Liability of a Corporate Criminal in India

Large multinational corporations have come to dominate the national and global economic scene. The scale of their operations is enormous. The largest have grown into enterprises of astonishing magnitude that in their economic dimensions are fully comparable to nation states. Imposing adequate controls over multinational conduct and achieving accountability by multinationals for their conduct both at home and abroad should be a major objective of every industrialized power.



A corporation is a separate legal entity established through some legislation or registration process. They have rights and liabilities separate from that of their shareholders. Some of these corporations have assets and facilities in other countries apart from their home country as well and such corporations are known as multinational corporations (MNCs). Multinational corporations have come to play a huge role in most aspects of human life today.

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Their powers have grown at an astonishing rate over the last couple of centuries, so much so that they are often compared to entire nations. Therefore, imposing some sort of means of accountability and control over these multinationals and corporations is of paramount importance and should be extremely high on the list of priorities for every nation.

Development with the Time

Throughout the ages, the evolution of the doctrine of corporate criminal liability faced many major issues, the main ones being:

  • The failure to identify or prove criminal intent of a juristic, fictional being. As corporations are intangible legal entities, finding the mens rea necessary for the commission of a criminal act proved to be quite the obstacle.
  • Sanctions were the second problem. A corporation cannot be imprisoned or put to death and hence the threat of imprisonment which plays a major role in criminal law could not be applied here. This lead to speculation that criminal law was not appropriate for the enforcement of this doctrine.
  • Courts required the accused in a criminal case to be physically brought before them for proceedings to take place. This was obviously not possible in the case of corporations.

Prior to the twentieth century, it was believed that a corporation lacked the mens rea required for the commission of a criminal act and hence to attain a criminal conviction. The idea that “A corporation has no soul to damn, and no body to kick” was widely prevalent at that time.

At present, the directors, employees and officers are all liable for criminal acts committed by them which they have actual authority to perform or appear to have authority to perform as observed by an average reasonable man. Further, directors and officers may also be subject to criminal liability under the “accomplice theory” which states that they either encouraged or instructed a subordinate to commit a criminal act or failed to exercise due care and supervision of their subordinates which in turn led to the commission of the crime. This theory states that a person is criminally liable by virtue of his “responsible relation” to the misconduct regardless of whether or not he possesses any knowledge regarding the criminal activity.

Today, for the doctrine of corporate criminal liability to be applicable, the criminal act of the employee must:

  1. Be committed with the intention of benefiting the corporation in some manner, or
  2. Be committed with the intention of increasing his own personal gain, and this conduct ultimately ends up benefiting the corporation as well.

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Deadlocks of Corporate Criminal Liability

Imprisonment

As has been discussed above that a company is recognized as a juristic person, and being a person it has to face the punishment that has been provided by the various acts. There are various provisions in Companies Act, 2013 itself which hold a company liable for its wrongdoing. However, there are provisions which provides mandatory imprisonment for a person including company, such as Section 447 of Companies Act, 2013 Act, Section 420 of The IPC, 276B of The Income Tax Act etc.

The Courts found themselves in dead end in these kind of situations where a company is charged under sections which provides for necessary imprisonment, as the company being a legal person cannot be imprisoned for its criminal acts, it can only be punished with fine and not otherwise.

The Supreme Court had to face similar difficulty in case of M.V. Javali vs. Mahajan Borewell & Co. and OthersThe Company was found guilty under Section 276B read with 278B of The Income Tax Act, which gives mandatory punishment of at least 3 months, but the Court found itself in a fix about how to imprison a company.  J. Mukhrjee said that, “Even though in view of the above provisions of Section 278B, a company can be prosecuted and punished for an offence committed under Section 276B the sentence of imprisonment which has got to be imposed there under cannot be imposed, it being a juristic person and we are of the opinion that the only harmonious construction that can be given to Section 276B is that the mandatory sentence of imprisonment and fine is to be imposed where it can be imposed namely on persons coming under categories (ii) and (iii) above, but where it cannot be imposed, namely on a company, fine will be the only punishment.”

Mens rea

In the case of Motorola Inc. vs. Union of India the Bombay 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 offense.

The corporation could not be prosecuted under section 420 of the IPC, but this idea of company not possessing mens rea came to an end Lord Denning’s view in the case of H.R. Bolton (engg.) Co. Ltd. vs. T.J. Graham was accepted that A company may in many ways be likened to a human body. They have a brain and a nerve centre, which controls what they do. They also have hands, which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what they do. The state of mind of these managers is state of mind of company and it treated by law as such. So you will find that in case where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of company.”

In the case of The Assistant Commissioner, Assessment-II, Bangalore & Ors. vs. M/s. Velliappa Textiles Ltd. & Anr, the Supreme Court has held that, “Though, initially, it was supposed that Corporation could not be held liable criminally for offences where mens rea was requisite, the current judicial thinking appears to be that the mens rea of the person in-charge of the affairs of the Corporation, the alter ego, is liable to be extrapolated to the Corporation, enabling even an artificial person to be prosecuted for such an offence.”

Thus, this doctrine of alter ego allowed the courts to frame corporate houses for the offences which had mens rea as an essential ingredient, and it is now less tiresome for the court to hold a corporation criminally liable.

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Two Pillars of Corporate Criminal Liability

1. Derivative Model

This model is individual centred model. Derivative model can be understood in two sub-categorises:

a) Vicarious Liability; b) Identification Doctrine.

a) Vicarious Liability 

The concept of vicarious liability is based on two latin maxims- first, qui facit per alium facit per se, it means that he who acts through another shall deemed to have acted on his own, and second, respondeat superior which means let the master answer. In Bartonshill Coal Co. v. McGuire, Lord Chelmsford LC said: ‘every act which is done by an employee in the course of his duty is regarded as done by his employer’s orders, and consequently is the same as if it were his employer’s own act.’ 

Vicarious liability generally applies to civil liability but Massachusetts court in Commonwealth v. Beneficial Finance Co, held three corporations criminally liable for a conspiracy to bribe, the first company, for the acts of its employee, the second, for the act of its Director, and the third, for the acts of the Vice-President of a wholly owned subsidiary. The Court seemed to believe that corporate criminal liability was necessary since, a corporation is a legal fiction comprising only of individuals. US courts are not the only courts which have incorporated the concept of vicarious liability in the cases of criminal liability, but now this model has been rejected considering it to be unjust to condemn one person for the wrongful conduct of another.

b) Identification Doctrine

This doctrine is an English law doctrine which tries to identify certain key persons of a corporation who acts in its behalf, and whose conduct and state of mind can be attributed to that of the corporation. In case of Salomon v. Salomon & CoHouse of Lords held that corporate entity is separate from the persons who acts on its behalf. The Courts in England had in various judgments like DPP v. Kent & Sussex Contractors Ltd, R v. ICR Haulage Ltd., ruled that the corporate entities could be subjected to criminal liability and the companies were held liable for crimes requiring intent. Judgment like these led to the promulgation of ‘identification doctrine’.

2.Organizational Model

Unlike derivative model which focuses on individual, organizational model takes corporation into consideration. Offences require mental state (mens rea) to commit a crime along with physical act (actus reus), but the problem that arises while holding corporations criminally liable is how a corporation which is juristic person could possess requisite mental state to commit a crime.

Derivative model was one way to attribute mental state to corporation. Other way could be by proving that there existed an environment in the corporation which directed, tolerated, led-on, and even encouraged the non-compliance of specific law which made it offence.Moreover, physical act that too is required to complete the requirement of commission of an offence can be derived rather be proved from the act of its employees, officers, directors, etc. Thus, culture of a corporation is to be seen while determining its criminal liability.

Corporate culture may help for commission of an offence requiring mental state by- firstly, providing the environment or necessary encouragement that it was believed by the offender working in the corporation that it was perfectly alright to commit that offence, or corporation has psychologically supported the commission of offence; secondly, it is quite possible that the corporation created an environment which led to commission of crime. Both ways it was the corporation and its working culture that let the offence committed.