COMPANY LAW – II(I INTERNAL)RESEARCH PAPERTOPIC: “Criminal Liability of Directors in Companies”Word Count: NAME:ASHUTOSH PATILDIVISION:APRN:15010125072YEAR:III YEAR Abstract”Acorporation is not indictable but the particular members of it are.”1- LordHolt CJIn this day and age of scams, crimeby corporate entities is on the rise and poses a serious threat to thefunctioning of society. The scale of crime may be extraordinary owing to themagnitude and reach of a corporation as opposed to an individual attempting tocommit a similar offence. Since a company is an artificial entity, it isimportant to ascertain whether it can possess guilt for such an offencecommitted. As a general rule, Corporations were not held liable for criminaloffences due to the absence of Mens Reaor the intention to commit the offence and inability to award imprisonment orarrest, etc. White-collar crime has been on the rise, as technology has seenimprovement. This has led to an increase in insider trading, corporate fraud aswell as manipulation of balance sheets etc., authorized by human minds.
However, with the advent of theCompanies Act, corporations are no longer immune. Directors of a company can beprosecuted and held criminally liable, along with the company. There arose aneed for creating legislations to regulate the manner in which companiesfunction and the liability of the directors regarding the act done by thecompany on its employees, environment as well as the general public.
This paperattempts to portray the overall journey of corporate criminal liabilities andgives suggestions for a fair system of doing business in the world. Introduction”Successcan breed all kinds of other behaviour and cause companies to behave a certainway that isn’t necessarily the ingredients for achieving more success. Forinstance, with success comes arrogance, and that’s typically the death ofsuccess.”2- BobIgerWiththe turn of the 19th Century there was a tectonic shift in the rules applicableto corporate criminal liability as well as the liability of the members of acompany.3 The Courts heldcorporations liable for the actions of their agents, acknowledging that doingotherwise would lead to “incongruous” results.4 The concept of “vicariousliability” became the precursor to holding corporations liable for actscommitted by the members and employees of the company. Thejurisprudence with respect to corporate criminal liability has developed a longway.
The initial ideology was that a corporation cannot be held criminallyliable since it is not a natural persona and cannot: (1)Have a Mens Rea;(2)Neither be indicted nor tried in person; (3)Be punished corporally5;Therefore,criminal acts of a corporation would be ultra vires and thus void6. Now the stance is that thata corporation can be guilty of most, if not all, crimes. The world has nowmoved to a time where a corporation can be held criminally liable for offensesas grave as manslaughter.7 The progress of the timeshas led to the implementation of the moral code upon companies and the law hasrecognized effective means of holding corporations liable.8 Interestingly,the civil law systems (Germany) never faced this problem. The civil law systemalways made a provision for punishment of both corporations and individuals tobe distinct9as a result, corporations were always held criminally liable, even before the industrialrevolution10,which is when the doctrine of corporate criminal liability in the common lawdeveloped. Intentof a corporation in the commission of a crime can be determined through acollective Mens Rea of the employees.
The company will be liable for theactions of an employee, irrespective of rank11, as long as the act wascommitted by the employee within the scope of employment. The agent, acting onbehalf of the corporation, should possess the intent to bestow a benefit upon thecorporation through an illegal act. There are only two situations in whichcorporate criminal liability cannot be imposed12: Ø When crimes cannot bepunished by fines, which is the primary means for punishing a corporationØ When the crime, by itsnature cannot be committed by a corporation (e.g. rape and murder). Inthe United States, in cases of strict liability, the intent of the agentbecomes irrelevant. Post the EnronScandal; the standards have been redefined through the Sarbanes–Oxley Act of 200213 which provides for aharsher punishment in cases of fraud and other corporate crimes.
Developmentof Corporate Criminal Liability in IndiaUntilrecently, the Indian Legal System, did not recognize the existence of corporatecriminal liability, taking after the Colonial system which it has been breedfrom. Therewas a great emphasis placed on the requirement of Mens Rea and imprisonment toenforce liability for crimes as a result of which corporations couldn’t becriminally penalized.14. This position wasreflected in A.K. Khosla v. T.
S.Venkatesan15.Two companies were charged with fraud under the Indian Penal Code.
They escapedliability, owing to the narrow understanding of criminal law and liability ofcorporations. Similarly,in Kalpanath Rai v. State16 the Supreme Court heldthat a company could not be charged under Section 3(4) of the Terrorists and Disruptive ActivitiesPrevention Act since the law provided for an implicit Mens Rea requirement,which remained unfulfilled in the case of a corporation.
Therequirement of Mens Rea was perceived as a core factor and as a result, holdinga company liable for its criminal actions became a tedious task. Unless the lawexplicitly excluded the existence of Mens Rea, a corporation could not be held accountablefor the offence. he Bombay High Court expressed similar notions in the case of Motorola Inc. v. UOI17, where the former was barredfrom being charged under Section 420 of the Indian Penal Code for cheating. However,with an increase in crimes being committed by corporations and companies, courtscould not continue to take such a stance. As a result, in 2005, in Standard Chartered Bank and Ors v/s Directorateof Enforcement18,the Supreme Court held that corporations could be held guilty of crimescommitted and since a corporation cannot be imprisoned, punishment will be in theform of fines.
Themost recent development with regards to the same was in 2011 when in the case ofIridium v. Motorola19 the Supreme Court ofIndia held that a company could be held liable for statutory and common lawoffenses, including any offences requiring Mens Rea. Thus, the company was heldliable for cheating and criminal conspiracy on account of alleged false representationsmade by its officers, who were considered to be the alter ego of the Company. Thecourt reached this decision, following the developments in the USA and UK. The courtalso took into account the changing developments in the field of business and technologywhich were fast-moving and creating more opportunity for people to defraud the lawand get away with criminal activities. Role of themembers of a company in corporate crimes (with Case Laws)Vicarious liabilityas a concept of law has been with us since the development of the traditionaldoctrine of tort law relating to the liability of employers. An employer isliable for the torts committed by his employee within the course of hisemployment.
Likewise, a principal is liable for the torts committed by hisagent within the scope of the agency.Recently,the Supreme Court in Iridium IndiaTelecom Ltd. v Motorola Inc.20, considered the issue of acompany being criminally responsible for the actions of its employees. InIridium, Motorola sold a technologyproduct to Iridium that was accompanied by assertions and promises by Motorolathe allegedly turned out to befalse. Iridium brought a case of cheating against Motorola. The case was brought not against Motorola’semployees but against Motorola itself.
Under the provisions of the Indian Penal Code, cheating requiresan intention to deceive. Motorola argued that a corporate body, being an artificial person, is notcapable of a mental state and therefore cannot be held criminally liable for offences such as cheating.Motorola’s arguments were rejected by the Supreme Court after it considered the modern approach tothe problem of corporate criminal liability in the English courts. Of particular relevance to the discussionin this essay is the Supreme Court’s reference to the House of Lords decision in Tesco Supermarkets Ltd. v Nattrass21 where it was held that,in the absence of a specificstatutory or common law exception, the principle of corporate criminalliability was not based on thevicarious liability of an employer for the acts of its agents and employees.
Instead it was based on the conceptof attribution. A company cannot think and act on its own as it is a juristicpersonality. It thinks and actsthrough certain of its employees. In other words, the mental states and actionsof its employees are attributed tothe company. This is a legal fictionbut a necessary legal fiction in order for the separate legal personality ofthe company to sustain itself over aperiod of time. Otherwise, the company would not be able to sign contracts, acquire property, negotiatewith business partners, sue and be sued and make public disclosures and statements.
It follows from Tesco Supermarkets that corporate criminal liability isnot a species of vicarious liability but is a species of attribution of naturalactions and states of minds to artificial entities. Liability of corporate officers onthe basis of attributionTheactions and mental states of a company’s directors are attributed to thecompany such that the actions and the mental states of the companies’ directorsare deemed to be the actions and the mental states of the companies. Can thereverse be true? Suppose a company (through its employees) commits actions thathave criminal consequences.
Can the directors of the company be attributedthese actions such that they can be held responsible for the criminalconsequences?Thisaspect of vicarious criminal liability was in issue in the recent Supreme Courtdecision in Sunil Bharti Mittal v Central Bureau of Investigation.22 The government issuedtelecommunication licences to a number of companies. The license process cameunder scrutiny for certain irregularities (related to bribery of publicofficials) as a result of which a criminal investigation was launched into theactions of various companies. One of these companies was Bharti Cellular Ltd.(BCL). The special court investigating the licensing irregularities decided toattribute the actions of Bharti Cellular Ltd.
to Sunil Bharti Mittal, itsChairman cum Managing Director, and made him an accused in them proceedings.The special court’s directions to make the director of BCL the accused waschallenged in the Supreme Court as a mistake of law. The Supreme Court held thatwithout statutory backing, the persons in charge of a company cannot be heldcriminally liable for the actions of a company. The court was firm in applyingthe proposition that there is no special vicariously liability in criminal lawwithout a statutory exceptions in this regard.Onemight quibble with Bharti Cellular’s refusal to attribute the company’s actionsto the directing minds of the company as the Supreme Court had no suchcompunctions, when, in Iridium, the court extended the actions of the directingminds of a company to the company itself, and held that the company can be heldcriminally liable by attribution.
One might argue that instead of the postIridium one way attribution, Indian jurisprudence needs a two way attributionbetween the company and persons in charge of the company to fully guarantee thereach of the criminal law. However, there are some significant problems with atwo way attribution of liability. The juristic basis for the attribution of theactions and mental states of the directing minds to their company is that thecompany cannot act otherwise. The legal fiction of a corporate person hasnecessitated another legal fiction of attribution for otherwise the first legalfiction would be meaningless. Nosuch necessity arises in the case of the actions of the company beingattributed to its directing minds. The directing minds are capable of thinkingand acting on their own and do not need attribution as a matter of necessity.
The best justification of the Indian Supreme Court’s decision is thatattribution is not the appropriate mechanism of imposition of liability inorder to hold the directing minds responsible for the actions of their company.Acne Markets Inc. case in the UnitedStatesInthe United States, the courts have taken a much more stringent line towardspersons in charge of companies that commit offences. In United States v Park23, the United StatesSupreme Court considered the case of Acme Markets Inc.
(Acme). Acme was a foodchain that operated throughout the United States. With an employee populationof thirty thousand and several hundred stores, its business operations werelarge and complex.
Acme’s President, Mr. Park, coordinated the business of thecompany through several senior delegates. The US federal government detected arodent infestation in some of Acme’s warehouses and warned Mr. Park ofpotential legal liability arising out of the unhygienic conditions in whichAcme stored its food. Mr. Park conferred with his legal team and referred thewarehouse hygiene problem to his delegates. When the rodent infestation problemcontinued, the federal government sued both Acme and Mr.
Park under a federallegislation that made liable any person who trades in adulterated food. TheU.S. Supreme Court stated that a person who has a responsible relationship to acorporate activity that leads to criminal liability is also liable under therelevant legislation. The liability of the responsible corporate officer is notvicarious liability: it is a species of primary liability. The liability arisesout of a voluntary assumption of responsibility coupled with a failure todischarge the liability and resultant harm. In this respect, the liability ofthe responsible corporate officer is akin to criminal negligence.
It is interestingthat a statutory offence has been converted, through prosecutorial zeal andjudicial interpretation, into an offence similar to criminal negligence.Vicarious criminal liability for thedirecting mindsVicariousliability (referred to in this essay as special vicarious liability) is anotherlegal option to hold the directing minds responsible for the actions of theircompany. Special vicarious liability does not require attribution; what itrequires is a prescribed connection between the acts (with or without arelevant mental state) of a person or an entity (the employees of a company orthe company itself) and the directing minds of the company. The prescribedconnection must be a legal requirement emanating from common law or statutorylaw. The most prominent example in theIndian context is the Income Tax Act, 1961 (ITA), and expresses the model thatis followed in a plethora of Indian legislation concerning the prosecution ofeconomic offences. TheITA prescribes criminal consequences for various kinds of tax offencescommitted by persons. A person has been defined in the ITA as including acompany.
Therefore, companies have been statutorily recognised as entitiescapable of committee criminal offences. The manner in which such companieswould be recognised as committing these offences have not been specified in theITA. However, as the court decisions analysed above have shown, a statutoryregime for attributing natural actions to companies is not needed. The commonlaw, both in England and in India, attributes the minds and acts of the peoplein charge of the company’s affairs (such as its managing director and wholetime directors) to the company itself.The Doctrine of direct Liability(Theory of corporate organs): Thisdoctrine, which was specifically developed for the purpose of imposingliability on corporations, seeks, in fact, to imitate the imposition ofcriminal liability on human beings.
The direct doctrine relies on the notion ofpersonification of the legal body. It identifies actions and thought patternsof certain individuals within the corporation called corporate organs who actwithin the scope of their authority and on behalf of the corporate body, as thebehaviour of the legal body itself. Hence, the name of the doctrine: the theoryof corporate organs or the alter ego doctrine referring to these individuals asthe embodiment of the legal body. In its wake corporation can be renderedcriminally liable for the very perpetration of the offences, resembling theliability imposed on a human perpetrator, subject to the natural limitationsthat follow from the character of the corporations as a legal personality.Corporate Mens Rea DoctrineItis often asserted that companies themselves cannot commit crimes; they cannotthink or have intentions. Only the people within a company can commit a crime(Sullivan 1995). However, once one accepts that the entire notion of corporatepersonality is a fiction – but a well-established and highly useful one – thereseems no reason why the law should not develop a concomitant corporate mens reafiction.
Most of the other doctrines – identification, aggregation etc. -involve fictitious imputations of responsibility. Thereal question is not whether the notion of a corporate mens rea involves afiction, but whether, of all the fictions, it is the one that most closelyapproximates modern-day corporate reality and perceptions. While thisinevitably will raise problems of how to assess policies and procedures toascertain whether they reflect the requisite culpability, such a task is notimpossible. The answers might not be easy, but at least this approach involvesasking the right questions.
Criminal Liability of directors underthe Companies Act, 2013Theissue of vicarious criminal liability for the directors and other key personnelof companies takes a somewhat alarming turn when it comes to the provisions ofthe Companies Act, 2013 (The Companies Act). The Companies Act approaches theissue of criminal liability in an all-embracing fashion when compared to thestatutes noticed above. Much like the other legislation concerned with economiccrime, the Companies Act also criminalises various kinds of activities in thecourse of the economic life of the company, chief among them being fraudulentactivities committed by the company (through its employees). For all offencescommitted by the company, the Companies Act imposes special vicarious liabilityon officers (of the company) who are ‘in default’. Section 2(60) of theCompanies Act specified the persons who would be considered as officers who are’in default’. The specifications closely follow the descriptions of thepersonnel considered in the predecessor legislation (Companies Act, 1956) aspersons responsible to the company for the conduct of the business of thecompany. Four categories of personnel come within the ambit of officer ‘indefault’.
Thefirst category encompasses what the Companies Act helpfully terms as ‘keymanagerial personnel’ (KMP). KMP includes the managing director, whole timedirectors, Chief Executive Officers (CEO), Chief Financial Officers (CFO) andCompany Secretaries (CS). 11 The second category comprises those personnel who,while reporting to the KMP, are responsible for maintaining, filing ordistributing accounts and records, and actively participate in, knowinglypermit or knowingly fail to take active steps to prevent any default. The thirdcategory is extraordinarily wide in its amplitude.
It covers anyone who isresponsible for ‘maintaining accounts and records’. It certainly looks like thecompliance officers of banks would be covered, for example. Provisionsregarding the third category can be contrasted with comparable provisions insection 5(f) of the predecessor legislation, the Companies Act, 195624 which made officers ofthe company liable under similar circumstances provided two conditions werefulfilled.
The Board ought to have given the officer the relevantresponsibility, for example, the responsibility of filing certain records forregulatory purposes. Further,the officer in question must have consented to taking on such a responsibility.On the face of it, the predecessor legislation looks slightly less onerous asit includes the consent. However, the Companies Act mitigates the potentialliability of independent directors by providing that two circumstances need tocombine for an independent director to be held liable for offences committed 11Section 2(51), Companies Act.25 Firstly,he must have knowledge of the offence attributable through board proceedings.Second, (note this is an additional requirement) the offence must have beencommitted either with his consent or because of his lack of diligence.12 Giventhat the managing director and whole time directors are covered under the firstcategory and independent directors have a different liability regime because ofan express provision in the Companies Act, who exactly is the fourth categoryintended to cover? Some guidance on this matter can be found in section 149(6)of the Companies Act, which defines an independent director. An independentdirector is any director other than the managing director, whole time directoror a nominee director of the company.
It follows from this definition that anominee director is not an independent director. Therefore nominee directorsare the kind of directors that are liable to be included in the fourthcategory. The fifth category consists of people who don’t run the company on aday to day basis but are instead associated with the issue or the transfer of acompany’s shares. Section 2(60) states that with regard to any offencesassociated with the issue or transfer of the shares of the company, theofficers in default would be deemed to be the share transfer agents, registrarsand the merchant bankers to the issue or transfer of the shares. Conclusion and the Way Forward REFERENCES· Ramaiya, Guide to theCompanies Act, 1956, LexisNexis, New Delhi (18th ed.
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1929) 8 Hall, Criminal Law And Procedure594 (1949).9 Markus D.Dubber, Theories of Crimeand Punishment in German Criminal Law, 53 AM. J.COMP.L.
679 (2005).10 Frederic William Maitland, MoralPersonality And Legal Personality, 3 The Collected PapersofFredericWilliam Maitland 304, 307 (H.A.L. Fishered., 1911).
11 See New York Cent. & HudsonRiver R.R. v. United States, 2I2 U.
S. 48, 494-95 (1909);12 See Bernd Schünemann,Unternehmenskriminalität und Strafrecht 194 (1979).13 Sarbanes, Sarbanes-Oxley act of2002, The Public Company Accounting Reform and InvestorProtectionAct, Washington DC: US Congress. 2002.14 0ManjeetSahu, Criminal Liabilityof Corporation: An Indian Perspective, Available at SSRN 2192308(2012).
15 (1992) Cr.L.J.1448.
16 (1997) 8 S.C.C 73217 (2004) Cri.L.J.
1576.18 A.I.R. 2005 S.C. 262219 A.
I.R. 2011 S.
C. 2020 (2010) 14 (ADDL) SCR 59121 1971 1 ALL ER 12722 Criminal Appeal No. 35 of 2015(arising out of Special Leave Petition (Crl) No. 3161 of 2013)23 421 U.S 658 (1975)24 A commercial organisation has beendefined widely In section 9 (3)(a) of the POCA Bill to include companies(Indianand foreign), partnerships (Indian and foreign) 25 Section 70, PMLA