COMPANY to corporate criminal liability as well as

COMPANY LAW – II

(I INTERNAL)

RESEARCH PAPER

TOPIC:  “Criminal Liability of Directors in    Companies”

Word Count:

 

NAME:
ASHUTOSH PATIL

DIVISION:
A

PRN:
15010125072

YEAR:
III YEAR

 

 

Abstract

“A
corporation is not indictable but the particular members of it are.”1

– Lord
Holt CJ

In this day and age of scams, crime
by corporate entities is on the rise and poses a serious threat to the
functioning of society. The scale of crime may be extraordinary owing to the
magnitude and reach of a corporation as opposed to an individual attempting to
commit a similar offence. Since a company is an artificial entity, it is
important to ascertain whether it can possess guilt for such an offence
committed. As a general rule, Corporations were not held liable for criminal
offences due to the absence of Mens Rea
or the intention to commit the offence and inability to award imprisonment or
arrest, etc. White-collar crime has been on the rise, as technology has seen
improvement. This has led to an increase in insider trading, corporate fraud as
well as manipulation of balance sheets etc., authorized by human minds.

However, with the advent of the
Companies Act, corporations are no longer immune. Directors of a company can be
prosecuted and held criminally liable, along with the company. There arose a
need for creating legislations to regulate the manner in which companies
function and the liability of the directors regarding the act done by the
company on its employees, environment as well as the general public. This paper
attempts to portray the overall journey of corporate criminal liabilities and
gives suggestions for a fair system of doing business in the world.

 

 

 

 

 

 

 

 

 

Introduction

“Success
can breed all kinds of other behaviour and cause companies to behave a certain
way that isn’t necessarily the ingredients for achieving more success. For
instance, with success comes arrogance, and that’s typically the death of
success.”2

– Bob
Iger

With
the turn of the 19th Century there was a tectonic shift in the rules applicable
to corporate criminal liability as well as the liability of the members of a
company.3 The Courts held
corporations liable for the actions of their agents, acknowledging that doing
otherwise would lead to “incongruous” results.4 The concept of “vicarious
liability” became the precursor to holding corporations liable for acts
committed by the members and employees of the company.

The
jurisprudence with respect to corporate criminal liability has developed a long
way. The initial ideology was that a corporation cannot be held criminally
liable since it is not a natural persona and cannot:

(1)
Have a Mens Rea;

(2)
Neither be indicted nor tried in person;

(3)
Be punished corporally5;

Therefore,
criminal acts of a corporation would be ultra vires and thus void6. Now the stance is that that
a corporation can be guilty of most, if not all, crimes. The world has now
moved to a time where a corporation can be held criminally liable for offenses
as grave as manslaughter.7 The progress of the times
has led to the implementation of the moral code upon companies and the law has
recognized effective means of holding corporations liable.8

Interestingly,
the civil law systems (Germany) never faced this problem. The civil law system
always made a provision for punishment of both corporations and individuals to
be distinct9
as a result, corporations were always held criminally liable, even before the industrial
revolution10,
which is when the doctrine of corporate criminal liability in the common law
developed.

Intent
of a corporation in the commission of a crime can be determined through a
collective Mens Rea of the employees. The company will be liable for the
actions of an employee, irrespective of rank11, as long as the act was
committed by the employee within the scope of employment. The agent, acting on
behalf of the corporation, should possess the intent to bestow a benefit upon the
corporation through an illegal act. There are only two situations in which
corporate criminal liability cannot be imposed12:

Ø  When crimes cannot be
punished by fines, which is the primary means for punishing a corporation

Ø  When the crime, by its
nature cannot be committed by a corporation (e.g. rape and murder).

In
the United States, in cases of strict liability, the intent of the agent
becomes irrelevant. Post the Enron
Scandal; the standards have been redefined through the Sarbanes–Oxley Act of 200213 which provides for a
harsher punishment in cases of fraud and other corporate crimes.

 

Development
of Corporate Criminal Liability in India

Until
recently, the Indian Legal System, did not recognize the existence of corporate
criminal liability, taking after the Colonial system which it has been breed
from.

There
was a great emphasis placed on the requirement of Mens Rea and imprisonment to
enforce liability for crimes as a result of which corporations couldn’t be
criminally penalized.14. This position was
reflected in A.K. Khosla v. T.S.
Venkatesan15.
Two companies were charged with fraud under the Indian Penal Code. They escaped
liability, owing to the narrow understanding of criminal law and liability of
corporations.

Similarly,
in Kalpanath Rai v. State16 the Supreme Court held
that a company could not be charged under Section 3(4) of the Terrorists and Disruptive Activities
Prevention Act since the law provided for an implicit Mens Rea requirement,
which remained unfulfilled in the case of a corporation.

The
requirement of Mens Rea was perceived as a core factor and as a result, holding
a company liable for its criminal actions became a tedious task. Unless the law
explicitly excluded the existence of Mens Rea, a corporation could not be held accountable
for the offence. he Bombay High Court expressed similar notions in the case of Motorola Inc. v. UOI17, where the former was barred
from being charged under Section 420 of the Indian Penal Code for cheating.

However,
with an increase in crimes being committed by corporations and companies, courts
could not continue to take such a stance. As a result, in 2005, in Standard Chartered Bank and Ors v/s Directorate
of Enforcement18,
the Supreme Court held that corporations could be held guilty of crimes
committed and since a corporation cannot be imprisoned, punishment will be in the
form of fines.

The
most recent development with regards to the same was in 2011 when in the case of
Iridium v. Motorola19 the Supreme Court of
India held that a company could be held liable for statutory and common law
offenses, including any offences requiring Mens Rea. Thus, the company was held
liable for cheating and criminal conspiracy on account of alleged false representations
made by its officers, who were considered to be the alter ego of the Company. The
court reached this decision, following the developments in the USA and UK. The court
also took into account the changing developments in the field of business and technology
which were fast-moving and creating more opportunity for people to defraud the law
and get away with criminal activities.

 

 

 

 

Role of the
members of a company in corporate crimes (with Case Laws)

Vicarious liability
as a concept of law has been with us since the development of the traditional
doctrine of tort law relating to the liability of employers. An employer is
liable for the torts committed by his employee within the course of his
employment. Likewise, a principal is liable for the torts committed by his
agent within the scope of the agency.

Recently,
the Supreme Court in Iridium India
Telecom Ltd. v Motorola Inc.20, considered the issue of a
company being criminally responsible for the actions of its employees. In
Iridium, Motorola sold a technology
product to Iridium that was accompanied by assertions and promises by Motorola
the allegedly turned out to be
false. Iridium brought a case of cheating against Motorola. The case was brought not against Motorola’s
employees but against Motorola itself. Under the provisions of the Indian Penal Code, cheating requires
an intention to deceive. Motorola argued that a corporate body, being an artificial person, is not
capable of a mental state and therefore cannot be held criminally liable for offences such as cheating.
Motorola’s arguments were rejected by the Supreme Court after it considered the modern approach to
the problem of corporate criminal liability in the English courts. Of particular relevance to the discussion
in this essay is the Supreme Court’s reference to the House of Lords decision in Tesco Supermarkets Ltd. v Nattrass21 where it was held that,
in the absence of a specific
statutory or common law exception, the principle of corporate criminal
liability was not based on the
vicarious liability of an employer for the acts of its agents and employees.
Instead it was based on the concept
of attribution. A company cannot think and act on its own as it is a juristic
personality. It thinks and acts
through certain of its employees. In other words, the mental states and actions
of its employees are attributed to
the company. This is a legal fiction
but a necessary legal fiction in order for the separate legal personality of
the company to sustain itself over a
period of time. Otherwise, the company would not be able to sign contracts, acquire property, negotiate
with business partners, sue and be sued and make public disclosures and statements. 
It follows from Tesco Supermarkets that corporate criminal liability is
not a species of vicarious liability but is a species of attribution of natural
actions and states of minds to artificial entities.

 

Liability of corporate officers on
the basis of attribution

The
actions and mental states of a company’s directors are attributed to the
company such that the actions and the mental states of the companies’ directors
are deemed to be the actions and the mental states of the companies. Can the
reverse be true? Suppose a company (through its employees) commits actions that
have criminal consequences. Can the directors of the company be attributed
these actions such that they can be held responsible for the criminal
consequences?

This
aspect of vicarious criminal liability was in issue in the recent Supreme Court
decision in Sunil Bharti Mittal v Central Bureau of Investigation.22 The government issued
telecommunication licences to a number of companies. The license process came
under scrutiny for certain irregularities (related to bribery of public
officials) as a result of which a criminal investigation was launched into the
actions of various companies. One of these companies was Bharti Cellular Ltd.
(BCL). The special court investigating the licensing irregularities decided to
attribute the actions of Bharti Cellular Ltd. to Sunil Bharti Mittal, its
Chairman cum Managing Director, and made him an accused in them proceedings.
The special court’s directions to make the director of BCL the accused was
challenged in the Supreme Court as a mistake of law. The Supreme Court held that
without statutory backing, the persons in charge of a company cannot be held
criminally liable for the actions of a company. The court was firm in applying
the proposition that there is no special vicariously liability in criminal law
without a statutory exceptions in this regard.

One
might quibble with Bharti Cellular’s refusal to attribute the company’s actions
to the directing minds of the company as the Supreme Court had no such
compunctions, when, in Iridium, the court extended the actions of the directing
minds of a company to the company itself, and held that the company can be held
criminally liable by attribution. One might argue that instead of the post
Iridium one way attribution, Indian jurisprudence needs a two way attribution
between the company and persons in charge of the company to fully guarantee the
reach of the criminal law. However, there are some significant problems with a
two way attribution of liability. The juristic basis for the attribution of the
actions and mental states of the directing minds to their company is that the
company cannot act otherwise. The legal fiction of a corporate person has
necessitated another legal fiction of attribution for otherwise the first legal
fiction would be meaningless.

No
such necessity arises in the case of the actions of the company being
attributed to its directing minds. The directing minds are capable of thinking
and acting on their own and do not need attribution as a matter of necessity.
The best justification of the Indian Supreme Court’s decision is that
attribution is not the appropriate mechanism of imposition of liability in
order to hold the directing minds responsible for the actions of their company.

Acne Markets Inc. case in the United
States

In
the United States, the courts have taken a much more stringent line towards
persons in charge of companies that commit offences. In United States v Park23, the United States
Supreme Court considered the case of Acme Markets Inc. (Acme). Acme was a food
chain that operated throughout the United States. With an employee population
of thirty thousand and several hundred stores, its business operations were
large and complex. Acme’s President, Mr. Park, coordinated the business of the
company through several senior delegates. The US federal government detected a
rodent infestation in some of Acme’s warehouses and warned Mr. Park of
potential legal liability arising out of the unhygienic conditions in which
Acme stored its food. Mr. Park conferred with his legal team and referred the
warehouse hygiene problem to his delegates. When the rodent infestation problem
continued, the federal government sued both Acme and Mr. Park under a federal
legislation that made liable any person who trades in adulterated food. The
U.S. Supreme Court stated that a person who has a responsible relationship to a
corporate activity that leads to criminal liability is also liable under the
relevant legislation. The liability of the responsible corporate officer is not
vicarious liability: it is a species of primary liability. The liability arises
out of a voluntary assumption of responsibility coupled with a failure to
discharge the liability and resultant harm. In this respect, the liability of
the responsible corporate officer is akin to criminal negligence. It is interesting
that a statutory offence has been converted, through prosecutorial zeal and
judicial interpretation, into an offence similar to criminal negligence.

Vicarious criminal liability for the
directing minds

Vicarious
liability (referred to in this essay as special vicarious liability) is another
legal option to hold the directing minds responsible for the actions of their
company. Special vicarious liability does not require attribution; what it
requires is a prescribed connection between the acts (with or without a
relevant mental state) of a person or an entity (the employees of a company or
the company itself) and the directing minds of the company. The prescribed
connection must be a legal requirement emanating from common law or statutory
law.  The most prominent example in the
Indian context is the Income Tax Act, 1961 (ITA), and expresses the model that
is followed in a plethora of Indian legislation concerning the prosecution of
economic offences.

The
ITA prescribes criminal consequences for various kinds of tax offences
committed by persons. A person has been defined in the ITA as including a
company. Therefore, companies have been statutorily recognised as entities
capable of committee criminal offences. The manner in which such companies
would be recognised as committing these offences have not been specified in the
ITA. However, as the court decisions analysed above have shown, a statutory
regime for attributing natural actions to companies is not needed. The common
law, both in England and in India, attributes the minds and acts of the people
in charge of the company’s affairs (such as its managing director and whole
time directors) to the company itself.

The Doctrine of direct Liability
(Theory of corporate organs):

This
doctrine, which was specifically developed for the purpose of imposing
liability on corporations, seeks, in fact, to imitate the imposition of
criminal liability on human beings. The direct doctrine relies on the notion of
personification of the legal body. It identifies actions and thought patterns
of certain individuals within the corporation called corporate organs who act
within the scope of their authority and on behalf of the corporate body, as the
behaviour of the legal body itself. Hence, the name of the doctrine: the theory
of corporate organs or the alter ego doctrine referring to these individuals as
the embodiment of the legal body. In its wake corporation can be rendered
criminally liable for the very perpetration of the offences, resembling the
liability imposed on a human perpetrator, subject to the natural limitations
that follow from the character of the corporations as a legal personality.

Corporate Mens Rea Doctrine

It
is often asserted that companies themselves cannot commit crimes; they cannot
think or have intentions. Only the people within a company can commit a crime
(Sullivan 1995). However, once one accepts that the entire notion of corporate
personality is a fiction – but a well-established and highly useful one – there
seems no reason why the law should not develop a concomitant corporate mens rea
fiction. Most of the other doctrines – identification, aggregation etc. –
involve fictitious imputations of responsibility.

The
real question is not whether the notion of a corporate mens rea involves a
fiction, but whether, of all the fictions, it is the one that most closely
approximates modern-day corporate reality and perceptions. While this
inevitably will raise problems of how to assess policies and procedures to
ascertain whether they reflect the requisite culpability, such a task is not
impossible. The answers might not be easy, but at least this approach involves
asking the right questions.

Criminal Liability of directors under
the Companies Act, 2013

The
issue of vicarious criminal liability for the directors and other key personnel
of companies takes a somewhat alarming turn when it comes to the provisions of
the Companies Act, 2013 (The Companies Act). The Companies Act approaches the
issue of criminal liability in an all-embracing fashion when compared to the
statutes noticed above. Much like the other legislation concerned with economic
crime, the Companies Act also criminalises various kinds of activities in the
course of the economic life of the company, chief among them being fraudulent
activities committed by the company (through its employees). For all offences
committed by the company, the Companies Act imposes special vicarious liability
on officers (of the company) who are ‘in default’. Section 2(60) of the
Companies Act specified the persons who would be considered as officers who are
‘in default’. The specifications closely follow the descriptions of the
personnel considered in the predecessor legislation (Companies Act, 1956) as
persons responsible to the company for the conduct of the business of the
company. Four categories of personnel come within the ambit of officer ‘in
default’.

The
first category encompasses what the Companies Act helpfully terms as ‘key
managerial personnel’ (KMP). KMP includes the managing director, whole time
directors, Chief Executive Officers (CEO), Chief Financial Officers (CFO) and
Company Secretaries (CS). 11 The second category comprises those personnel who,
while reporting to the KMP, are responsible for maintaining, filing or
distributing accounts and records, and actively participate in, knowingly
permit or knowingly fail to take active steps to prevent any default. The third
category is extraordinarily wide in its amplitude. It covers anyone who is
responsible for ‘maintaining accounts and records’. It certainly looks like the
compliance officers of banks would be covered, for example. Provisions
regarding the third category can be contrasted with comparable provisions in
section 5(f) of the predecessor legislation, the Companies Act, 195624 which made officers of
the company liable under similar circumstances provided two conditions were
fulfilled. The Board ought to have given the officer the relevant
responsibility, for example, the responsibility of filing certain records for
regulatory purposes.

Further,
the officer in question must have consented to taking on such a responsibility.
On the face of it, the predecessor legislation looks slightly less onerous as
it includes the consent. However, the Companies Act mitigates the potential
liability of independent directors by providing that two circumstances need to
combine for an independent director to be held liable for offences committed 11
Section 2(51), Companies Act.25

Firstly,
he must have knowledge of the offence attributable through board proceedings.
Second, (note this is an additional requirement) the offence must have been
committed either with his consent or because of his lack of diligence.12 Given
that the managing director and whole time directors are covered under the first
category and independent directors have a different liability regime because of
an express provision in the Companies Act, who exactly is the fourth category
intended to cover? Some guidance on this matter can be found in section 149(6)
of the Companies Act, which defines an independent director. An independent
director is any director other than the managing director, whole time director
or a nominee director of the company. It follows from this definition that a
nominee director is not an independent director. Therefore nominee directors
are the kind of directors that are liable to be included in the fourth
category. The fifth category consists of people who don’t run the company on a
day to day basis but are instead associated with the issue or the transfer of a
company’s shares. Section 2(60) states that with regard to any offences
associated with the issue or transfer of the shares of the company, the
officers in default would be deemed to be the share transfer agents, registrars
and the merchant bankers to the issue or transfer of the shares.

 

 

 

Conclusion and the Way Forward

 

 

 

 

 

 

 

 

REFERENCES

·        
Ramaiya, Guide to the
Companies Act, 1956, LexisNexis, New Delhi (18th ed., 2013)

·        
The Companies Act, 2013 as
amended up to date

·        
papers.ssrn.com/sol3/papers.cfm

 

1 Anonymous (1701) 88 Eng Rep 1518
(KB)

2 https://www.brainyquote.com/topics/companies

3 John C. Coffee, Jr., Making The
Punishment Fit The Corporation: The Problems Of Finding An

Optimal
Corporation Criminal Sanction, 1 N. Ill. U. L. Rev. 3, 3 (1980)

4 James R. Elkins, Corporations And
The Criminal Law: An Uneasy Alliance, 65 Ky. L.J. 73, 91–92

(1976).

5 See 1 Blackstone, Commentaries
476, And Citations At 1 Burdick, Law Of Crimes 223 (1946).

6 Pollock, First Book On Jurisprudence
126 (6th Ed. 1929)

 

8 Hall, Criminal Law And Procedure
594 (1949).

9 Markus D.Dubber, Theories of Crime
and Punishment in German Criminal Law, 53 AM. J.COMP.

L.
679 (2005).

10 Frederic William Maitland, Moral
Personality And Legal Personality, 3 The Collected Papersof

Frederic
William Maitland 304, 307 (H.A.L. Fishered., 1911).

11 See New York Cent. & Hudson
River R.R. v. United States, 2I2 U.S. 48, 494-95 (1909);

12 See Bernd Schünemann,
Unternehmenskriminalität und Strafrecht 194 (1979).

13 Sarbanes, Sarbanes-Oxley act of
2002, The Public Company Accounting Reform and Investor

Protection
Act, Washington DC: US Congress. 2002.

14 0ManjeetSahu, Criminal Liability
of Corporation: An Indian Perspective, Available at SSRN 2192308

(2012).

15 (1992) Cr.L.J.1448.

16 (1997) 8 S.C.C 732

17 (2004) Cri.L.J. 1576.

18 A.I.R. 2005 S.C. 2622

19 A.I.R. 2011 S.C. 20

20 (2010) 14 (ADDL) SCR 591

21 
1971 1 ALL ER 127

22 Criminal Appeal No. 35 of 2015
(arising out of Special Leave Petition (Crl) No. 3161 of 2013)

23 421 U.S 658 (1975)

24 A commercial organisation has been
defined widely In section 9 (3)(a) of the POCA Bill to include companies

(Indian
and foreign), partnerships (Indian and foreign)

25 Section 70, PMLA

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