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Crime and Corporations: Criminal Liability in India

Corporate Criminal Liability is based on the principle that a corporation is a separate legal entity and is liable for acts committed by its employees. This nascent understanding was changed with the arrival of various interpretations and applications of numerous principles. These principles have encircled the development of corporate liability by emerging from contract law, the law of tort, taxation, and other common laws in India. The word liability has been derived from the French word “lier”, which means “to bind or to tie u” and correlates to the legal meaning of the term “bound by law or justice to pay or to be responsible for.” The concept has been developed with the emergence of the “alter ego” principle, where the corporate veil is lifted by considering the shareholders or directors as a single entity.[1] It was enshrined in the Assistant Commissioner, Assessment-II, in Bangalore v. Velliappa Textiles Ltd.[2]  The Company was a private entity and prosecuted under the Income Tax Act. It was liable for imprisonment. The apex court held that the company could be prosecuted because it did not have a physical body for imprisonment. The courts have analysed the change in the position of the laws and have roped in the corporations based on the facts of the cases. The stance has been evolving, and the speculations have created some controversies both in India and England.

APPROACH TAKEN BY INDIAN COURTS

In India, Pandora’s box regarding corporate criminal liability opened with the Standard Chartered Bank v. Directorate of Enforcement[3] case, where the bank was charged for violation of a few provisions of the Foreign Exchange Regulation Act, 1973. The Supreme Court remarked that, apart from punishment under the respective statute, the corporation would be liable to pay a fine.[4] This was a clear divergence from the precedence of not convicting corporations. This led to a novel judicial interpretation regarding felony crimes committed by corporations. Further, mens rea, which refers to the criminal mind’s intention to commit an offence, was noticed in deciding Iridium India Telecom Ltd v. Motorola Inc.[5] In this case, Iridium Ltd. filed a case against Motorola under sections 120 and 420 of the IPC, i.e., conspiracy and cheating relating to wrong and misleading statements in the context of financial securities.[6] The High Court decided that a company is unable to have mens rea (guilty mind). When the appeal went to the Supreme Court, a question was raised as to “whose mental element should be attributed to the company”. It was held that the person with direct control over the affairs of the corporation should be booked for having a criminal mentality. The principle of alter ego can only be applied when corporations and directors have pervasive and active control over the exercise of criminal acts. The Sunil Bharti Mittal v. CBI[7] judgement took cognisance of the wrong application of the alter ego principle where the managerial heads of the company were held liable for the corruption within the company without establishing the involvement of the officials in the crime. The Supreme Court emphasised that guilt will be found only when there is active or pervasive participation of the officer in the criminal act. The alter ego principle cannot be applied vice-versa.

CURRENT POSITION OF LAW

The laws governing various aspects of companies and corporations have upheld the criminal vicarious liability of the officers of corporations. Section 27 of the SEBI Act, 2013[8] imposes liability if the officer of a company oversees illegal activity. This emerged from the concept of Vicarious Liability and the relationship between principal and agent. Section 179(1) of the Companies Act, 2013[9] makes the Board of directors liable for all the acts under the aegis of the company. The NDPS Act[10] deals with the offences committed by the company and defines the meaning of “directors of a company” under Section 38. Also, the Negotiable Instrument Act[11] relating to transactions and payments deals with the issue of criminal activity in Section 138. The Bank Regulations Act has also carved out the procedure for the imposition of liability on corporations in sections 46 (3)[12] and (4)[13] during the default in payments. These specific sections of the statutes refer to wrongdoings or defaults committed by officers on behalf of the corporation as the legal responsibility of the corporation. With the increase in the activities and more advanced functioning of corporations, the appropriation of criminal liability by corporations has rapidly accelerated.[14]

REFORMS LIMITING THE LIABILITY OF CORPORATES

The 20th Law Commission on ‘Punishment and Trial of Socio-Economic Offences’ has suggested changing section 62 of the IPC as “in every case in which the offence is punishable with imprisonment only and not any other punishment, and the offender is a corporation, it shall be competent for the court to sentence the such offender to a fine.”[15] With the recent amendments to the Companies Act 2013, the government has decriminalised many provisions regarding individuals and corporations liable for offences.[16] A few sections of the Act, such as Section 447, punish making false and misleading statements with imprisonment for at least three years and a fine of up to seven years.[17] The Amendment that came into effect in 2019 altered up to seventeen provisions that reduced the onus of punishment upon offenders. The amendments are seen as supporting the business and growth of India, but the decriminalisation of penal actions for fraudulent corporate offences is detrimental to the common masses, who are essential stakeholders in the corporate arena. The government is attempting to stimulate corporations by imposing less stringent actions, but it is affecting the interests of investors and victims who are suffering from the perils of corporations’ criminal acts.[18]

DEFENCES AGAINST CORPORATE CRIMINAL LIABILITY

The general defences that are present in criminal law are also applicable in the case of Corporate Criminal Liability. The act of an agent or corporate officer committed intoxicated with an unsound mind, due to a mistake of fact or by necessity, can be termed as a defence to save themselves from liability.[19] A peculiar defence used for Corporate Criminal Liability is the defence of “Superior Order” which states that the subordinate should not be held liable for the acts done under the purview of the superior.[20] This defence is not substantiated by Indian courts but was used by SEBI in the issuance of orders dealing with monetary scandals by Vijay Mallya and officers at key managerial posts in United Spirits Limited (USL).[21] This defence dives into the helm of the instructions by the directors or stakeholders and mere follow-up undertaken by subordinate employees of an organisation.

WAY FORWARD

More advanced and stringent regulations are needed to restore the confidence of the stakeholders, which has been lost due to the upper hand provided by the reforms in statutes. The number of White-Collar crimes committed by corporations will increase with the lackadaisical approach taken by the government. The felony committed by a corporation harms the victim, and it is, therefore, affirmative to make the corporation liable for wrongful acts. The officers and workers constitute a corporate. Anyone who is involved in a felonious act should be punished. The conversion of criminal liability into tortious liability is not the right approach to accelerate the “ease of doing business.” The leeway provided by recent amendments is going to affect the criminal justice system.

CONCLUSION

Judicial precedents have been set, but there is no pellucid synergy, and the application of principles has been inconsistent. The Indian system has taken a formative step in developing the concept by considering men’s rea for incision of the act. There is a lack of a defined set of jurisprudence and the existence of numerous ad-hoc decisions. Control over the exercise of the act is an essential precondition for the appropriation of criminal liability under the law. As corporate capacity has grown, so has the legal framework governing corporate liability. 

Author(s) Name: Aryan Rawat (National Law University Odisha)

References:

[1] ‘Lifting of Corporate Veil’, (Lawctopus, 08 April 2015) <https://www.lawctopus.com/academike/corporate-veil-2/>  accessed 12 September 2022

[2] Assistant Commr. v Velliappa Textiles Ltd. (2003) 11 SCC 405 

[3] Standard Chartered Bank v Directorate of Enforcement (2005) 4 SCC 530

[4] Anubhav Chakravorty, ‘The Principle of Alter Ego and the Evolution of Corporate Criminal Liability in India’ (2021) 4 JCLG 84  

[5] Iridium India Telecom Ltd. v Motorola Inc. (2011) 1 SCC 74 

[6] V. Umakanth and Mihir Naniwadekar, ‘Corporate Criminal Liability and Securities Offerings: Rationalizing the Iridium-Motorola Case’ (2013)  Spl. Issue NLSI Rev. 144

[7] Sunil Bharti Mittal v CBI (2015) 4 SCC 609

[8] Securities and Exchange Board of India 2013, s 27

[9] Companies Act 2013, s 179(1)

[10] Narcotic Drugs and Psychotropic Substances Act 1985, s 38

[11] Negotiable Instrument Act 1881, s 138

[12] Banking Regulation Act 1949, s 46(3)

[13] Banking Regulation Act 1949, s 46(4)

[14] Team Lawyered, ‘Corporate Criminal Liability In India’ (Lawyered, 8 December 2021)

<https://www.lawyered.in/legal-disrupt/articles/corporate-criminal-liability-india/>  accessed 12 September 2022

[15] Law Commission of India, 47th  Report: Trial and Punishment of Socio-Economic Offences 8.1 <https://lawcommissionofindia.nic.in/1-50/Report47.pdf> accessed 12 September 2022

[16] Praneet Kumar & Richa Bhandari, ‘Decriminalisation of Offences Under The Companies Act, 2013’ (Mondaq, 27 July 2022) >https://www.mondaq.com/india/corporate-governance/1216126/decriminalisation-of-offences-under-the-companies-act-2013> accessed 10 September 2022

[17] Companies Act 2013, s 447.

[18] Nabarun Bhattacharjee, ‘A Holocaust of Criminal Justice Shredded under Corporate Criminal Liability’ (2021) 3 (4) IJLSI 833 – 843

[19] Lawrence Friedman, ‘In Defence of Corporate Criminal Liability’ (2000) 23 Harv J L & Pub Policy 833

[20] ‘Corporate India, Individual Liability and the Relevance of the Superior Orders Defence’ (Cyril Amarchand Blogs, 1 July 2019) <https://corporate.cyrilamarchandblogs.com/2019/07/superior-orders-defence-corporate-fraud/> accessed 12 September 2022

[21] ‘Mallya Case is like a Dead Wall: Supreme Court’ (The Hindu, 10 March 2022) <https://www.thehindu.com/news/national/mallya-case-it-is-like-a-dead-wall-so-how-long-can-we-go-on-asks-sc/article65211075.ece> accessed 12 September 2022