Corporate Criminal Liability.docx

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

TOPIC CORPORATE CRIMINAL LIABILITY

2017-2018 INDIAN PENAL CODE

SUBMITTED TO:

SUBMITTED BY:

Mr. Malay Pandey

Alok Bhardwaj (23)

Assistant Professor (LAW)

Sec.- A

RMLNLU, Lucknow

B.A. L.L.B. (HONS.)

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Acknowledgement “I would like to extend my sincere thanks to all those who helped me in this topic of research. I extend my sincere acknowledgements to my teacher and mentor Mr. Malay Pandey who gave me this wonderful opportunity to make a project “CORPORATE CRIMINAL LIABILITY”. I am deeply indebted to her helping me with her able guidance and advice in choosing this particular topic. I further extend my thanks to Vice Chancellor, Dr. Sanjay Singh Sir and Dean (Academics), Professor C.M. JARIWALA for their encouragement and enthusiasm, my seniors for sharing their valuable tips, and my classmates for their constant support.”

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

Alok Bhardwaj

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4th Semester

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B.A.LL.B (Hons.)

TABLE OF CONTENTS 1. INTRODUCTION 2. TWIN MODEL OF CORPORATE CRIMINAL LIABILITY 3. DEADLOCKS OF CORPORATE CRIMINAL LIABILIT 4. CORPORATE CRIMINAL LIABILITY: IS IT REALLY NECESSARY? 5. CORPORATE CRIMINAL LIABILITY IN INDIA 6. RECOMMONDATIONS 7. CONCLUSION 8. BIBLIOGRAPHY

RESEARCH METHODOLOGY Research methodology is Doctrinal in nature. Author preferred some books, case laws and some articles and other online sources.

OBJECTIVE “The objective of the author behind to write this paper is just to understand the concept of alienation of joint family property. Further while researching on this topic, author came to know about some conditions which are necessary to be fulfilled. In this paper, to overhaul these conditions is also a primary objective. Further to overhaul the position of coparcener viz-a-viz alienation of joint family property. In this paper, writer would like to try to present the answer to the abovementioned question.”

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INTRODUCTION “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 “Section 11 of Indian Penal Code, 1860 (the Code) define person. It reads “the word person includes any Company or Association or a body of persons, whether incorporated or not.” Further section 2 of the Code provides that “Every person shall be liable to punishment under this Code.” Thus, section 2 of the Code without any exception to body corporate, provides for punishment of every person which obviously includes a Company. Therefore, by reading of these two provisions concept of corporate criminal liability can be derived, though it is not the sole legislation which provides for the punishment of corporate body, Companies Act, 2013, Income Tax Act, etc.” “Corporations have now became an integral part of our society, and with development of corporations they have become significant actor in our economy, our society runs in the risk of getting victimized by these corporation, and therefore they should be deterred too. Imposition of punishment, upon offenders of any kind, can be understood by various rationale of criminal law jurisprudence, but deterrence is the rationale that is applicable to such economic entities as corporations.1 Corporations have their own identity, they have separate legal personality and they are different from their members2, and this is sufficient to makes it possible to held them liable and censure them.”3 “Criminal Liability is the quality or state of being legally obligated or accountable; legally responsible to another or to society which is enforceable by criminal punishment.4 And therefore, Corporate Criminal Liability means the extent to which a Corporation as a legal person can be held criminally liable for its acts and omissions and for those of the natural persons employed by 1

John T. Byam, The Economic Inefficiency of Corporate Criminal Liability (Vol. 2), 1982, pp. 582-585. Salomon v. Salomon & Co., 1897 AC 22: (1895-99) All ER Rep 9 (HL). 3 Supra note 1. 4 Black’s Law Dictionary (9th edition), p. 997. 2

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it. This paper is intended to examine various nuances related to corporate criminal liability, and at the end to provide various recommendations which should be incorporated in in legislations.”

TWIN MODEL OF CORPORATE CRIMINAL LIABILITY A. Derivative Model “This model is individual centered model. It derives to attach the liability to the corporation only because an individual connected to the corporation incurred some liability for which the individual is to be punished, but since it is connected to the corporation the liability is put on the corporation to having that individual with it and letting it incurred some liability. 5 Derivative model can be understood in two sub-categories: a) Vicarious Liability; b) Identification Doctrine.” 1. Vicarious Liability “The concept of vicarious liability is based on two latin maxims- first, qui facit per alium facit per se, it means that he who acts through another shall deemed to have acted on his own, and second, respondeat superior which means let the master answer. In Bartonshill Coal Co. v. McGuire6, Lord Chelmsford LC said: ‘every act which is done by an employee in the course of his duty is regarded as done by his employer’s orders, and consequently is the same as if it were his employer’s own act.’” “Vicarious liability generally applies to civil liability but Massachusetts court in Commonwealth v. Beneficial Finance CO.7, held three corporations criminally liable for a conspiracy to bribe, the first company, for the acts of its employee, the second, for the act of its Director, and the third, for the acts of the Vice-President of a wholly owned subsidiary. The Court seemed to believe that corporate criminal liability was necessary since, a corporation is a legal fiction comprising only of individuals. US courts are not the only courts which have incorporated the

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Sumit Baudh, Corporate Criminal Liability, The Student Advocate (Vol. 10), 1988, pp. 45-46. Bartonshill Coal Co. v. McGuire, (1853) 3 Macq 300. 7 Scoff Massachusetts, 1971 360 Mass 188,cfWR Lafare, Modem Criminal Law (West Publishing 6

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concept of vicarious liability in the cases of criminal liability, but now this model has been rejected considering it to be unjust to condemn one person for the wrongful conduct of another.”8 2. Identification Doctrine “This doctrine is an English law doctrine which tries to identify certain key persons of a corporation who acts in its behalf, and whose conduct and state of mind can be attributed to that of the corporation. In case of Salomon v. Salomon & Co.9 House of Lords held that corporate entity is separate from the persons who acts on its behalf. The Courts in England had in various judgments like DPP v. Kent & Sussex Contractors Ltd.,10 R v. ICR Haulage Ltd.11 ruled that the corporate entities could be subjected to criminal liability and the companies were held liable for crimes requiring intent. Judgment like these led to the promulgation of ‘identification doctrine’.” “As to the liability of these key persons who act on behalf of company, it was held in Moore v. Brisler.12 That the persons who are identified with the corporations must be acting within the scope of their employment or authority. The conduct must occur within an assigned area of operation even though particulars may be unauthorised. It will be wise to infer that identification doctrine is narrower in scope than the vicarious liability doctrine, instead of holding corporation liable for act of any employee, identification doctrine narrows it down to certain persons.”13 B. Organizational Model “Unlike derivative model which focuses on individual, organizational model takes corporation into consideration. Offences require mental state (mens rea) to commit a crime along with physical act (actus reus), but the problem that arises while holding corporations criminally liable is how a corporation which is juristic person could possess requisite mental state to commit a crime.” 8

State of Maharashtra vs. M/s Syndicate Transport Co. (P) Ltd. AIR 1964 Bom 195. Salomon v. Salomon & Co., 1897 AC 22: (1895-99) All ER Rep 9 (HL). 10 DPP v. Kent & Sussex Contractors Ltd., (1944) 1 All E.R.119. 11 DPP v. Kent & Sussex Contractors Ltd., (1944) 1 All E.R. 691. 12 Moore v. Brisler, [1944] 2 All ER 515. 13 Smith and Hogan, Criminal Law 178 (1992). 9

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“Derivative model was one way to attribute mental state to corporation. Other way could be by proving that there existed an environment in the corporation which directed, tolerated, led-on, and even encouraged the non-compliance of specific law which made it offence.14Moreover, physical act that too is required to complete the requirement of commission of an offence can be derived rather be proved from the act of its employees, officers, directors, etc. Thus, culture of a corporation is to be seen while determining its criminal liability.” “Corporate culture may help for commission of an offence requiring mental state byfirstly,providing the environment or necessary encouragement that it was believed by the offender working in the corporation that it was perfectly alright to commit that offence, or corporation has psychologically supported the commission of offence; secondly, it is quite possible that the corporation created an environment which led to commission of crime. Both ways it was the corporation and its working culture that let the offence committed.”

DEADLOCKS OF CORPORATE CRIMINAL LIABILITY A. Imprisonment “As has been discussed above that a company is recognized as a juristic person, and being a person it has to face the punishment that has been provided by the various acts. There are various provisions in Companies Act, 2013 itself which hold a company liable for its wrongdoing. However, there are provisions which provide mandatory imprisonment for a person including company, such as Section 447 of Companies Act, 2013 Act, Section 420 of The IPC, 276B of The Income Tax Act etc.” “The Courts found themselves in dead end in these kinds of situations where a company is charged under sections which provide for necessary imprisonment, as the company being a legal person cannot be imprisoned for its criminal acts, it can only be punished with fine and not otherwise. The Supreme Court has to face similar difficulty in case of M.V. Javali vs. Mahajan

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Criminal Law Officers Comm. [Code Committee] of the Standing Comm. of Attorneys-General, Austl., Model Criminal Code: Chapter 2, General Principles of Criminal Responsibility Section 501 (1992).

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Borewell & Co. and Others15, The Company was found guilty under Section 276B read with 278B of The Income Tax Act, which gives mandatory punishment of at least 3 months, but the Court found itself in a fix about how to imprison a company. J. Mukhrjee said that, “Even though in view of the above provisions of Section 278B, a company can be prosecuted and punished for an offence committed under Section 276B the sentence of imprisonment which has got to be imposed there under cannot be imposed, it being a juristic person and we are of the opinion that the only harmonious construction that can be given to Section 276B is that the mandatory sentence of imprisonment and fine is to be imposed where it can be imposed namely on persons coming under categories (ii) and (iii) above, but where it cannot be imposed, namely on a company, fine will be the only punishment.”” “Therefore, the solution as of now is that a person is juristic person then punishment relating to imprisonment would not apply to it instead he will be liable for fine. The court can do one thing though, if it cannot imprison a corporate body but it can charge greater amount of fine in such cases in comparison to what it charges to the person who are capable of being imprisoned for the same offence.”

B. Mens rea “Another problem faced by the Judges was how to try a company for the offences where mens rea was an essential. How can a juristic person have a mental element to commit a crime? The trend was such that the company was only tried for cases where mens rea was not an essential and it was accepted that it cannot be tried for offences where mens rea is required.” “In the case of Motorola Inc. vs. Union of India16 the Bombay High Court quashed a proceeding against a corporation for alleged cheating, as it came to the conclusion 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 under section 420 of the IPC, but this idea of company not possessing mens rea came to an end Lord Denning’s view in the case of H.R.

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M.V. Javali vs. Mahajan Borewell & Co. and Others, (1997) 8 SCC 72. Motorola Inc. vs. Union of India, 2004 Cri LJ 1576.

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Bolton (engg.) Co. Ltd. vs. T.J. Graham17 was accepted that “A company may in many ways be likened to a human body. They have a brain and a nerve centre, which controls what they do. They also have hands, which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what they do. The state of mind of these managers is state of mind of company and it treated by law as such. So you will find that in case where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of company.”” “The concept of alter ego was evolved subsequently in India to tackle with the problem. The alter ego doctrine revolves around the concept of personification of the legal body. The Corporation is considered to be the alter ego of the individual. Therefore, the corporation can be rendered liable for the criminal act of the individual done in his scope of work. Mensrea of the individual is considered to be the mens rea of the corporation itself. In the case of The Assistant Commissioner, Assessment-II, Bangalore & Ors. vs. M/s. Velliappa Textiles Ltd. & Anr 18, the Supreme Court has held that, “Though, initially, it was supposed that Corporation could not be held liable criminally for offences where mens rea was requisite, the current judicial thinking appears to be that the mens rea of the person in-charge of the affairs of the Corporation, the alter ego, is liable to be extrapolated to the Corporation, enabling even an artificial person to be prosecuted for such an offence.”” “Thus, this doctrine of alter ego allowed the courts to frame corporate houses for the offences which had mens rea as an essential ingredient, and it is now less tiresome for the court to hold a corporation criminally liable.”

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H.R. Bolton (engg.) Co. Ltd. vs. T.J. Graham, [1957] 1 QB 159. The Assistant Commissioner, Assessment-II, Bangalore & Ors. vs. M/s. Velliappa Textiles Ltd. & Anr, (2003)11 SCC 405 18

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CORPORATE CRIMINAL LIABILITY: IS IT REALLY NECESSARY? “Time and again, the question has arisen about the need for corporate criminal liability. It is often asked whether we need to address the issue of “corporate criminals” or ‘criminal corporations”. There is no general correct answer to this question. Each case has to be carefully examined and then a decision has to be taken regarding the corporations liability.” “Critics argue that this doctrine is completely unnecessary on two grounds. Firstly they challenge the deterrent effect of fines and other sanctions against corporations on the grounds that it is not the corporations that commit crimes, it is the individuals who do and the second being that the retributive effect is borne by innocent shareholders (by decreasing the value of their shares) and consumers (by driving up the prices of commodities and services).” “The critics’ first objection is very simplistic in the fact that it doesn’t account for the labyrinthinian structure of corporations in today’s world which makes it highly impossible to pinpoint individual responsibility for any specific decision. Also, the existence of corporate criminal liability provides the top officers with a great incentive to supervise middle and lower level management very closely. The existence of individual liability would encourage a “don’t ask, don’t tell” kind of attitude from the top brass, thereby keeping themselves clear of all liability whilst reaping the profits from illegal acts.” “The second objection is that the cost of corporate criminal fines and sanctions is borne by shareholders and consumers, and this too seems baseless. Shareholders are well aware of the risks involved in investing in any venture and are seemingly happy when illegal acts bring them profits so it is only fair to expect them to bear a part of the brunt when those illegalities are discovered and duly sanctioned. As for the brunt borne by the consumers, it seems highly illogical that a sanctioned corporation would try and pass on the fine to them by raising prices of goods and services because that would only lead to consumers looking for alternate sources which would in turn lead to loss of profit and reduced viability of the company, and in some cases leading to irreparable harm that’d push the company down the slippery slope towards bankruptcy.”

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CORPORATE CRIMINAL LIABILITY IN INDIA “The issue of whether a company or a juristic person can be prosecuted for an offence for which the mandatory punishment prescribed is both imprisonment and fine has come up in several cases in India such as the cases of The Assistant Commissioner Assessment-II, Bangalore & Ors. v. Velliappa Textiles19 and State of Maharashtra v. Syndicate Transport20 wherein a ruling was given stating that the court cannot impose only a fine where the mandatory punishment laid down by the appropriate statute is both imprisonment and fine. The majority view is that the court should not deviate from the minimum prescribed punitive sanctions. If the court did prosecute for such offences and found the defendants guilty, it ran a massive risk of stultifying itself by not being able to impose an effective order by way of sentence.” “The doctrine of corporate criminal liability in India was made crystal clear in the recent groundbreaking judgement in 2005 of the Apex Court in the case of Standard Chartered Bank and Ors. etc. v. Directorate of Enforcement and Ors. Etc.21 that overruled all the previous views. This case was related to the now defunct Foreign Exchange Regulation Act (1973), otherwise known as FERA. The majority held that there is no immunity to the companies from prosecution merely because the prosecution is in respect of offences for which the punishment prescribed is mandatory imprisonment. As the company cannot be sentenced to imprisonment, the Court cannot impose that punishment, but when imprisonment and fine is the prescribed punishment the Court can impose the punishment of fine which could be enforced against the company. Such a discretion is to be read into the Section viz., S. 56 of Foreign Exchange Regulation Act (1973) (FERA) and Ss. 276-C and 278-B of Income-tax Act (1961) so far as the juristic person is concerned. Of course, the Court cannot exercise the same discretion as regards a natural person. As regards company, the Court can always impose a sentence of fine and the sentence of imprisonment can be ignored as it is impossible to be carried out in respect of a company. It cannot be said that, there is blanket immunity for any company from any prosecution for serious offences merely because the prosecution would ultimately entail a sentence of mandatory imprisonment. The bench by a majority of 3:2 held that a corporation can be punished and is

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TheAssistant Commissioner, Assessment-II, Bangalore & Ors. v. Velliappa Textiles, (2003)11 SCC 405 State of Maharashtra v. Syndicate Transport , AIR 1964 Bom 195 21 Standard Chartered Bank and Ors. etc. v. Directorate of Enforcement and Ors. Etc, AIR 2005 SC 2622 20

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criminally liable for offences for which the mandatory punishment is both imprisonment and fine. In case the company is found guilty, the sentence of imprisonment cannot be imposed on the company and then the sentence of fine is to be imposed and the court has got the judicial discretion to do so. This course is open only in the case where the company is found guilty but if a natural person is so found guilty, both sentence of imprisonment and fine are to be imposed on such person. This particular judgment in has further crystallized the Court’s interpretative power with regards to a penal statute, by departing from the traditional view and endorsing that for the punishment of the crime the court should go beyond the strict word, and not let offences go unpunished due to application of too technical an interpretation that is restrictive, strict and constricting to the very intent of the statute.” “If a corporate entity or juristic person is found to have breached the law, the Courts, though bound to impose the sentence prescribed under law, now have the discretion to impose the sentence of fine as a corporate entity cannot be subjected to imprisonment. However, if a natural person is found to have committed a crime, the sentence of imprisonment is still applicable. There is no blanket immunity for corporations just because prosecution would ultimately lead to the sentence of mandatory imprisonment.” “The judgment of the Supreme Court in Iridium India Telecom Ltd. v. Motorola Inc.22 on 20 October 2010 merely reiterated the principles laid down previously in the Standard Chartered Bank case. This was a case in which Iridium India Limited filed a criminal complaint against Motorola Inc. alleging offences under section 420 (cheating) read with section 120B (conspiracy) of the Indian Penal Code (IPC). The complaint alleged that Motorola Inc. had floated a private placement memorandum (PPM) to obtain funds/investments to finance the ‘Iridium project’. The project was represented as being “… the world’s first commercial system designed to provide global digital hand held telephone data … and it was intended to be a wireless communication system through a constellation of 66 satellites in low orbit to provide digital service to mobile phones and other subscriber equipment locally.”On the basis of the information contained in and representations made through the PPM, several financial institutions invested in the project. The project turned out to be unviable and resulted in massive

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Iridium India Telecom Ltd. v. Motorola Inc, 2004(1)Mh.L.J. 532

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losses to the investors which was alleged by Iridium India Limited to have been caused as a result of Motorola Inc.’s false representations in the PPM.” “M.J. Antony, while commenting on the case, said the following23: The question of punishing a corporation came up recently in the Supreme Court in a criminal case filed by Iridium India Telecom Ltd against Motorola Incorporated. The allegations were cheating and criminal conspiracy. The magistrate in Pune started proceedings against Motorola. It moved the Bombay High Court against the prosecution. The high court quashed the proceedings giving several reasons, one of them being that a corporation was incapable of committing the offence of cheating as it has no mind. According to the high court, although a company can be a victim of deception, it cannot be the perpetrator of deception. Only a natural person is capable of having a guilty mind to commit an offence.” “However, the Supreme Court set aside the high court’s finding and asserted that a corporate body can be prosecuted for cheating and conspiracy under the Indian Penal Code. The offences for which companies can be criminally prosecuted are not limited only to the specific provisions made in the Income Tax Act, the Essential Commodities Act, and the Prevention of Food Adulteration Act. Several other statutes also make a company liable for prosecution, conviction and sentence.” “The court allowed the prosecution to go on, stating that companies and corporate houses can no longer claim immunity from criminal prosecution on the ground that they are incapable of possessing the necessary mens rea for the commission of criminal offences. The legal position in England and the United States has now crystallised to leave no manner of doubt that a corporation would be liable for crimes of intent. This is the position all over the world where rule of law supreme.”

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M J Antony: Dissecting Body and Mind, November 17, 2010 , available at http://www.businessstandard.com/article/opinion/m-j-antony-dissecting-body-and-mind-110111700038_1.html, last visited on 28/03/2018.

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RECOMMENDATIONS “The 47th law commission report has recommended various solutions to deal with such problem: 1. Some discretion is to be given to judges to impose penalties as they deem fit for the case. 2. Para 8(3) of the47th law commission report recommended that, “in every case in which the offence is punishable with imprisonment only or with imprisonment and fine, and the offender is the corporation, it shall be competent to the court to sentence such offender to fine only.” 

In every case in which the offence 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.”

“Unfortunately, the legislatures have ignored these recommendations by law commission and failed to incorporate these provisionS, and thus the problem is where it was earlier. It is still very difficult for court to punish the offenders. Therefore, it can be said that even though Corporate Crimes are much in vogue today, but the methods to tackle them are still in their pre-mature stage.”

CONCLUSION “Corporate criminal liability is steadily gaining importance in the spheres of social concern such as consumer protection, environment law and occupational health and safety norms. Till the recent past, corporate governance wasn’t given much thought, but with the emergence of this particular doctrine that focuses on organizational blameworthiness and accountability of superiors, this mindset is changing rather rapidly. Issues regarding the operation of corporations are now being closely linked to their governance so as to avoid potentially triggering criminal liability.” “As Lord Reid so rightly said, 14

A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these; it must act through a living person, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his act is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persons of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent. In that case the liability of the company can only be a statutory or vicarious liability.”24 “Over time, Courts have ruled that corporations too can have mens rea, which is a vital component for the commission of a crime. This ruling was delivered in India in the case of Iridium India Telecom Ltd. v. Motorola Incorporated &Ors.25 by the Supreme Court, thereby establishing that it was possible for a corporation to be party to a conspiracy. Indian social legislations like the Essential Food Commodities Act 1955, the Prevention of Food Adulteration Act 1954, the Negotiable Instruments Act 1881, the Environment (Protection) Act 1986 state that at the time of the commission of the offence, the company, along with every person in its employment, shall be deemed to be liable for that offence and if pronounced guilty, they could be punished with not only a fine, but also with imprisonment.” “Thus it has now become possible to hold a corporation criminally liable for acts committed through their agents and employees, and attributemens rea to them. In this day and age of economic advancement where corporations have a say in almost every aspect of life, such a principle has assumed paramount importance in corporate governance.”

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Tesco Supermarkets Limited v. Nattrass [1971] UKHL 1 Iridium India Telecom Ltd. v. Motorola Incorporated &Ors 2004(1)Mh.L.J. 532

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BIBLIOGRAPHY 

http://corporatelawreporter.com/2014/01/02/corporate-criminal-liability-indianperspective/

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https://corporate.cyrilamarchandblogs.com/tag/corporate-criminal-liability/

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http://www.legalserviceindia.com/articles/cor_dr.htm

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http://lex-warrier.in/2014/02/analysis-corporate-criminal-liability-india/

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https://www.lawctopus.com/academike/corporate-criminal-liability/

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https://blog.ipleaders.in/corporate-criminal-liability-in-india/

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http://www.nishithdesai.com/information/research-and-articles/nda-hotline/ndahotline-single-view/article/corporate-criminal-liability-principles-of-attribution-andvicarious-liabilityclarified.html?no_cache=1&cHash=0ddbd391c3e0c61faf498f7c998f4c1a

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https://www.lawteacher.net/free-law-essays/business-law/a-note-on-corporatecriminal-liability-business-law-essay.php

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http://www.legalservicesindia.com/article/2537/Evolution-of-Corporate-CriminalLiability-In-India.html

BOOKSPrinciples of Criminal Liability in India, Cases and Materials By Dr. Kumar Askand Pandey.

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