Corporations In The Dock: Unraveling Criminal Liability

TODAY'S Society is increasingly faced with types of economic offences unknown to the nineteenth-century society in which criminal justice systems were shaped. In today's societies prosecutors have to deal with economic and environmental criminality previously not heard of. An important aspect of these trend corporations in white-collar criminality and the consequences punishment of this particular type of wrongdoing. As the bulk omic activity nowadays takes place through corporations, omic criminality. A logical reaction to this phenomenon seems to be, as has that matter in torts law, to sanction corporations for the wrongdoing which they are responsible. Logical though this solution not take into account the traditional hesitation of criminal law and criminal lawyers with regard to change. In fact, though the role of corporations in society has been expanding ever since the nineteenth century, it was only after the Second World War that the criminal law came to recognize the concept of corporate criminal liability. Though some jurisdictions (e.g. the United States) have taken this step earlier, other criminal law systems in Europe apparently still have not been able to incorporate the concept of corporate liability into their criminal law system. In Indian legal system the same concept of corporate criminal liability is applied as is applied in England. In our code of criminal procedure, 1973 {Now Bharatiya Nagarik Suraksha Sanhita, 2023, (BNSS)} there is section 305 of Cr.Pc, 1973 (Section 342 corresponding section of BNSS, 2023) which deals with the procedure for the corporate to be penalized. This Article will analyze and study the brief historical background of corporate criminal liability, why there was felt need of corporate criminal liability.^[1]

It has for many years been common place for corporations to be prosecuted for criminal offences. Numerous Acts of parliament contain provisions specially making a body corporate liable for offences created by the Act in question. Even if there is no such provision, the Interpretation Act, 1978^[2] provides that, subject to the appearance of contrary of a contrary intention, the word “person” in a statute or subordinate legislation is to be construed as including “a body of persons corporate or unincorporated.”^[3] This definition applies to any Act. The first interpretation Act to contain this provision was enacted in 1889. It has now been held repeatedly that companies may properly be indicted for common law offences as well as statutory, and for offences requiring proof of a criminal state of mind well as those of strict liability. It is submitted that there is a plain necessity for corporate criminal liability, although not all commentators agree^[4]. Ashworth has described the aims of the criminal law in this way^[5]: “The first is to protect those interests which are most central to life in society (leaving less important interests to be protected by government regulations or civil actions). The second aim of the criminal law is to establish an authoritative framework for the official response to lawbreakers.”

Concept of Corporations

A corporation is nothing but an artificial person. It is creation of law i,e in apt words a legal fiction which can own property. Corporations are of two kinds (i) Corporation Aggregate (ii) Corporation sole. Corporation Aggregate is an incorporated body having membership of several persons. It is formed by a number of persons known as shareholders who pool their resources to create a fund known as capital to start with and it works for common interest of all the shareholders with a prime objective of making profit. The partnership must not be confused with the corporations. Although it is also formation of more than one person it is not an incorporated body. On the other hand, a corporate sole is a series of successive persons and have only one member at a time. Salmond clearly states that corporation sole is formed only when the successive holders of some public offices are incorporated so as to constitute a single, permanent, legal person.

Basis of Criminal Liability

Criminal liability is attached only to those acts in which there is violation of criminal law i,e to say there cannot be liability without criminal law which prohibits certain acts or omissions. The basic rule of criminal liability revolves round a Latin Maxim “actus non facit reum, nisi mens sit rea”. It means that an act or omission is not criminal unless it is accompanied by a guilty mind. Hence every crime has two elements one physical acts known as actus rea. On the other hand, mensrea is generally mental condition, which constitutes of intention or knowledge.

The Development of Corporate Criminal Liability in India

The attribution of criminal liability to corporations has been a contentious subject since the eighteenth century, when they became more ubiquitous. Legal systems across the globe have since adopted various approaches to locate a balance between ensuring that public interest is adequately protected and that the regulatory environment is favourable for trade and commerce. Classically, criminal liabilities were only seen to be attributed to quasi-public corporations when there were claims of public nuisance. The precedent set by the courts in England and the United States that public nuisance claims could be linked back to actions or omissions of quasi-public companies^[6] paved the way for the attribution of such liabilities to private commercial entities too^[7]. This principle was then broadened to include other acts and omissions by corporations not requiring intent as well before more nuanced jurisprudence around corporate criminal liability could begin to materialize. One of the more predominant, and slow-moving developments in the realm of corporate criminal liability was the inclusion of crimes that did require intent^[8]. It was only in 1909 that the United States Supreme Court first held a corporation guilty for a crime requiring intent^[9]. In India too, the common hurdles of attributing criminal liability to corporations like the inability to send a corporation to prison, the association of mens rea to its actions or the justness of punishing an entity for the vicarious guilt of others, still prevailed. Even though the alter ego principle the theory that liabilities for criminal offences committed by the directors of a company could be attributed to the company was endorsed by the Supreme Court in 2003^[10], the inability to arrest companies for their lack of a physical form was a hurdle that continued to persist. Later, the Supreme Court's judgement in Standard Chartered Bank v. Directorate of Enforcement^[11] served as a pivotal precursor to the breaking of this logjam. It held that not penalizing companies at all for grave crimes for the simple reason that the penalty of a fine was coupled with imprisonment was inconsistent with the legislative intent. Despite the Supreme Court not expressly stating whether companies are capable of having mens rea, the precedent that they could be prosecuted for criminal offences in a manner that was distinct from individuals was an essential milestone in shaping the approach of the courts towards corporate criminal liability. The principle of alter ego was dissected further by the Supreme Court in Iridium India Telecom Ltd. v. Motorola Inc.^[12]where it held that companies could be held liable for criminal offences committed by those in charge of the company's affairs. This further broadened the ambit that the court delineated in the Standard Chartered judgement, which not only required the person to be authorized but also to be acting in the course of his/her employment to be held liable for the actions of the company. In the Iridium judgement, the Supreme Court had also placed great reliance on Tesco Supermarket v. Nastrass^[13], which identified individuals who derived powers from the constituting documents of the company or specifically named by the Board as individuals who could have liabilities of the company's wrongdoings associated to them. As discussed above, the Supreme Court drew from Tesco's reasoning and expanded it to include any individual that was instrumental to the company's functioning or in charge of its affairs. Much of the importance of the Iridium judgement lay in the questions raised about the liability of corporations for the actions of the individuals in control (and vice versa): whether the liabilities of the officers and the company were mutually exclusive, what recourses the shareholders would be left with in such situations and how culpability would be apportioned in instances of combined guilt, etc. Later, in Sunil Bharti Mittal v. Central Bureau of Investigatio^[14], the Supreme Court further deliberated on the principle of alter ego and added more texture to its prevailing stand on the matter, filling some of the gaps that remained. The bench of the Supreme Court laid two crucial criteria to determine the circumstances in which directors could be implicated for the actions of the company: when there was sufficient incriminating evidence to signify their role and requisite mens rea for the commission of the crime in question, or when there exist statutory specifications of liability to be meted out vicariously to directors for criminal acts committed by the company. These findings served as a crucial counterbalance to the ever-widening net of individuals and circumstances where individuals in charge of the functioning of the company could be liable for the company's actions. Another essential limitation that the Court placed on the application of the principle of alter ego was that although corporations could be penalized for the actions of the directors, the imputation of criminal liability to directors for criminal offences committed by the company would not be permissible and that would necessarily require the fulfilment of the two criteria it detailed above. This judgement encouraged a more nuanced approach to this subject and made way for similar positions taken by lower courts and tribunals.

India's gradual transition from the approach where corporations stood insulated from most criminal liability to such a layered approach to the apportionment to liabilities was greatly heralded by the many landmark judgements passed by the Supreme Court. This, coupled by many noteworthy initiatives by the government guided by the Committee to Review Offences under the Companies Act, 2013 and the Company Law Committee ultimately resulted in legislative changes, towards the end of the last decade. With the two, seemingly polar goals of making the regulatory environment conducive for corporations to flourish and ensuring that adequate safeguards are kept in place to act as deterrents from any gross deviations of the law; certain legislations were enacted to reduce the burden on the already overwhelmed judiciary, encourage alternative mechanisms to redress disputes and, most importantly, reclassify certain non-grievous offences as civil ones. Even before these amendments were passed, the government's vision for the regulatory landscape of companies was evident through its initiatives to pardon late filings for certain classes of companies to granting immunity in certain criminal proceedings. The Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020 classified many such criminal offences as civil wrongs or completely decriminalized certain compoundable offences under the Companies Act, 2013. The amendments also established the In-House Adjudication Framework, under the aegis of the Ministry of Corporate Affairs to redress certain non-compoundable offences more quickly, thereby easing the backlog for the National Company Law Tribunal and giving companies faster access to recourses without impeding their functioning to a great degree. The opposing schools of thought that have gradually and thoroughly shaped the contemporary conception of corporate criminal liability have aided the government in striking a balance between ensuring that the regulatory framework within which corporations exist adequately protects the interests of the people and continues to foster the generation of value and scalable innovation.

The concept of Corporate Criminal Liability has been recognized under the Companies Act, 2013 Under:-

Section 53 Prohibition of shares at a discount

(1) Except as provided in section 54, a company shall not issue shares at a discount.

(2) Any share issued by a company at a [discount] shall be void.

[(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.]

[(3) Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent. per annum from the date of issue of such shares to the persons to whom such shares have been issued.] Section 118 (12) Minutes of the proceeding of General Meeting, Meeting of Board of Directors and other meetings and resolutions passed by Postal Ballot, it provides that if a person is found guilty of tampering with the minutes of the proceedings of meetings, he shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. Section 128 (6) Books of Account, etc, to be kept by company, this section provides that if the Managing Director, the whole time director in charge of finance, the chief financial officer or any other person of a company charged by the board with the duty of complying with the provisions of this section, contravenes such provisions, such Managing Director, whole time Director in charge of finance. Chief financial officer or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both. Section 129 (7) Financial Statement, it provides that if a company contravenes the provisions of this section, the managing director, the whole time director in charge of finance, the chief financial officer or any other person charged by the board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term, which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. Section 134- Financial statement board report etc, Section 188 (5) Related to party transactions, Section 57 provides for punishment for personation of shareholder, Section 58 (6) provides that Refusal for registration and appeal against refusal, Section 182 (4) provides that Prohibitions and Restrictions regarding political contribution, Section 184 (4) provides that disclosure of interest by the director, Section 187 (4) provides that Investments of the company to be held in own name, Section 447 provides for the punishment for fraud and NDPS, Act, 1985 Section 38 of the NDPS Act, 1985 mentions offences by companies

As it is evident from the above literature it is evident that after the Second World War there was bloom of companies all over the world. Today, in the world of information technology, AI and hunger for data every human behavior is regulated and recognized by these corporate sectors. Though, the corporation does not have its own sole and mind but it is clear its actions are represented by its officers who manage it. In companies most of the work is regulated by the managing directors and financial officers they are the persons on whom the corporate criminal liability is imposed. As it is evident from the Companies Act, 2013 the various sections which recognizes the corporate criminal liability mainly relies on the fines rather than imprisonment. The 47^th Law Commission report has recommended various solutions to deal with corporate criminal liability namely the Judges should have the discretionary powers to impose penalties as it deems fit to them. In my opinion there should be some mechanism which should have overlooked on the corporate criminals like that of “Ombudsman” as these corporate crimes are not ordinarily known to the public they commit within the corporation. So, remedy lies in the incorporation of new policies and rules regulating criminal behavior of corporations both public as well as private corporations.

Author is Research Assistant, High Court of Jammu & Kashmir and Ladakh

Views Are Personal.

1. . Stessens, Guy. “Corporate Criminal Liability: A Comparative Perspective.” The International and Comparative Law Quarterly, vol. 43, no. 3, 1994, pp. 493–520. JSTOR, http://www.jstor.org/stable/760646. ↑

2. . Sections 5 and 11 ↑

3. . Section 11 of IPC, 1860 (Section 2(26) corresponding Section of BNS, 2023) ↑

4. ^. Smith and Hogan Criminal Law (10^th ed., Butterworths, London 2002) ↑

5. . Defining offences without harm in criminal law: Essays in Honours of J.C Smith (P. Smith ed. Butterworths, London 1987) ↑

6. . L.H. Leigh, The Criminal Liability Of Corporations In English Law 16-18 (1969) ↑

7. . James R. Elkins, Corporations and the Criminal Law: An Uneasy Alliance, 65 KY. LJ. 73, 91-92 (1976) ↑

8. . James R. Elkins, Corporations and the Criminal Law: An Uneasy Alliance, 65 KY. LJ. 73, 95-96 (1976) ↑

9. . New York Central R. Co. v. United States, 212 U.S. 481 (1909) ↑

10. . Appeal (crl.) 142 of 1994 ↑

11. . Appeal (civil) 1748 of 1999 ↑

12. . Criminal Appeal NO.688 of 2005 ↑

13. . Tesco Supermarket v. Nattrass, [1972] AC 153 ↑

14. . CRIMINAL APPEAL NO. 34 OF 2015 (arising out of Special Leave Petition (Crl.) No. 2961 of 2013) ↑