL LIABILITY:

Corporations play a significant role in creating and regulating the business activities and also in managing the lives of the common people, as a result of which, the modern criminal law systems overlooked the possibility of holding the corporations criminally liable for the commission of a criminal offence.

The doctrine of corporate criminal liability turned from its infancy to almost a prevailing rule6. It is very difficult to define corporate criminal liability in the present day scenario as it covers wide range of offences. However for understanding its purpose, it can be defined as an illegal act of omission or commission, punishable by criminal sanction committed by an individual or group of individuals in the course of their occupation7.  It can be even defined as socially injurious acts committed in course of occupations by people who are managing the affairs of the company to further their business interest8. Corporate criminal liability 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 prescribed and punishable by law9.” Thus the “Corporate criminal Liability” refers to the imposition of criminal liability on either the corporation or its employees and agents and it is also referred to as white-collar crime.

ORIGIN OF CORPORATE CRIMINAL LIABILITY

During the early sixteenth and seventeenth centuries, the general notion was that corporations could not be held criminally liable. In the early 1700s, corporate criminal liability faced four obstacles:

  • First obstacle was attributing acts to a juristic fiction, the corporation. During Eighteenth-century, courts and legal thinkers approached corporate liability with an obsessive focus on theories of corporate personality; a more pragmatic approach was not developed until the twentieth century.
  • The second obstacle was that legal thinkers did not believe corporations could possess the moral blameworthiness necessary to commit crimes of intent.
  • The third obstacle was the ultra vires doctrine, under which the courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters.
  • The fourth obstacle was court’s literal understanding of criminal procedure; for e.g. the Judges required the accused to be brought physically before the court10.

In the modern era, the activities of the corporations has had a tremendous impact on the society and it has also helped in the development of the society to a large extent  but at times, the activities of the corporation has also been proved disastrous to the society which then falls under the category of corporate crimes. Despite those disastrous activities of the corporations, the law was not willing to impose criminal liability upon corporations because11:

  • Corporations cannot have the mens rea or the guilty mind to commit an offence;
  • Corporations cannot be imprisoned.

Even the common law did not impose criminal liability on corporations because it was based on the belief that a corporation lacked moral blameworthiness and the requisite mens rea, which is an essential element of a crime. Further, the thought that was prevalent was that a corporate has ‘no soul to damn and no body to kick’. But from the early 20th century onwards, the importance of the criminal liability of the corporation was recognized by various courts.

THEORIES OF CORPORATE CRIMINAL LIABILITY

  • Theory of Vicarious Liability – The doctrine of vicarious liability recognizes that a person may be bound to answer for the acts of another. Similarly in the case of corporations, the company may be liable for the acts of its employees, agents, or any person for whom it is responsible. The traditional theory of vicarious liability holds the master liable for the acts of the servant in the course of the master’s business without proof of any personal fault on the part of the master.
  • Identification theory– In this theory, the corporations are held criminally liable for true crimes and regulatory offences. This theory recognizes that the acts and state of mind of certain senior officers in a corporation are the directing minds of the corporation and thus deemed to be the acts and state of mind of the corporation itself. The corporation is considered to be directly liable under this theory.
  • Aggregation Theory- – Under the aggregation theory, 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 they had all been committed by one person.180 According to Celia Wells, aggregation of employees’ knowledge means that corporate culpability does not have to be contingent on one individual employee’s satisfying the relevant culpability criterion12.

POSITION OF CORPORATE CRIMINAL LIABLITY IN INDIA:

Until recently, 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. Venkatesan13, 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 pre-requisites, 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.

In Oswal Vanaspati & Allied Industries v. State of U.P.14, 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. Ltd15., 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 India16, 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-II, Bangalore & Ors.  v. Velliappa Textiles17, 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 favor of the construction that exempts an accused from penalty rather than the one that imposes the penalty.

In MV Javali v. Mahajan Borewell & Co and Ors18where 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 then fine will be the only punishment.

Thus the Indian courts never felt about inclusion of company on certain criminal liability.

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.”
  •  In every case in which the offense is punishable with imprisonment and any other punishment not being fine and the offender is a corporation, it shall be competent to the court to sentence such offender to fine.
  •  In this section, “corporation” means an incorporated company or other body corporate, and includes a firm and other association of individuals.

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 Enforcement (([2005] 4 SCC 530)). 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. The Court observed that all the penal statutes are to be strictly construed in the sense that the Court must see that the thing charged as an offence is within the plain meaning of the words used and must not strain the words on any notion that there has been a slip that the thing is so clearly within the mischief that it must have been intended to be included and would have included if thought of19.

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 the prosecution is in respect of offences for which punishment prescribed is a mandatory imprisonment.

In Iridium India Telecom Ltd. v. Motorola Incorporated and Ors20, 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. M/s Blue-Sky Tie-up Ltd and Ors21, 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. 1 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 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 down22. Section 357, Cr PC, 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 Code23, to punish industrial and business organizations which pose danger to public life by polluting water24, 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 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. To defend corporate liability in deterrence terms, one must show that it deters corporate managers or employees better than does direct individual liability25.

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 interpretation by providing for infliction of criminal liability on the corporations as also providing for various kinds of punishments apart from fines only.

  1. Balakrishnan. K; “Corporate Criminal Liability – Evolution of the concept” (1998) Cochin University Law Review p.255 []
  2. Stanley, Re [1906] 1 Ch. 131 []
  3. Salomon v. Salomon (1897) AC 22 []
  4. Abhishek Anand, Holding Corporations Directly Responsible For Their Criminal Acts: An Argument, www.manupatra.com []
  5. Russell, W.O., Russell on Crime p.17-51 (J.W.C. Turner Ed., New Delhi; Universal Law Publishing Pvt., 2001).  []
  6. Thiyagarajan, T. Sivananthan; “Corporate Criminality-concept”, available at: http://www.manupatra.com/Articles/artlist.asp?s=Corporate/Commercial []
  7. Williams, K.S.; “Text Book on Criminology”, Universal Law Publishing Pvt., New Delhi, 2001, p.64 []
  8. Siegal, L.J.; “Criminology” , Wadsworth/ Thomson Learning, London, 2000, pp.398-99 []
  9. Braithwaite, John ; Corporate Crime in the Pharmaceutical Industry, 1st Edition, Routledge and Kegan Paul, London, 1984, p.6. []
  10. 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; Reinier H. Kraakman, Corporate Liability Strategies and the Costs of Legal Controls, 93 Yale L.J. 857, 857-58 (1984). []
  11. Zee Tele films Ltd. v. Sahara India Co. Corporation Ltd., 2001 (3) Recent Criminal Reports (Criminal) 292; Motorola Inc. v. UOI, 2004 Cri LJ 1576 []
  12. Celia Wells, Corporations and Criminal Responsibility, 2nd ed. (Oxford: Oxford University Press, 2001) p. 156. []
  13. A. K. Khosla v. S. Venkatesan  (1992) Cr.L.J. 1448 []
  14. 1993 1 Comp LJ 172 []
  15. 2004 Cri LJ 1576 []
  16. Motorola Inc. v. Union of India,(2004) Cri.L.J. 1576 []
  17. The Assistant Commissioner, Assessment-II, Bangalore & Ors.  V. Velliappa Textiles, (2004) 1 Comp. L.J. 21 []
  18. AIR 1997 SC 3964 []
  19. Tolaram Relumal and Anr. v. The State of Bombay MANU/SC/0057/1954 []
  20. AIR 2011 SC 20 []
  21. CBI v. M/s Blue-Sky Tie-up Ltd and Ors ,Crl. Appeal No(s). 950 of 2004 []
  22. Angira Singhvi ,”Corporate Crime and Sentencing in India: Required Amendments in Law”, International Journal of Criminal Justice Sciences ,Vol 1 Issue.2 July 2006 []
  23. Indian Penal Code, 1860 S. 277. Fouling water of public spring or reservoir: Whoever voluntarily corrupts or fouls the water of any public spring or reservoir, so as to render it less fit for the purpose for which it is ordinarily used, shall be punished with imprisonment of either description for a term which may extend to three months, or with fine which may extend to five hundred rupees, or with both. []
  24. Water Pollution (Amendment) Act,1978 []
  25. Lewis A. Kornhauser , An Economic Analysis of the Choice Between Enterprise and Personal Liability for Accidents, 70 CAL. L. REV. 1345 passim (1982). []

Share this post:

Related Posts