Corporate Criminal Liability In India

2nd July, 2024 - 6:57 am Categories: Corporate Law 0 Comments

Introduction

Legally established as a separate entity from its shareholders, a corporation possesses the right to issue stocks and has an enduring existence, as stated in Black’s Law Dictionary. Although corporations are expected to align with shareholders’ intentions, situations can arise where the company’s actions prioritize the personal gains of select top executives over the shareholders’ preferences.

While no single crime theory is flawless, legal cases involve a confrontation between the accused individual and the state. The actions that the accused claims to have committed are viewed as offenses against society as a whole, prompting state intervention. Consider situations where crimes involving substantial amounts of currency occur, defrauding numerous shareholders. Among these shareholders, many had entrusted their life savings and faith in the company, relying on regulatory safeguards to protect in times of crisis. Unfortunately, this safety net does not always materialize.

Criminal Liability for Corporate Crimes is not a new concept. “Corporate Crimes are a significant sort of white-collar crime perpetrated,” according to the 47th Law Commission Report. It’s also difficult to punish the creature since it lacks a ‘mind’ capable of criminal purpose, as well as a physical body to punish.^[1]

India has seen its fair share of Big Corporate Crimes, three Cases are chosen and explained below with the scope of damage which was caused by these crimes.

The Big Bull Scam or the Securities Scam or Harshad Mehta Scam:

In April 1992, the first reports came hinting at a shortfall on in the Government Securities, held by the State Bank of India. Investigations after a month revealed the true scope: Misappropriation of Rs. 35,00,00,00,000.^[2] In the ensuing months, an investigation was set up, and in two months after discovery of the scam, the stock market plummeted by 40 percent, and more than Rs. 10,00,00,00,00,000 were lost.^[3] The banks were highly regulated back then banks had to invest a threshold amount in government securities, as there was a weekly cut-off. The smaller banks had to buy surplus securities from bigger banks. And for such transactions, a broker was required. And a Bank Receipt was issued.

Harshad Mehta in 1984 started a firm named Grow More Research and Asset Management. He then started heavily investing in Associated Cement Company (ACC), and the share price jumped from Rs. 200 to Rs. 9000. Harshad Mehta found a way to issue Bank Receipts.

Satyam Computers Ltd. Scam, 2009

The fraud case is quite well christened as Enron of India in Forbes’s Article, ‘India’s Enron’. And for valid reasons, like, the Enron Scam, The Liabilities of the company were understated (Rs. 1,230 Crore worth of liabilities were understated), and its assets overstated (Assets worth Rs. 490 Crore were overstated).

Enron’s Chairman, Founder, and CEO Kenneth Lay, used an ‘ambitious’ and very flawed accounting method to inflate the projections of the company’s profit by estimating the next year’s profit. Similarly, the Satyam Computers manipulated the books of account by:

1. A fake cash balance of more than Rs. 5000 crores in Satyam’s Balance Sheet.
2. An interest of Rs. 376 crores was never shown in the company’s balance sheet.

Stock Plummeted because investors reacted sharply and dumped shares by 78 percent to Rs. 39.98 on The Bombay Stock Exchange. A staggering loss of Rs. 100 billion in Satyam in market capitalization. And like the employees of Enron and the employees of Satyam Computers were stranded financially, legally, morally, and socially. Sustained harm to the Indian Market and IT sector was dealt with, shaking the faith of both foreign and domestic investors. The Chairman, The Chief Executive Officer, The Chief Finance Officer, The Key Managerial Personnel, and the Managing Director were arrested. Also, the Partners of the audit firm were arrested.^[4]

“It is to be noted that subsections 1,2 and 3 are just symptoms of the major problem, and that problem is the frequency and the scale of defaults in the country, these incidents are therefore not cherry-picked but are the best way to see the bigger picture. And unfortunately, it’s not the case that there were no such cases in the contemporary times of writing the paper.  Yes, Bank Scam and Punjab National Bank Scam were two cases that occurred in 2018 and 2019.”

[Image Sources: Shutterstock]

LITERATURE REVIEW

1. A Critical Study On Corporate Criminal Liability with Special Reference to US and Indian Laws by Kunal Kaushik^[5]– This research paper covers corporate criminal liability interconnected with various provisions of the Indian Penal Code. The research paper consists of various provisions of IPC which are used to determine the liabilities of corporate crimes. It also states the practical problems which are faced by corporations nowadays and the punishment for fraud under the Companies Act, of 2013.
2. Corporate Criminal Liability In India by Pradeep Kumar Singh^[6]– This research paper depicts the impact of corporate crimes on our economy and the fallacies in the system due to which giant corporations benefit by doing such huge crimes. It tells us the causes of corporate crimes in India and the theories given by the famous Edwin H. Sutherland and Robert Merton. At last, it states certain provisions of the Indian Penal Code which defines punishments with the concluding remarks.  
3. Corporate Criminal Liability- A Critical Legal Study by V. Vijaya Lakshmi- This research paper discusses the situation of Criminal liability in Multinational corporations as they play a massive role in most aspects of human life today. It describes the concept of corporate criminal liability and about the corporation.

AIM OF THE RESEARCH PAPER

This paper aims to recognise India’s current position on corporate criminal liability, as well as how court rulings conflict with existing law restrictions. In addition, it offer an overview of the present state of corporate criminal responsibility in the international scenario and discusses some of the main cases and scam in India.

• What is India’s current position on the criminal liability of corporations?
• What is the international stand on the criminal liability of corporations?
• Can the criminal liability of a corporation be determined by imprisonment?

Criminal Liability of Corporations in India

“In India, all criminal obligations are governed by the Indian Penal Code (IPC), enacted in 1860. In the event of a corporation’s criminal responsibility, this legislation should be considered. Corporations have an important role not only in the creation and management of businesses but also in the everyday lives of most people. As a result, most current criminal law systems provide for the potential of holding a company legally accountable for committing a crime. From its beginnings, the theory of corporation criminal responsibility has evolved into a near-universal rule. The necessity for industrial growth in India has resulted in the building of several plants and factories by both indigenous and foreign enterprises. Many of these businesses participate in hazardous or intrinsically dangerous operations, posing a risk to the lives, health, and safety of those who work in the plant or live in the surrounding region. Even though the operation of such industries and plants is governed by a total of 614 regulations in our nation, there is no particular legislation in place to provide compensation and damages to outsiders who may be injured as a result of an industrial disaster.”

• “Section 11 in The Indian Penal Code “Person”.—The word “person” includes any Company or Association or body of persons, whether incorporated or not.
• “Section 405. Criminal breach of trust.—Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits “criminal breach of trust””
• Section 406. Punishment for criminal breach of trust.—Whoever commits a criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, with fine, or with both.
• “Section 415. Cheating.—Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to “cheat”.””

“The legislature should take appropriate measures, such as enacting additional penalties, to curtail the illegal acts of companies in the country. The following suggestions can be implemented:

• In addition to the fine, the courts should be empowered to issue a supplemental order penalizing the corporation.
• Stricter penalties, such as the dissolution of a corporation. In such circumstances, the courts should be able to monitor whether the penalized corporation is reincorporated.
• When dealing with serious offenses that have a negative impact on society, social sanctions should be given.
• The courts should be able to appoint technical and professional experts to make assessment reports on the corporation if the situation requires.
• International networks between countries should act in such a way that criminals do not escape liability because of their connections with other countries.”

India intends to battle widespread corruption in its administration as well as large-scale commercial issues. To do this, the emphasis is shifting to holding businesses liable for corruption and bribery, rather than individual directors or agents. However, India’s current legal system falls short of keeping up with these changes, frequently resulting in minor sanctions for firms rather than criminal culpability. More strong measures are needed to demonstrate the criminal liability of Indian firms to prevent this issue from spreading.

The Indian Penal Code, though sharing similarities with English laws due to its colonial origins, was designed primarily to facilitate British interests during that era. The laws were tailored to benefit industries, especially those owned by the British Crown, which led to limited liability for enterprises. These laws were relevant for late nineteenth-century Britain and colonial India, aiming to promote industrial growth and administration. However, the current global landscape demands updated laws that ensure the security of all citizens. The Indian legal system has demonstrated its adaptability in the past, as seen with the introduction of the Absolute Liability principle in the Oleum Gas Leak Case. Similar reforms are now crucial in the realm of Criminal Law to better suit India’s position as a rising world power and protect its citizens effectively.

• Law Commission of India, Forty-Seventh Report on the trial and punishment of social and economic offenses, 1972.
• Dr Sheo Nandan Pandey, India’s Tryst with Corruption Menace, Institute fur Strategies-​ Politik-​ Sicherheits- ​und Wirtschaftsberatung (ISPSW)
• Amna Niazi and Muhammad Ali, The Debacle of Satyam Computers Ltd: A Case Study from Management’s Perspective, Universal Journal of Industrial and Business Management 3(2), Page: 58-65. (2015)
• Kumar Saurav, Corporate Criminal Liability – White Collar Crime, International Journal of Research in Humanities and Social Sciences, Vol 2 Issue: 2 February 2014.
• Bernhard Lötscher and Marzia Schilleci, Corporate Criminal Liability, URL: https://cms.law/en/che/publication/corporate-liability-for-lack-of-corruption-prevention accessed at 14:22 AM on 25^th August 2022.
• Arshiya Thansum and M. Kannappan, A critical study on corporate criminal liability concerning Indian case laws, International Journal of Pure and Applied Mathematics, Vol 119 No. 17 (2018).

Author: Ojas Jain, A Student at Symbiosis Law School, Pune, 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]Law Commission of India, Forty-Seventh Report on The Trial and Punishment of Social and Economic Offences, Chapter-8, Corporations and their officers, page 61.

[2] Samir K. Barua & Jayanth R. Varma, Securities Scam: Genesis, Mechanics and Impact, Vikalpa, January-March (1993, 18(1), 3-12), Introduction, Page-2.

[3] Ibid.

[4] •Amna Niazi and Muhammad Ali, The Debacle of Satyam Computers Ltd: A Case Study from Management’s Perspective, Universal Journal of Industrial and Business Management 3(2), Page: 60-61.

[5] Kunal Kaushik, A Critical Study On Corporate Criminal Liability with Special Reference to US and Indian Laws by Kunal Kaushik, 1-7, (2020)

[6] Corporate Criminal Liability In India by Pradeep Kumar Singh, Athens Journal of Law, Vol X, No. Y, 1-17, (2021)