Corporate Criminal Liability & Its Implications

6th March, 2024 - 10:32 am Categories: Company Act 0 Comments

Introduction

Corporate criminal liability (CCL) refers to the commission of a crime by either a person or a group of persons who, in the pursuit of a shared objective or for the aim of financial gain in the context of their professional activities, engage in actions or omissions that are prohibited by the law. These actions or omissions are carried out with a culpable state of mind and are intended to benefit either the corporation itself or a person who is part of the group of people involved. In earlier times, when the notion of corporate liability was absent, corporations were not held accountable for any criminal actions. This was due to the fact that corporations are considered artificial legal entities and therefore cannot be subject to imprisonment. Additionally, as corporations are not natural persons, the theory of mens-rea, or malicious intent, was not applicable.[1]

Corporate criminal liability plays a very important role in the societal, legal, and economic arena. Through this concept, corporations can be held liable for the wrongs committed by the persons working for the corporation. Thus, CCL guarantees that the corporation does not evade its liability because of being an artificial being or for not being a natural person. The absence of the notion of corporate criminal liability could potentially enable firms to elude accountability for their acts, depriving victims of any means of seeking a remedy.[2] Further, CCL serves the purpose of creating deterrence with respect to corporations who might indulge in wrongdoings. This would motivate the agents of the corporations to not commit any crime on behalf of the corporation. Also, it motivates the corporation to implement programs related to compliance with the legal and moral rules and motivates them to follow the laws which results in reduced crime. This in turn safeguards the society from the wrongdoing that might have been committed by the corporation such as environmental crimes, economic frauds, etc. The liability imposed also includes an obligation to mitigate the effects of the crime by providing certain compensation to the people who are affected because of the crime.

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Previously, there was hesitancy to hold companies accountable for their actions. However, the initial occurrence of implementing corporate criminal culpability was observed inside the English Courts in 1842, wherein a corporation was penalized for its failure to comply with its obligation.[3] The concept of corporate criminality liability emerged from the legal idea in common law that masters are held responsible for the illegal actions of their slaves, particularly in cases involving public nuisance. This notion is commonly known as vicarious liability. The development of this notion into its complete manifestation as corporate criminal liability may be attributed mostly to the interpretation of common law by the judiciary and the prevailing statute laws. Nevertheless, the development of CCL was comparatively more gradual than that of civil responsibility for corporations. In civil law jurisdictions, the narrow judicial interpretation of statutes has hindered the development of CCL.[4]

The concept of corporate criminal liability is based on several principles, which paved the way to the concept that it is currently. These principles are identification principle that originated in England and it asserts that the mental state and actions of individuals doing the company’s business should be imputed and assigned to the corporation. The primary rationale behind this argument depends on the notion that a corporation, as a fictional entity, has the capacity for independent thought. Another principle is related to the concept of attribution, which is very similar to the identification principle.[5] In this, the actions of the corporation are attributed to the person or group of persons. This principle was discussed in the case of Iridium India Telecom Ltd. v. Motorola Incorporated & Ors.[6] Which will be deliberated ahead in the paper.

Then there is the doctrine of Respondeat Superior that developed in the American courts and is similar to the doctrine of vicarious liability. According to this, for the imposition of liability on the corporation, two requirements are to be fulfilled. These are the agent must have acted within the scope of his employment and the corporation should have authorized the agent to do it. However, sometimes, the liability is imposed in cases where the agent was asked expressly not to do certain acts. The second requirement is that the benefit was intended to the corporation and the act should not have been in contradiction to the interests of the corporation. However, in CCL, these requirements are not very stringent.[7]

The concept of CCL in the USA was different from that of India as a standard was proposed by the name of corporate ethos standard in the USA for the identification and imposition of criminal intent. The proposition posited by this standard is that a corporate entity possesses its own distinct personality and identity, sometimes referred to as its “ethos.” Consequently, unless it can be demonstrated that the corporate ethos directly influenced the perpetrator to engage in illegal conduct, the corporation will not be deemed liable.[8] Subsequently, it can be inferred that the illegal conduct or demeanor exhibited by a corporation is consistent with the policies, values, and goals of the said corporation. The aforementioned methodology represents a noteworthy advancement within the realm of corporate wrongdoing, as it signifies a transition in the attribution of responsibility from individuals to the collective values and principles of the organization. In India, the imposition of criminal liability on the corporate firm does not derive its power only from the Companies Act but also from other laws such as the Negotiable Instruments Act, the Income Tax Act, and the Prevention of Corruption Act.[9]

Historically, the Indian legal system was not amenable to the idea of imposition of criminal liability on the corporates. This was mainly because of the legal maxim, which is actus non facit reum which basically means that the liability can be imposed if an act is committed with a malafide intention and the corporation being an artificial entity is not capable of having a malafide intention or a criminal mind which is present in natural persons.[10] There have been case laws that delved into this domain. In the case of AK Khosla v. S. Venkatesan[11], two corporate firms were accused of indulging in fraudulent act. The Court discussed the issue of not imposing criminal liability. Later on, the Law Commission in its 41^st report suggested certain changes in laws regarding paying fines to be the only punishment in cases where the corporations are accused of the crime.[12] However, the bill could not be passed in the parliament.

In recent years, India has experienced an increase in corporate fraud because of its economic liberalization efforts. These frauds have had significant consequences for the organizations involved, their employees, and the country’s international reputation. The behavior of corporations may result in extensive damage, and it is necessary to re-evaluate the standards outlined in the Companies Act of 2013, which holds officers accountable for their positions. The burden of proof is higher under these standards, requiring evidence of knowledge, specific actions, or omissions that demonstrate awareness of a crime, even in the absence of direct involvement, specific role, or intent. This burden of proof will play a crucial role in determining criminal liability. As the concept of corporate criminal liability keeps evolving, lawmakers and the judiciary must strike a balance between deterrence and imposing strict liability on both the individuals responsible and the corporation as a whole.[13]

Additionally, in another case of Standard Chartered Bank & Ors. v. Directorate of Enforcement,[14] the position took a change in terms of imposing liability. The corporation was alleged to have violated the provisions of the Foreign Exchange Regulation Act. The Court did away from doing the literal interpretation of the law and observed that if the corporation is liable and both the punishments of imposition of fine and imprisonment are possible then the fine can be levied. The Court also held that the laws neither promote nor intend to allow the corporations to run away from criminal liability.[15]

The Supreme Court ruling in the Sunil Bharati Mittal v. CBI determined that in India, the principle of vicarious liability does not apply to the enforcement of criminal liability unless there is a particular and explicit provision in the legislation that imposes vicarious liability for the conduct of a crime. In order to apply the principles of strict liability, absolute liability, and imputed liability, it is imperative to show a connection between the individual responsible for causing damage and the corporate entity involved. The utilization of the “controlling and willful mind” test is employed in this context; nevertheless, its applicability may not be universally suitable. Consequently, additional tests such as the benefit test and due diligence test are employed.[16]

Then, in the case of Iridium India Telecom Ltd. v. Motorola Incorporated & Ors.[17], the Court held that a corporation can be held liable for the crime committed by the agent during the scope of the business of the corporation. This contention depends on the understanding that the corporation can be considered an entity that can think and act through its agent. The Court also observed that the principle of identification is in relation to the facts of the case and this principle was imported from the common law.[18] Hence, there is no issue in imposing criminal liability on the corporation for the crime that was committed by the employee or the agent.

Author: Anas Khan Rayeen, A Studet at National Law University Delhi, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] Ku Melissa & Lee Pepper, Corporate Criminal Liability, U.S. Department of Justice, American Criminal Law Review, Vol. 47 Iss. 4 (2008).

[2] Stephen F. Smith, Corporate Criminal Liability: End it, Journal of Corporation Law.

[3] Chip Pitts, Corporate Criminal Liability, Encyclopedia of Criminology and Criminal Justice (2014).

[4] Id.

[5] Corporate Criminal Liability: A Discussion Paper, Law Commission of UK (June 2021).

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

[7] P.J. Henning, Corporate Criminal Liability and the Potential for Rehabilitation, Law Faculty Research Publications, Wayne State University (January 2009).

[8] Kunal Kaushik, A Critical Study on Corporate Criminal Liability with Special Reference to US and Indian Laws.

[9] Id.

[10] M. Arshiya Thansum & M. Kannappan, A Critical Study on Corporate Criminal Liability with Reference to Indian Case Laws, International Journal of Pure and Applied Mathematics Volume 119 No. 17, Pp. 681- 692 (2018).

[11] AK Khosla v. S. Venkatesan (1992) 1 CALLT 77 HC.

[12] V. Vijaya Lakshmi, Corporate Criminal Liability – A Critical Legal Study, Acclaims Vol. 5 (January 2019).

[13] Pradeep Kumar Singh, Corporate Criminal Liability in India, Athens Journal of Law (2017).

[14] Standard Chartered Bank & Ors. v. Directorate of Enforcement AIR 2005 SC 2622.

[15] Id.

[16] Sunil Bharti Mittal v. CBI 2005 SCC (Cri) 961.

[17] Supra note 7.

[18] Supre note 11.