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23 April, 2017
In this day and age of scams, crime by corporate entities throws a lot of challenges at multiple levels. The level of crime may be extraordinary owing to the magnitude, powers and reach of such corporations as opposed to an individual committing any crime. Once it is found that a corporation has committed a crime, the next question is whether corporations can be held guilty of such crimes since they do not have minds of their own.
For a long time, corporations in India were not held liable for criminal offences due to the requirement of mens rea or the intention to commit the offence and inability to award imprisonment or arrest, etc. However, corporations are no longer immune.
Supreme Court on Liability of Corporations and its Officials
The law on this aspect has evolved over time. Now, a corporation can be convicted of offences involving mens rea by applying the doctrine of attribution[1]. Thus, the corporation can be held responsible for offences committed in relation to the business of the corporation by the persons in control of its affairs. The legal position in the US and UK has also crystallised to ensure a corporation can be held liable for crimes of intent. In the UK, the courts have adopted the doctrine of attribution to the corporation liable for acts committed by the directing mind, i.e., the directors and managers.
It is now clear that the criminal intention of the company’s directors or officials can be attributed to the company to make the company liable. However, the question then arises whether the reverse is possible – i.e. whether the officials of the company can be held responsible for acts of the company? This question was recently answered by the Supreme Court of India in Sunil Bharti Mittal v. Central Bureau of Investigation ((2015) 4 SCC 609). The Apex Court in this case in no uncertain terms held that an individual who has perpetrated the commission of an offence on behalf of a company can be made accused, along with the company. However, to make an individual liable, there must be sufficient evidence of his active role coupled with criminal intent and/or a provision must be specifically incorporated into the statutory regime that attracts the doctrine of vicarious liability[2]. It may thus be noted that when the company is the offender, vicarious liability of the directors cannot be imputed automatically, in the absence of any statutory provision to this effect.
Who can be held liable?
It is worth clarifying that a person cannot be held liable merely on the basis of the designation. No presumption can be drawn against the person occupying the position of a chairman or managing director only on the basis of their position.
There is no universal rule that a director of a company is in charge of its everyday affairs. A person should fulfil the ‘legal requirement’ of being a person in law (under the statute governing companies) responsible to the company for the conduct of the business of the company and also fulfil the ‘factual requirement’ of being a person in charge of the business of the company.
Certain legislations have a provision titled as ‘Offences by Companies’, which makes the person in charge of and responsible at the time of commission of the offence liable for that offence along with the company unless the person proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commissioning of such offence. Under the said provision, the director, manager, secretary or any other official of the company may also be held liable if it is shown that the offence was committed with his consent or connivance.
The concept of vicarious liability of corporate officials has evolved substantially over the past decade. It is worth noting that it has become a tendency to implead the senior management officials of the company along with the company to exert pressure on the company to settle. In a lot of instances, such senior officials may also be summoned by the investigating authorities. There is almost unanimous judicial opinion that a clear case needs to be spelt out against the person in the complaint before fastening criminal liability.
Furthermore, in case the court is required to issue summons, there has to be strict compliance with statutory requirements. Summoning is a serious issue and criminal law cannot be set in motion as a matter of routine, and summons should only be issued after recording reasons in writing. The Indian Courts have so far been very cautious in their approach and have generally protected the corporate officials from harassment by the investigating agencies unless there is enough material against the official concerned.
It may be interesting to note that the above provision attaching liability to the directors, etc., is similar to the law in the UK to some extent wherein the corporate officials can be held liable if they consented, connived or neglected in their duties. Consent and connivance both presuppose knowledge.
Similarly, in the US, the corporate officials are held liable under the ‘Responsible Corporate Officer Doctrine’, which holds a corporate officer criminally liable for the criminal violations committed by a subordinate where the said officer occupies a position of responsibility and authority in the company and has the power to prevent such a violation, but fails to do so.
However, it must be noted that as opposed to the US and UK, there is no provision for Deferred Prosecution Agreements (DPA) in India, wherein the company can reach any settlement with the prosecution to avoid criminal sanctions.
To the comfort of corporates, so far we have seen that courts have taken a balanced view. They have not shied away from acting against the senior official if it is established that the official was responsible for the crime. At the same time, however, they have protected senior officials where their personal involvement could not be proved. Having said that, the need of the hour is to take certain deterrent measures to impose costs or punish complainants for initiating frivolous proceedings.
[1] Doctrine of Attribution– The doctrine of attribution implies that the criminal intent of the “alter ego” of the company / body corporate, i.e., the person or group of person that guide the business of the company, would be imputed to the corporation. Mens rea is attributed to the company on the basis of the alter ego of the company.
[2] Doctrine of Vicarious Liability- This doctrine implies that the officials of the company shall be held responsible for the acts of the company by virtue of their position in the company.
For further information, please contact:
Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
bishwajit.dubey@cyrilshroff.com
