CORPORATE CRIMINAL LIABILITY – WIDENING ITS SCOPE IS THE NEED OF THE HOUR
By K P C Rao.,
LLB., FCS., FICWA
Practising Company Secretary
kpcrao.india@gmail.com
Introduction
India is a Sovereign, Socialist, Secular, Democratic, Republic containing a federal system with a parliamentary form of government in the Union and the States, an independent judiciary, guaranteed fundamental rights, and so-called Directive Principles of State Policy that contain objectives that, while not enforceable in law, are fundamental to the governance of the nation. The primary source of law in India is its constitution, which gives due recognition to statutes, case law, and customary law consistent with its dispensations. Statutes are enacted by the Parliament (the Union legislature) and the State legislatures. There is also a vast body of law known as "subordinate legislation" in the form of rules, regulations, and by-laws-made by the Central and State governments and local authorities like municipal corporations, municipalities, Gram Panchayats, and other local bodies.
One of the unique features of the Indian Constitution is that, notwithstanding the adoption of a federal system and the existence of Central and State acts in their respective spheres, it has generally provided for a single integrated system of courts to administer the laws of both the Union and the States. The Supreme Court of India is at the apex of the entire judicial system. Below it are the High Courts in each State, below which lies a vast hierarchy of subordinate courts.
Evolution of the Doctrine of Corporate Criminal Liability
Two major issues which were of dominance, during the phase of evolution of the doctrine of Corporate Criminal Liability were:
1) One is the failure to identify or prove corporate intent. Traditionally, the criminal law has been reserved for intentional violations of the law. Yet, our prosecutions of corporations have been marked by floundering efforts to identify the intent of intangible, fictional entities.
2) A second issue is regarding sanctions. In addition to proof of intent, a major distinguishing characteristic of the criminal law has been the threat of imprisonment. It was said that a corporation cannot be imprisoned; the criminal law is not an appropriate vehicle for controlling corporate behavior.
Corporate criminal liability under environmental, antitrust, securities and other laws has grown rapidly over the last two decades. The general belief in the early sixteenth and seventeenth centuries was that corporations could not be held criminally liable. In the early 1700s, corporate criminal liability faced at least four obstacles.
1) The first obstacle was attributing acts to a juristic fiction, the corporation. Eighteenth-century courts and legal thinkers approached corporate liability with an obsessive focus on theories of corporate personality; a more practical approach was not developed until the twentieth century.
2) The second obstacle was that legal thinkers did not believe corporations could possess the moral blameworthiness necessary to commit crimes of intent.
3) The third obstacle was the ultra vires doctrine, under which courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters.
4) Finally, the fourth obstacle was courts’ literal understanding of criminal procedure; for example, judges required the accused to be brought physically before the court .
Resistance prior to the twentieth century to extension of the doctrine of corporate criminal liability was tied to the widely-held juridical belief that a corporation lacked the requisite mens rea essential to sustain a criminal conviction. It was widely prevalent and followed that: A Corporate has ‘no soul to damn, and nobody to kick.’
The corporation is invisible, incorporeal, and immortal; it cannot be assaulted, beaten, or imprisoned; it cannot commit treason . . .
So, one can find that history of “Doctrine of Corporate Criminal Liability” is full of problems and then solutions to it. At present, different nations have diverse notions regarding the applicability and extension of the Doctrine of Corporate Criminal Liability.
The modern trend of imposing criminal responsibility on corporations has began in 1970 in countries like USA, Netherlands, Denmark, Switzerland, France, etc.,
Legal position in India -Pre-Standard Chartered Bank Case
Till the Standard Chartered Bank Case is decided, Indian courts were of the opinion that corporations could not be criminally prosecuted for offences requiring mens rea as they could not possess the requisite mens rea. Mens rea is an essential element for majority, if not all, of offences that would entail imprisonment or other penalty for its violation. Adopting an overly generalized rationale, pre Standard Chartered decision, Indian courts held that corporations could not be prosecuted for offences requiring a mandatory punishment of imprisonment, as they could not be imprisoned.
In A.K. Khosla v. T.S. Venkatesan[1] two corporations were charged with having committed fraud under the IPC. The Magistrate issued process against the corporations. In the Calcutta High Court, the counsel for the defendants argued, inter alia, that the corporations, as juristic persons, could not be prosecuted for offences under the IPC for which mens rea is an essential ingredient. The court agreed. The court pointed out that there were two prerequisites for the prosecution of corporate bodies, the first being that of mens rea and the other being the ability to impose the mandatory sentence of imprisonment. Each of these prerequisites rendered the prosecution of the defendant corporations futile: a corporate body could not be said to have the necessary mens rea, nor can it be sentenced to imprisonment as it has no physical body.
In Kalpanath Rai v. State[2], a company, accused and arraigned under the Terrorists and Disruptive Activities Prevention ("TADA") Act, was alleged to have harbored terrorists. In a bench trial, the trial court convicted the company of the offence punishable under section 3(4) of the TADA. On appeal, the Indian Supreme Court referred to the definition of the word "harbor" ["harbour"] as provided in Section 52A of the IPC and pointed out that there was nothing in TADA, either express or implied, to indicate that the mens rea element had been excluded from the offence under Section 3(4) of TADA. The Indian Supreme Court referred to its earlier decisions in State of Maharashtra v. Mayer Hans George[3] and Nathulal v. State of M.P[4] and observed that there was a plethora of decisions by Indian courts which had settled the legal proposition that unless the statute clearly excludes mens rea in the commission of an offence, the same must be treated as an essential ingredient of the act in order for the act to be punishable with imprisonment and/or fine. Taking this reasoning a step further, the Indian Supreme Court held that an accused corporation could not possess the requisite mens rea, even if any terrorist had been allowed to occupy the rooms in its hotel. The Court observed:
“We are aware that in many recent penal statutes, companies or corporations are deemed to be offenders on the strength of the acts committed by persons responsible for the management or affairs of such company or corporations e.g. Essential Commodities Act, Prevention of Food Adulteration Act, etc. . . . But there is no such provision in TADA which makes the Company liable for the acts of its officers. Hence, there is no scope whatsoever to prosecute a company for the offence under Section 3(4) of TADA[5]”.
Similarly, in Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd.[6], the court dismissed a complaint filed against Zee under Section 500 of the IPC. The complaint alleged that Zee had telecasted a program based on falsehood and thereby defamed Sahara India. The court held that mens rea was one of the essential elements of the offence of criminal defamation and that a company could not have the requisite mens rea. In another case, Motorola Inc. v. UOI[7], the Bombay (now "Mumbai") 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 offence. Thus, the corporation could not be prosecuted under section 420 of the IPC.
It is clear that, in the past, Indian courts were of the opinion that if mens rea is an element of an offence, a corporation cannot be prosecuted for such an offence as it cannot possess mens rea. But what if a corporation is accused of violating a statute that mandates imprisonment for its violation?
In Velliappa Textiles[8], a private company was prosecuted for violation of certain sections under the Income Tax Act ("ITA"). Sections 276-C and 277 of the ITA provided for a sentence of imprisonment and a fine in the event of a violation. The Indian Supreme Court held that the respondent company could not be prosecuted for offences under certain sections of the ITA because each of these sections required the imposition of a mandatory term of imprisonment coupled with a fine. The sections in question left the court unable to impose only a fine. Indulging in a strict and literal analysis, the Court held that a corporation did not have a physical body to imprison and therefore could not be sentenced to imprisonment. Further, the Indian Supreme Court was of the view that the legislative mandate was to prohibit the courts from deviating from the minimum mandatory punishment prescribed by the Act. The Court also noted that when interpreting a penal statute, if more than one view is possible, the court is obliged to lean in favor of the construction that exempts an accused from penalty rather than the one that imposes the penalty.
Standard Chartered Bank and ors v. Directorate of Enforcement
In Standard Chartered Bank and Ors v. Directorate of Enforcement[9], Standard Chartered Bank was being prosecuted for violation of certain provisions of the Foreign Exchange Regulation Act of 1973 ("FERA"). Ultimately, the Indian Supreme Court held that the corporation could be prosecuted and punished, with fines, regardless of the mandatory punishment of imprisonment required under the respective statute.
The Court initially pointed out that, under the view expressed in Velliappa Textiles, the Bank could be prosecuted and punished for an offence involving rupees one lakh or less as the court had an option to impose a sentence of imprisonment or fine. However, in the case of an offence involving an amount exceeding rupees one lakh, where the court is not given discretion to impose imprisonment or fine, that is, imprisonment is mandatory, the Bank could not be prosecuted.
The Court also referred to the recommendations made by the Law Commission, which had noticed the legal conundrum arising out of the aforementioned situation. The Law Commission recommended the following provision to be inserted in the Penal Code:
1) In every case in which the offence is punishable with imprisonment only or with imprisonment and fine, and the offender is a corporation, it shall be competent to the court to sentence such offender to fine only.
2) 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.
3) In this section, "corporation" means an incorporated company or other body corporate, and includes a firm and other association of individuals.
Of course, Standard Chartered Bank argued that the Indian Parliament enacted laws knowing fully-well that a corporation cannot be subjected to custodial sentence, and, therefore, the legislative intention was not to prosecute the companies or corporate bodies. According to the defendant, when the sentence prescribed cannot be imposed, the very prosecution itself is futile and meaningless, and, thus, the majority decision in Velliappa Textiles had correctly laid down the law.
The Indian Supreme Court in Standard Chartered Bank observed that the view of different High Courts in India was very inconsistent on this issue. For example, in State of Maharasthra v. Syndicate Transport[10],the Bombay High Court had held that the company could not be prosecuted for offences which necessarily entailed corporal punishment or imprisonment; prosecuting a company for such offences would only result in a trial with a verdict of guilty and no effective order by way of a sentence. On the other hand, in Oswal Vanaspati & Allied Industries v. State of Uttar Pradesh[11], the appellant-company had sought to quash a criminal complaint, arguing that the company could not be prosecuted for the particular criminal offence in question, as the sentence of imprisonment provided under that section was mandatory. The Full Bench of the Allahabad High Court had disagreed:
A company being a juristic person cannot obviously be sentenced to imprisonment as it cannot suffer imprisonment. . . . It is settled law that sentence or punishment must follow conviction; and if only corporal punishment is prescribed, a company which is a juristic person cannot be prosecuted as it cannot be punished. If, however, both sentence of imprisonment and fine is prescribed for natural persons and juristic persons jointly, then, though the sentence of imprisonment cannot be awarded to a company, the sentence of fine can be imposed on it. . . . Legal sentence is the sentence prescribed by law. A sentence which is in excess of the sentence prescribed is always illegal; but a sentence which is less than the sentence prescribed may not in all cases be illegal.
The Indian Supreme Court in Standard Chartered Bank also referred to an old decision of the United States Supreme Court, United States v. Union Supply[12]. In that case, a corporation was indicted for willfully violating a statute that required the wholesale dealers in oleomargarine to keep certain books and make certain returns. Any person who willfully violated this provision was liable to be punished with a fine of not less than fifty dollars and not exceeding five hundred dollars and imprisonment for not less than 30 days and not more than six months. It is interesting to note that for the offence under Section 5 of the statute at issue, the Court had discretionary power to punish by either fine or imprisonment, whereas under Section 6 of the statute (the section that was actually violated in Union Supply), both types of punishment were to be imposed in all cases. The corporation moved to quash the indictment, and the District Court quashed it on the grounds that Section 6 was not applicable to the corporations. The United States Supreme Court reversed the District Court's judgment. Justice Holmes held:
It seems to us that a reasonable interpretation of the words used does not lead to such a result. If we compare Section 5, the application of one of the penalties rather than of both is made to depend, not on the character of the defendant, but on the discretion of the Judge; yet, there, corporations are mentioned in terms. And if we free our minds from the notion that criminal statutes must be construed by some artificial and conventional rule, the natural inference, when a statute prescribes two independent penalties, is that it means to inflict them so far as it can, and that, if one of them is impossible, it does not mean, on that account, to let the defendant escape.
In the end, it was obvious to the Indian Supreme Court in Standard Chartered Bank that the legislative intent to prosecute corporate bodies for the offences committed by them was clear and explicit. The statute in question never intended to exonerate corporations from being prosecuted. To follow Velliappa Textiles would be to presume that the legislature intended to punish the corporate bodies for minor and silly offences while it extended immunity of prosecution for major and grave economic crimes. As a specific illustration, the court pointed out that in the case of cheating and dishonestly inducing delivery of property covered under Section 420 of the IPC, the punishment prescribed is imprisonment, which may extend to seven years and fine. However, for the offence under Section 417, that is, simple cheating, the punishment prescribed is imprisonment for a term which may extend to one year, a fine, or both. If Standard Chartered Bank's argument were accepted, it would mean that for the offence under Section 417 of the IPC, which is a minor offence, a company could be prosecuted and punished with a fine, whereas for the offence under Section 420, which is an aggravated form of cheating, the company could not be prosecuted as there is a mandatory sentence of imprisonment. This interpretation clearly produced an illogical result.
The Indian Supreme Court in Standard Chartered Bank held:
We do not think that the intention of the Legislature is to give complete immunity from prosecution to the corporate bodies for these grave offences. The offences mentioned under Section 56(1) of the FERA Act, 1973 . . . for which the minimum sentence of six months' imprisonment is prescribed, are serious offences and if committed would have serious financial consequences affecting the economy of the country. All those offences could be committed by company or corporate bodies. We do not think that the legislative intent is not to prosecute the companies for these serious offences, if these offences involve the amount or value of more than one lakh, and that they could be prosecuted only when the offences involve an amount or value less than one lakh.
The Indian Supreme Court also pointed out that, as to criminal liability, the FERA statute does not make any distinction between a natural person and corporations. Further, the Indian Criminal Procedure Code, dealing with trial of offences, contains no provision for the exemption of corporations from prosecution when it is difficult to sentence them according to a statute. The court held that the FERA statute was clear: corporations are vulnerable to criminal prosecution, and allowing corporations to escape liability based on the difficulty in sentencing would do violence to the statute. The Court did not develop its reasoning far enough so as to specifically hold that a corporation is capable of forming mens rea and acting pursuant to it. However, the Court held that corporations are liable for criminal offences and can be prosecuted and punished, at least with fines. Many of the offences, punishable by fines, however do have mens rea as a necessary element of the offence. By implication, it can be said that post Standard Chartered decision, corporations are capable of possessing the requisite mens rea. As in prosecution of other economic crimes, intention could very well be imputed to a corporation and may be gathered from the acts and/or omissions of a corporation.
Karnataka Shops and Commercial Establishment Act (Violation of Section 25)
The question as to whether a company’s managing director or CEO be personally held responsible for any offence, saying “employer” as defined under statutory law is the senior most official and not the company per se has came up before the Supreme Court .
In this case, the Managing Director of a Bangalore-based IT solution provider had asked whether the corporate criminal liability lies on the company or its Managing Director in the event of any violation of the exemption granted to establishments/ firms, for employing women during night shifts under the Karnataka Shops and Commercial Establishment Act, 1961.
The state Government initiated criminal prosecution against the MD in December 2005 after an unfortunate incident involving a woman employee of the company. Taking cognizance of the complaint, the Metropolitan Magistrate on December 30, 2005 made the senior official an accused for violation of Section 25 and other provisions of the Karnataka Shops and Commercial Establishment Act.
Section 25 of the Act, besides prohibiting women from being employed in night shifts, also allows the state Government to exempt certain industries from this requirement. But the exemption granted entails certain conditions to be met, like providing free transportation to and fro from work to home, having adequate number of security guards and so on.
A Bench consisting Justices H K Sema and Markandeya Katju while agreeing that the question raised in the appeal must be settled, noted that there’s an absence of a specific and clear provision under the above Act defining the penal liability in case anybody contravenes exemption granted under it.
Senior advocate K K Venugopal, appearing for the MD, argued that the “employer” as defined under the Act is the company and not the officials per se. Justice Katju, meanwhile, observed that, “If there’s a lacunae in the Act, the benefit must go to the accused.”
Conclusion
The Indian Supreme Court has settled the disputed question of criminal liability of a corporation. The Standard Chartered Bank decision overrules prior decisions to the contrary and holds that corporations are liable for criminal offences and can be prosecuted and punished, at least with fines.
In December, 1984, India witnessed one of the greatest man-made calamities in Bhopal, the capital city of the State of Madhya Pradesh, from a factory owned by Union Carbide India Limited. Methyl Isocyanate, a highly poisonous gas leaked out and it resulted in the death of more than two thousand persons who were mostly the hutment-dwellers in the near vicinity of the factory. The air carried the leaked deadly poisonous gas to the thickly populated areas and about two lakhs people suffered various bodily injuries. The Union Carbide India Limited is a company incorporated in India by Americans. The Bhopal Gas Tragedy was an eye opener and the protection of environment was taken as a serious matter. The Indian Parliament passed the Environment Protection Act, 1986. The Environment Protection Act empowers the Central Government to take measures to protect and improve the environment.
The right to life is a fundamental right in India. So this macro-murder, the worst industrial carnage in history, is a huge blot. An untested facility was installed in India with no examination of the potential dangers, as if it were a mere soda factory. The act of installation in itself was a crime. A corporate Director usually does not personally commit crimes himself or herself. These are committed perhaps without their knowledge, but with their connivance and vicarious awareness. Nevertheless, culpability exists in a higher dimension of punitive jurisprudence. This is the basis of culpability in corporate crimes and offences. To plead that Union Carbide or Anderson did not physically switch on equipment or were not responsible for the acts of commission or omission that caused the leakage is no argument of innocence. But for the installation of such a facility, the deaths would not have happened. If a nuclear plant were set up that exploded and wiped out thousands of lives, those who set up and operated it are vicariously guilty, not by mens rea but morally and legally.
Note : The Author is Practising Company secretary based at Hyderabad and Co-Author of entire range of law books under ‘Study in Law Series’ published by ALT Publications, Hyderabad.
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[ Published in Corporate Secretary of ICSI, April, 2011]
[5] Kalpnath Rai v. State [1997] 8 S.C.C. 732
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