Corporate's criminal liability

For ascertaining an offence, we need two ingredients i.e. Actus reus and Mens rea and essentially need a person to commit it. This person either be a natural person or be a legal person.  It is not an issue at all when the offence committed by a natural person, because, he committed the offence on his own or with abetment of someone, hence for punishing him, it is enough to prove the above two ingredients. Such punishment may be either imprisonment or fine or both. In case if the offence is committed by a legal person, who will be punished? and upon punishment who will be imprisoned? Obviously on punishment of the company, it can pay off the fine, but what about imprisonment? The analysis is focusing mainly on the imprisonment part.

The Cr.PC didn’t provide a clear mandate about imprisonment but only the procedure when the corporation and registered society an accused.

305.Procedure when corporation or registered society is an accused.-

(1) In this section, "corporation" means an incorporated company or other body corporate, and includes a society registered under the Societies Registration Act, 1860(21 of 1860).

(2) Where a corporation is the accused person or one of the accused persons in an inquiry or trial, it may appoint a representative for the purpose of the inquiry or trial and such appointment need not be under the seal of the corporation.

(3) Where a representative of a corporation appears, any requirement of this Code that anything shall be done in the presence of the accused or shall be read or stated or explained to the accused, shall be construed as a requirement that that thing shall be done in the presence of the representative or read or stated or explained to the representative, and any requirement that the accused shall be examined shall be construed as a requirement that the representative shall be examined.

(4) Where a representative of a corporation does not appear, any such requirement as is referred to in sub-section (3) shall not apply.

(5) Where a statement in writing purporting to be signed by the managing director of the corporation or by any person (by whatever name called) having, or being one of the persons having the management of the affairs of the corporation to the effect that the person named in the statement has been appointed as the representative of the corporation for the purposes of this section, is filed, the Court shall, unless the contrary is proved, presume that such person has been so appointed.

(6) If a question arises as to whether any person, appearing as the representative of a corporation in an inquiry or trial before a Court is or is not such representative, the question shall be determined by the Court.

Since this provision is vague about fixing responsibility of the crime on the specified person of the corporation but only for representation on behalf of the corporation.

The company cannot act on its own as it has no brain to think and no physic to act, but its decision can be made by Natural persons (board of directors / shareholder / Promoters) and the same can be acted upon by a natural persons (Director, CEO, Manager etc). If an offence has been committed by a company, who will be imprisoned, whether the company or the brain behind the offence? in limine, we can’t imprisoned the company as it exists only on papers, brands and its recognition by law, as if it was created under fiction.

The fiction theory of corporation is said to be promulgated by Pope Innocent IV (1243-1254). This theory is supported by many famous jurists, particularly, Savigny and Salmond. According to this theory, the legal personality of entities other than human beings is the result of a fiction. Hence, not being a human being, corporation cannot be a real person and cannot have any personality on its own.

The famous case of Salomon v A Salomon Co Ltd is a proof of the English court adoption of the fiction theory. In this case, Lord Halsbury stated that the important question to decide was whether in truth an artificial creation of the legislature had been validly constituted. It was held that as the company had fulfilled requirements of the Companies Act, the company becomes a person at law, independent and distinct from its members.

Similar to the fiction theory, the purpose theory declares that only human beings can be a person and have rights. Entities other human is regarded as an artificial person and merely function as a legal device for protecting or giving effect to some real purpose. As corporations are not human, they can merely be regarded as juristic or artificial person. Under this theory, juristic person is no person at all but merely as a “subject less” property destined for a particular purpose and that there is ownership but no owner. The juristic person is not constructed round a group of person but based on the object and purpose. The property of the juristic person does not belong to anybody but it may be dedicated and legally bound by certain objects. This theory rationalized the existence of many charitable corporations or organizations, such as trade unions, which have been recognized as legal persons for certain purposes and have continuing fund.

Similarly it was supported by the bracket theory as the conception of corporate personality is essential and merely an economic device by which simplify the task of coordinating legal relations. Hence, when it is necessary, it is emphasized that the law should look behind the entity to discover the real state of affairs. This is clearly in line with the principle of lifting of the corporate veil.

One more theory in this context is the realist theory, which describes a corporation exists as an objectively real entity and the law merely recognizes and gives effect to its existence.

In view of the above theories it would be evident that the corporation is fictitious, merely function as legal devise for protecting or giving effect to some real purpose, based on the object, which simplify the task of coordinating legal relations. Creating corporation is a devise for fulfilling the decided object by the common intentional people i.e members or share holder and such decided object is being analysed and formulated the route to achieve the object by the board of directors and then the board of directors pick the right one (director, CEO, Manager, etc) to execute it, while executing the task only the violation and the offence taken place. In such case can we imprisoned the executing mind alone rather than the directing mind which is bigger, powerful and in volume than to executing mind. Mainly, the Board of Directors / Shareholders / promoters are the directing mind and the director, CEO, Manager, etc are the executing hands. The executive hands can’t go against directing mind as if it is a power concentrated centre to administer the corporation and it has widely react when the task is uncompleted by the executive hands. Hence for securing and keep holding the position of the executive hands, it simply ignore the compliance and at the result committing an offence to complete the task. It is clear that the executing hands are only a tool. Can you imprison the tool i.e executing hands, alone, by giving immunity to the directing mind?

While discharging the duty, the violation and offences committed are under Civil wrong obviously the principal i.e the corporation will come for rescue. If the offence under Chapter XVI of IPC, there is no doubt that the person involved in the offence will be prosecuted irrespective of its capacity as the offences affecting the human body, but when the offences are committed under Chapter XVII, XVIII of IPC or any other statutory offences, then obviously we have to fix responsibility on a person for prosecution.

In this context it is necessary to high light that ‘Responsibility for prosecution is different from representative for prosecution under 305 of Cr.PC’.

In company law, for fixing the responsibility for prosecution the “officer who is in default”, for the violation of its own provision, not offences under any other acts

The company act 1956 describes in Section 2:-

(31) "officer who is in default ", in relation to any provision referred to in section 5, has the meaning specified in that section ;

Sec 5- Meaning of "officer who is in default".

For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression " officer who is in default " means all the following officers of the company, namely :

(a) the managing director or managing directors ;

(b) the whole-time director or whole-time directors ;

(c) the manager ;

(d) the secretary ;

(e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act ;

(f) any person charged by the Board with the responsibility of complying with that provision :

Provided that the person so charged has given his consent in this behalf to the Board ;

(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors :

Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.

By reading it is very clear that all the persons derived powers and directions only from the Board of Directors, furthermore we should not simply ignore the person mentioned in subsection (e) of Section 5 of the Company Act, 1956, where the idea is originating, if the board is not expertise in such areas. He may be a promoters / shareholders, they may be called as master mind. Unfortunately this responsibility and its definitions have very thin and narrower meaning and strictly applicable only to the company law violations. 

To understand better, how the board is important for the corporation for allocating the powers and direction to others, the relevant definitions are produced hereunder.

(6) " Board of directors " or " Board ", in relation to a company, means the Board of directors of the company ;

(13) " director " includes any person occupying the position of director, by whatever name called ;

(24) " manager " means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not ;

(26) " managing director " means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called :

Provided that the power to do administrative acts of a routine nature when so authorized by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management :

Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of directors ;

(30) "officer" includes any director, manager or secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is or are accustomed to act;

The company act 2013 describes Section 2

I.  “officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

i. whole-time director;

ii. key managerial personnel;

II. where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

III. any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

IV. any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

V. every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

VI. in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

Here another point to be considered is who the ultimate beneficiary of the crime committed; there is crucial, very relevant and important to be answered, to fix responsibility, because everything is committed in the name of the fictitious person.

Let us assume and compare the board of directors with the Council of Ministers. In both the forums there is no individual responsibility, but collective. If any minister committed an offense / scam, by fact the entire council is liable vicariously for such offence / scam but for prosecution, the enforcing agency will not going behind every minister of the council for such offence / scam but only against the minister concern who is the ultimate beneficiary. But in company, a director (executing hand) alone cannot be beneficiary of the crime, as the brain behind is the board / promoter / share holder.

The reason behind this comparison is the Concession theory, the state is considered to be in the same level as the human being and as such, it can confer on or withdraw legal personality from other groups and associations within its jurisdictions as an attribute of its sovereignty. Hence, a juristic person is merely a concession or creation of the state. It focuses on the sources of which the legal power is derived.

Indian courts held that corporations could not be prosecuted for offenses requiring a mandatory punishment of imprisonment, as they could not be imprisoned.

In Motorola Inc. v. Union of India (2004) Cri.L.J. 1576,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. Thus, the corporation could not be prosecuted under section 420 of the IPC.

Standard Chartered Bank and Ors. v. Directorate of Enforcement (2005) 4 SCC 530. This is the landmark case in which the apex court overruled the all other laid down principles. The Court held that the corporation could be prosecuted and punished, with fines, regardless of the mandatory punishment required under the respective statute.

The Court did not go by the literal and strict interpretation rule required to be done for the penal statutes and went on to provide complete justice thereby imposing fine on the corporate. The Court looked into the interpretation rule that that all penal statutes are to be strictly construed in the sense that the Court must see that the thing charged as an offence is within the plain meaning of the words used and must not strain the words on any notion that there has been a slip that the thing is so clearly within the mischief that it must have been intended to be included and would have included if thought of

In the Iridium case, it was held that the companies and corporate houses can no longer claim immunity from criminal prosecution on the ground that they are incapable of possessing the mens rea for the commission of criminal offences.

The Supreme Court recently in Sunil Bharti Mittal v. Central Bureau of Investigation ("CBI") and Others, (2015) 4 SCC 609 has held that the principle of alter ego can only be applied to make the company liable for an act committed by a person or group of persons who control the affairs of the company as they represent the alter ego of the company; however it cannot be applied in reverse direction to make the directors of the company liable for an offence committed by the company. The Supreme Court has clarified that the application of the principle of vicarious liability to make the directors of the company liable for an offence committed by the company can only be done if the statute provides for it.

The Court thereafter observes that in the following circumstances a director/person in charge of the affairs of the company can also be prosecuted, along with the company as an accused:

1. If there is sufficient evidence of his active role coupled with criminal intent;
2. Where the statute specifically imposes liability.

The Court relied upon the decision of the House of Lords in Tesco Supermarkets Limited v. Nattrass ("Tesco"),[1972] AC 153, wherein it was held that “the person whose mens rea is to be attributed must be the directing mind and will of the company”. Interestingly, the Privy Council in a subsequent judgment in Meridian Global Funds Management Asia Limited v. Securities Commission ("Meridian")[1995] UKPC 5 has expanded the rule laid down in Tesco by holding that, "the company builds upon the primary rules of attribution by using general rules of which are equally available to all natural persons, namely, the principles of agency" thereby making the rules of attribution a more flexible one to be decided on a case to case basis.

On conclusion part, since the apex court adopted the doctrine of attribution and imputation, it put a tremendous pressure on the prosecution to find out the directing mind of the crime, but it would not suffice to find the real person behind it. It would be logic to find out the ultimate beneficiary of the crime. He is the real directing mind of the crime. No clever business man put everything in black and white but it may be a phone call or may be a slip instruction, which is next to impossible for the prosecution to produce as evidence. The company law, which is a source, make the fictitious person to existence also silent about punishment part. An amendment to the company law to include the ultimate beneficiary is held responsible for the crime may evacuate the lacuna. The trial court also cannot go strictly on the words of the statue but with the object of the act to identify and fix the responsibility.

References;

1. Company Act, 1956 & 2013
2. Indian Penal Code
3. Criminal Procedure Core
4. Criminal Law journal
5. Recent criminal reports
6. Supreme Court Cases
7. All India Reports
8. Wikipedia website
9. Lawyerclubinida website
10. Corporatelawreporter website
11. Legalserviceindia website