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This article has been written by Aditya Saurabh, pursuing the Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

Large businesses hold a dominant and substantial position in our economy, and they pose a threat to our society, so they must be discouraged. Multinational corporations (MNCs) are corporations that have assets and facilities in countries other than their home country and play a substantial role in practically every aspect of modern society. Because corporations have their own legal identity and are distinct from their members, it is difficult to hold them accountable and punish them. In general, a crime is committed by a person with their own body and soul, and it was previously thought that an organization could not be held accountable for wrongdoing. Criminal offences need a goal, and an organization without a brain could not formulate one. Furthermore, an enterprise lacked its own body that might be imprisoned. A corporation, however, can commit a crime. Accepting companies’ complicity in criminal activity, liability concepts have been developed in numerous jurisdictions by attributing actus reus and mens rea to corporations.

The courts achieved this by imposing culpability on the officer-in-charge, chiefs, or other individuals acting within the scope of their employment. The doctrine of a corporate criminal liability says that a company can be held criminally accountable and convicted for the unlawful activities of any of its agents, as long as those persons acted within the boundaries of their actual or apparent authority. As a result, Corporate Criminal Liability is a must-have in today’s world, as corporate criminal liability poses numerous issues on various levels due to the size, power, and reach of such businesses, as compared to an individual committing a crime. This article will reflect upon the concept of corporate criminal liability and how it has developed in India through judicial pronouncements.

Concept of corporate criminal liability

The essential cornerstone of corporate liability laws all around the world is the recognition of the corporation as a separate legal entity. Courts, on the other hand, struggled to hold corporations liable for acts that were considered criminal offences on two fronts: 

  1. assigning mens rea, or a criminal intent factor, to fictional entities such as corporations; and 
  2. punishing corporations where statutory punishments were mostly corporal in nature, requiring imprisonment.

The idea of corporate criminal liability arose in response to this necessity, allowing courts to hold individuals accountable for illegal activities performed in the name of corporations. The simple response the courts came up with for offences that did not require the proof of mens rea was to create a modified version of the Doctrine of Vicarious Liability, under which the company’s controlling persons would be held accountable.

However, soon after, business directors were held accountable for criminal activities for which criminal intent had to be established. For this, the ‘Identification’ or ‘Attribution’ theory was used, which is a modified form of vicarious responsibility in which the person in charge of the firm’s affairs and the corporation were deemed one and the same for the purposes of the criminal act. The doctrine of attribution suggests that the criminal purpose of the company’s or body corporate’s “alter ego”, i.e., the person or group of people, who run the company’s operations, is ascribed to the corporation. On the basis of the company’s alter ego, mens rea is thus assigned to it.

Development of corporate criminal liability in India

In the past, Indian courts have held that corporations could not be tried for offences requiring mens rea, which is an essential requirement for the bulk of crimes, and that corporations could not be prosecuted for offences requiring imprisonment because corporations could not be imprisoned. Furthermore, stakeholders argued that by dividing responsibilities among board members, if the firm confronts criminal liability, the director assigned to manage that aspect of its operation will be held criminally liable. The legal approach, on the other hand, has been a little more difficult.

Two corporations were charged with fraud under the Indian Penal Code in A.K. Khosla v. T.S. Venkatesan. The defendants’ counsel claimed in the Calcutta High Court, among other things, that the corporations, as juristic persons, could not be punished for IPC offences requiring mens rea. The court agreed, stating that there were two prerequisites for prosecuting corporate bodies: mens rea and the ability to impose the mandatory sentence of imprisonment, and that a corporate body could not be said to have the necessary mens rea or be sentenced to imprisonment because it lacked a physical body.

Similarly, the court dismissed a case made against Zee Telefilms Ltd. under Section 500 of the IPC in Zee Telefilms Ltd. v. Sahara India Co. Corp. Ltd. According to the lawsuit, Zee aired a program that was based on lies and thereby defamed Sahara India. The court found that one of the primary aspects of criminal defamation was mens rea, and that a corporation could not have the required mens rea.

Thus previously, Indian courts only recognized that companies may act through their managers and directors, but the judgments as it exists now solidifies the view that companies are just as guilty as any living person and can be tried and punished for it. 

This was governed by two major decisions in this regard. The first is the case of Standard Chartered Bank v. Directorate of Enforcement, in which the Supreme Court’s constitution bench held that no company is immune from prosecution for serious crimes simply because the prosecution would result in a mandatory prison sentence. Large-scale financial irregularities are perpetrated by numerous corporations that control a significant amount of the industrial, commercial, and sociological sectors; therefore, the corporation’s compliance with criminal law is necessary for a peaceful society with a stable economy and as a result, a corporation can be charged with and convicted of a crime requiring a minimum sentence of imprisonment. 

Secondly, in Iridium India Telecom Ltd. v. Motorola Inc., where the issue was whether a company could be held liable under Section 420 of the Indian Penal Code, 1860, the Apex Court answered affirmatively and clarified that even if the offence requires the proof of mens rea, a company can be held liable to the act as the guilty mind of the person in control of the company will be ‘attributed’. As a result, the doctrines of attribution and imputation were accepted.

Imprisonment: a deadlock

A person is defined in Section 11 of the Indian Penal Code, 1860 (“the Code”) as “any Company, Association, or a group of persons, whether incorporated or not.” and according to Section 2, every individual shall be liable to punishment under this Code. As a result, section 2 of the Code, with no exception for corporations, punishes everyone, which plainly includes corporations. 

By reading these two clauses, the notion of corporate criminal liability may be developed, albeit it is not the only legislation that provides for the punishment of corporate bodies; others include the Companies Act of 2013, the Income Tax Act of 2013, and so forth. However, in circumstances when a corporation is accused under sections that require necessary imprisonment, the courts have reached a dead end because the company, as a legal person, cannot be imprisoned for its illegal activities and may only be fined.

The Supreme Court faced a similar problem in the case of M.V. Javali v. Mahajan Borewell & Co. and Others, where the Company was found guilty under Section 276B r/w 278B of the Income Tax Act, which requires a mandatory sentence of at least 3 months, but the Court was stumped as to how to imprison a company and thus held that the only harmonious construction that can be given to S. 276B is that the required term of prison and fine is to be enforced where it is possible, such as on persons falling under categories (ii) and (iii), but where it is not possible, such as on a company, the fine will be the sole sanction.

The 47th Law Commission Report also recommended that the criminal law be amended to the point where corporations should be required to pay an additional fee instead of being imprisoned. Unfortunately, the legislatures have ignored the law commission’s recommendations, and the problem has returned to its previous state. Courts still have a tough time punishing perpetrators. As a result, even if corporate crimes are popular today, the means for combating them are still in their infancy. Furthermore, the Companies Act recognizes the concept of criminal liability as well as the doctrine of corporate veil lifting. These principles under the Companies Act have provided an option for punishing corporations that are not held accountable under the IPC due to the ineffectiveness of the penalties imposed.

Recent approach towards the liability of a corporation and its officials

By using the law of attribution, it is now obvious that a company can be found guilty of crimes including mens rea. Thus, by attributing the criminal intent of the company’s directors or officials to the corporation, the corporation can be held liable for offences committed in connection with the corporation’s business by those in control of its affairs. The question then becomes whether the opposite is conceivable, i.e., if corporate officials may be held liable for the company’s actions.

The Supreme Court of India has answered this question in Sunil Bharti Mittal v. Central Bureau of Investigation, ruling that an individual who commits an offence on behalf of a company can be charged alongside the company. To hold an individual accountable, however, there must be adequate evidence of his active engagement, as well as criminal intent, and/or a provision must be deliberately integrated into the legislative system that attracts the notion of vicarious liability. In the absence of any statutory provision to the contrary, the vicarious culpability of the directors cannot be imputed automatically when the corporation is the offender.

The question that emerges as a result of the preceding explanation is whether somebody who is simply identified by the Company as an officer-in-default can be held criminally accountable. The Supreme Court also stated in this case that the person to whom the company’s acts must be attributed must be the company’s ‘alter-ego’, meaning that the degree of identity between the company’s acts and the responsible persons “directing mind and will” must be high enough for the courts to infer them as one and the same. Furthermore, just because someone is in charge of things does not make them accountable for crimes requiring intent. As a result, the Supreme Court decided that the special court was correct in refusing to accept the charge sheet against the managing director just because he was the company’s CEO.

Therefore, an officer may be prosecuted by virtue of his or her position if he or she is in default for violations that do not need proof of intent, but this is simply not true in cases when proof of intent is required. As a result, the general rule is that, unless otherwise stated in a statute, a director can only be held criminally accountable if there is proof of intent against the director. The directors must take care to avoid committing such offences in the Company’s name; however, the onus will remain on them to prove that the offence was done without their knowledge or approval. However, given the recent approach of Indian courts, it is important to note that a person cannot be held accountable just because of the title. A person who holds the post of the chairman or managing director cannot be presumed guilty only because of their position. A person must meet both the ‘legal condition’ of being a person in law (under the company statute) responsible to the company for the conduct of the company’s business and the ‘factual requirement’ of being a person in charge of the company’s business.

In the recent case of Shiv Kumar Jatia v. State of NCT of Delhi, the Supreme Court rejected criminal proceedings that were brought solely on the basis that the accused was the company’s managing director and the only non-independent executive director. He was not, however, vicariously responsible under the IPC since there was insufficient proof of his active engagement combined with criminal intent.

Therefore, until there is adequate evidence against the individual in question, the Indian courts have taken a cautious stance and have generally safeguarded corporate officials from harassment by investigating authorities.

Conclusion

India is attempting to slow down the unrelenting pace of corruption in its government, which has been plagued by a rash of large-scale corporate scandals. In this context, it is necessary to consider not only the criminal liability of individual directors or agents of a business but also the criminal liability of the corporation itself. Many times, the courts have reaffirmed and strengthened the concept that corporations have criminal liability and can be tried for criminal offences.

It does, however, protect directors and workers who, despite being the company’s alter ego, are not legally accountable unless there is an express statute stating otherwise. To the relief of corporations, the courts have taken a balanced approach, not shying away from taking action against a high official if it is proven that the official was culpable for the crime, as seen above. At the same time, they have shielded top officials whose involvement could not be proven personally. Even though the ruling is consistent with criminal law principles, it is counterintuitive to argue that an artificial person would only be charged with criminal accountability, while the natural humans in charge of the company’s business may get away with it.

As previously stated, the primary premise of strict interpretations of criminal statutes binds the hands of justice. With corporate scandals aplenty, it’s more important than ever to revamp the regulatory regime and statutes to make corporate criminal liability more robust and purposeful, while also striking a balance by relieving executives of the fear of being held criminally liable simply because of their position. While combating crime, it is critical for legislation to achieve a balance between the functioning of society and the overall benefit of the economy.

As a result, major changes in relation to the criminal liability of Indian corporations must be adopted in order to strike a balance, as the statutes are out of sync with these developments.


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