The Changing Face of Corporate Criminal Liability

October 2021

1. Introduction

A corporation is a separate legal entity in law and exposed to liability, civil and criminal, for any wrongdoing. The latter is premised on the maxim actus non facit reum nisi mens sit rea which means an act is wrongful only when it is done with wrong intent. The question whether wrongdoing by a company can be subject to criminal law sanctions has been a challenging one. Individuals managing a company may be liable under criminal law for their wrongful acts, but the question remains whether their acts can be attributed to the company and the corporation can be held liable under criminal law. Since a company does not have a mind nor can knowledge or intent be attributed to it, both civil and criminal liability started to be imposed based on the doctrine of vicarious liability. Companies can be held criminally liable for offences that occur while conducting operations and for which they are responsible. Under vicarious liability, an accused is blamed for the offence of another. A company is held vicariously liable for the acts of its employees if it is done in the course of the employment and the act and intent of the employee is attributed to and is for the benefit of the corporation.

This newsletter examines vicarious liability of corporations, those of key employees but without any active involvement and some key judicial trends.

2. Legal Framework of Liabilities 

Criminal liability is imposed on corporations through a variety of laws including anti-corruption, income-tax, Indian Penal Code (“IPC”), money-laundering, Negotiable Instruments, Securities and Exchange Board of India, amongst others. Jurisprudence provides that for serious offences under the IPC a corporation may be found guilty. In a 2005[1] case, the Supreme Court (“SC”) held that a company is liable to be prosecuted and punished for criminal offences. Obviously, a company cannot be imprisoned but when imprisonment and fine are prescribed the court can impose and enforce monetary sanctions. In other words, precedent establish that companies are not immune from criminal prosecution on the ground they cannot possess mens rea; rather, actions of its directors should be linked to the actions of the company which should be held responsible for acts of those who possess decision-making capacity and steer its course.

When the Companies Act of 1956 was overhauled through Companies Act, 2013 (“CA 2013”), stricter provisions were introduced that criminalized various activities of a company in order to hold both officers and directors[2] liable for a company’s fraudulent activities committed through its employees. CA 2013 contains liabilities for directors and key managerial persons (“KMP”)[3] who can be held responsible for illegal acts of corporations. The liability may be affixed pursuant to designation, nature of duties regardless of the need to prove involvement in an act. In other words, where a company commits an offence, every person who, at the time of commission was in charge of and responsible for the conduct of its affairs is considered guilty along with the company, proceeded against and punished accordingly. Over time, the officers involved included those who are in the line of reporting, engaged with and responsible for fiscal matters, participating actively through both actions or inactions and directors of a company. However, no liability can be affixed if the concerned individual establishes that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of this offence.

3. The Bajpe Case: Vicarious Liability  

The debate on vicarious liability has been focused and deliberated on whether a company can be held criminally liable for the actions of its employees where the law is silent on this question. Corporate criminal liability in India is evolving and courts now tend to adopt a strict approach. In 2005, in Iridium India Telecom Ltd. vs. Motorola Inc. & Ors’ case the SC considered the issue of a company being criminally responsible for actions of its employees. Iridium alleged cheating against Motorola Inc. who argued that a corporate body is an artificial person, incapable of a mental state and, therefore, cannot be held criminally liable for cheating. The SC rejected Motorola’s arguments and held the company vicariously liable for the acts committed by its employees, if done in the course of its employment. It is noteworthy that the SC took the view that if a company commits a crime involving a guilty intent, it would usually be the intent and acts of individuals who acted on behalf of the company.

Recently, in an important case discussed below, the SC held[4] that criminal proceedings cannot be commenced against the directors and other officers without specific allegations about their role in the crime.

The High Court of Karnataka passed a judgment on September 28, 2015 through which it dismissed certain revision petitions and confirmed the order passed by a sessions court that had issued summons against several accused persons.[5] A complainant had filed a criminal complaint against 13 accused persons where he alleged that (a) he was the absolute owner of a property situated in Bajpe village within Mangalore region; (b) Mangalore Special Economic Zone Ltd. (“MSEZ”) intended to lay a water pipeline adjoining his property; (c) after obtaining the necessary permissions, MSEZ and its directors appointed a company as contractor to execute the project who, in turn, deputed its supervisors to oversee the work and appointed a subcontractor to execute through its labor. The complaint alleged that MSEZ, its directors and managers, contractor’s directors, supervisors, subcontractor and its workforce all conspired with intent to lay the pipeline beneath his property and trespassed, demolished the compound wall and cut 100 trees on his property to lay the pipeline, without any lawful authority and right. He attributed the accused with intent to damage the property and contended that the accused committed this high-handed act when he was out of town, and such act of mischief, waste caused him pecuniary loss of more than INR 2.7 million or about USD 36,000. He contended that the accused are jointly and severally liable since they are administrators of the companies and all its executives are vicariously liable.

The accused (who were the Respondents in the SC proceedings) took the position, amongst others, that

  • no specific allegations and roles was attributed to them, other than the statement that all of them connived with each other in committing the offence;
  • since issue of court summons is a serious matter, it should be done only when there are specific allegations and clear delineation of roles attributed to each accused.

The SC heard extensive arguments and relied on some of its prior judgments, notably the case of Sunil Bharti Mittal[6] where it examined the circumstances when a director or person-in-charge of the affairs of the company can be prosecuted, when the company is an accused. In this case, telecom licenses were issued to a number of companies and the process came under scrutiny for certain irregularities. Consequently, a criminal investigation was launched against various companies including their directors. One of them was Bharti Cellular and the special investigative court decided to attribute the actions of the company to Mr. Mittal, its chairman-cum-managing director and made him an accused in the proceedings. This was challenged as a mistake of law. The SC held that an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, provided (a) there is sufficient evidence of his active role coupled with criminal intent; and (b) he is implicated in cases where the statute attracts vicarious liability, by specifically incorporating such a provision.[7] Vicarious liability cannot be imposed on any director in the absence of legislative mandate.

After citing and relying upon several landmark judgments, in Bajpe’s matter the SC observed that “summoning of an accused in a criminal case is a serious matter.” Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of a magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and applicable law. He has to examine the nature of allegations made in the complaint and the evidence in support thereof and if that will suffice for the complainant to succeed. A magistrate is not a silent spectator but has to carefully scrutinize the evidence on record, question the complainant and witnesses for responses to find out the merit and truth of the allegations and then examine if any offence is committed.

In the present case, it was incumbent on a magistrate to record his satisfaction about a prima facie case against the accused who are managing director, company secretary and directors and their respective roles in their capacities which is sine qua non for initiating criminal proceedings against them. Looking at the averments and the allegations of the complaint, the apex court held that there are no specific allegations with respect to the role played by them in their different capacities. Merely because they had occupied certain positions, without any specific role attributed and the role played by them, they cannot be arrayed as an accused and cannot be held vicariously liable for the offences committed by the company. The SC dismissed the appeal and upheld the order of the lower courts in dismissing the issue of process against the accused persons.

4. The Road Ahead   

While the concept of corporate criminal liability is an evolving one, both in India and globally, what emerges from the above is that specific allegations about the role played by officers is a prerequisite before they are accused or held vicariously liable for a company’s offences. Corporations, on the other hand, should be held responsible for actions of persons having decision making authority instead of those implementing policies. At the same time, one must keep in mind that the intention and action of a company are the results of its employees too. When an act or omission leads to violation of criminal law, the guilty mind must be attributed towards directing the corporations. But only those directors are liable who are aware of contraventions and who fail to object either at board meetings or in situations when contraventions occur with their consent or connivance. Generally, managing, whole-time directors, CEOs are in-charge of day-to-day operations while independent and non-executive directors are not. The latter can be held liable when acts of omission or commission by a company occurred with their knowledge (attributable to Board processes), consent or connivance or where they failed to act diligently. On March 2, 2020 Ministry of Corporate Affairs issued directions to the Regional Directors, Registrar of Companies and Official Liquidators, directing them not to initiate any civil or criminal proceedings against independent and non-executive directors unless sufficient evidence exists against them.

In recent years, as India opened its economy and spurred on the path of economic progress, frequent corporate scams started to emerge which have had a cascading impact on the organization, its people and the country’s reputation on the global stage. The (wrong) actions of corporations can cause massive harm, while existing standards under the CA 2013 need to be reassessed as it holds officers criminally liable on account of their designation. The burden of evidence is definitely higher – be it of knowledge, specific actions or inactions which demonstrate knowledge of a crime though no direct involvement, specific role, intent – and will play an important role in attributing a criminal act. As the face of corporate criminal liability changes and evolves further, the legislators and the judiciary will have to find the right balance between deterrence and affixing strict liability, be it on the responsible individuals or on the company.

Author

Priti Suri

[1] Standard Chartered Bank vs. Directorate of Enforcement, AIR 2005 SC 2622

[2] Section 166 mentions the fiduciary duties of the directors which inter-alia includes that the director shall exercise his duties with due and reasonable care, skill and diligence and should not attempt to achieve or attempt to achieve any undue advantage either to himself or to any of his relatives. A director can be held liable for offences under different statutes and not merely CA 2013 and KMPs often qualify as defaulting officers.

[3] This is a defined term under CA 2013 which KMP includes managing, whole-time directors, chief financial officer and company secretary

[4] Ravindranatha Bajpe v. Mangalore Special Economic Zone Ltd & Ors.

[5] The charge was for offences punishable under Sections 406, 418, 420, 427, 447, 506 and 120B read with section 34 IPC. Section 34 provides that when a criminal act is done by several persons in furtherance of common intention of all, each of such persons is liable for that act in the same manner as if it were done by him alone

[6] Sunil Bharti Mittal v. Central Bureau of Investigation, (2015) 4 SCC 609

[7] For example, labour and environmental law statutes affix such liability