UNIVERSITY OF PETROLEUM & ENERGY STUDIES

COLLEGE OF LEGAL STUDIES

DEHRADUN

Criminal liability of company

Submitted To Submitted By

S M.R. N.S Bawa (Assistant professor) Deepak Shahani

COLS, UPES Roll No- 40

B.A LL.B Sec-A

Semester VIth

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CRIMINAL LIABILITY OF A COMPANY

Introduction:

The Companies Act provides a proper legal framework and sets out norms for the proper

governance of the corporations and protecting the rights of the shareholders. Violations of such

norms are defined as offences with associated penalties. The criminal liability of a company is

the extent to which the company as a legal person is liable for the acts and omissions of the

natural persons it employs. It is sometimes regarded as an aspect of criminal vicarious liability,

as distinct from the situation in which the wording of a statutory offence specifically attaches

liability to the corporation as the principal or joint principal with a human agent.

The imposition of criminal liability is only one means of regulating corporations. There are also

civil law remedies such as injunction and the award of damages which may include a penal

element. Generally, criminal sanctions include imprisonment, fines and community service

orders. A company has no physical existence, so it can only act vicariously through the agency of

the human beings it employs. While it is relatively uncontroversial that human beings may

commit crimes for which punishment is a just desert, the extent to which the corporation should

incur liability is less clear. Obviously, a company cannot be sent to jail, and if a fine is to be paid,

this diminishes both the money available to pay the wages and salaries of all the remaining

employees, and the profits available to pay all the existing shareholders. Thus, the effect of the

only available punishment is deflected from the wrongdoer personally and distributed among all

the innocent parties who supply the labour and the capital that keep the corporation solvent.

It is the general principle of Criminal Law that a crime is not committed unless the person

committing it has the mens rea viz. guilty mind. The maxim "actus non facit recum, nisi mens sit

rea" means that the intent and act must both concur to constitute the crime. Crime is a general

term. Offence is that crime which is made punishable by law.1 For commission of every offence

the requisite thing is actus reas along with mens rea unless the statute expressly excludes it.

1 A. Ashworth, Principles of Criminal Law p. 79-81 (Oxford: Clarendon Press, 1991) cited by Fisse, Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault, and Sanctions, 56 S. Cal. L. Rev. 1141.

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DOCTRINE OF IDENTIFICATION:

The concept of Doctrine of Identification finds its roots in the English Law. The growth of this

doctrine has helped in the implication and prosecution of the criminal activities of directors /

managers of many companies.

The corporate personality of a company is different and separate from the promoters, directors or

owners of the company. This is a widely known principle in law and has its source in the

celebrated case of Solomon v. Solomon2. In this case, the Court held that the corporate entity is

different from the people who are in the business of running of the company. The misuse of this

principle led to “Lifting of the Corporate Veil” wherein the shareholders or creditors of the

company are protected if the company is engaged in any fraud or other criminal activities.

A corporate entity can sue and be sued in its own individual name. In criminal cases, the

company can be prosecuted against but it is quite ineffectual as the company cannot be punished

with imprisonment or death. The only punishment that can be levied on the company is by way

of fine, which at times is quite minimalistic. The question then raised is whether a company can

ever be prosecuted for criminal offences and be punished with more than just a monetary fine.

The Courts in England, during the 1940s had in various judgments like DPP v. Kent & Sussex

Contractors Ltd3. R v. ICR Haulage Ltd. 4and Moore v. Bresler Ltd.5 ruled that the corporate

personalities could be subjected to criminal action and the companies were held liable for crimes

requiring intent (mens rea).

In light of the above, the Doctrine of Identification was promulgated so as to affix liability of the

crimes committed by the people in charge of running the company.

This theory states that the liability of a crime committed by a corporate entity is attributed or

identified to a person who has a control over the affairs of the company and that person is held

liable for the crime or fault committed by the company under his supervision.

2 [1897] AC 223 (1944) 1 All E.R.1194 (1944) 1 All E.R. 6915 (1944) 2 All E.R. 515 (KBD)

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In the case of Director of Public Prosecutions v. Kent and Sussex Contractors Ltd6, where the

defence was taken that the company is incapable of forming criminal intent as it did not have the

will or a state of mind, the Court held that the company can form its intentions through its human

agents and in certain circumstances (like in this case) the knowledge of the agent has to be

imputed to the body corporate.

In the celebrated case of Tesco Supermarkets Ltd. v. Nattrass7, the Appellant was marketing a

packet of washing powder at a price lower than the market price, but the Defendant did not find

the packet of washing powder at the reduced price, as advertised. The Defendant therefore filed a

complaint under the Trade Descriptions Act, 1968. One Mr. Clemant of the Appellant was in

charge of the packets with the reduced price being displayed in the store. Lord Reid discussed

the law relating mens rea and the importance of the same in criminal law.

“A living person has a mind which can have knowledge or intention or be negligent and he has

hands to carry out his intentions. A corporation has none of these: it must act through living

persons, though not always one or the same person. Then the person who acts is not speaking or

acting for the company. He is acting as the company and his mind which directs his acts is the

mind of the company. There is no question of the company being vicariously liable. He is not

acting as a servant, representative, agent or delegate. He is an embodiment of the company or,

one could say, he hears and speaks through the persona of the company, within his appropriate

sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt

of the company. It must be a question of law whether, once the facts have been ascertained, a

person in doing particular things is to be regarded as the company or merely as the company's

servant or agent. In that case any liability of the company can only be a statutory or vicarious

liability”

Lord Reid also discussed which people can be ¨identified¨ with the company. He stated that the

main considerations are the relative position he holds in the company and the extent of control he

exercises over its operations or a section of it without effective superior control. In this case, it

was held that the shop manager could not be identified with the company.

6 Supra 3, page no.2 7 (1971) 2 All E.R. 127

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CRIMINAL LIABILITY OF CORPORATIONS IN INDIA:

Criminal Liability is attached only those acts in which there is violation of Criminal Law i.e. to

say there cannot be liability without a criminal law which prohibits certain acts or omissions. The

basic rule of criminal liability revolves around the basic Latin Maxim actus non facit reum, nisi

mens sit reat. It means that ‘to make one liable, it must be shown that act or omission has been

done which was forbidden by law and has been done with guilty mind.’

As far as the current status of the Doctrine of Corporal Legal Liability in India, is concerned, the

recent landmark judgment of Apex Court in Standard Chartered Bank and Ors. etc. v. Directorate

of Enforcement and Ors. etc8. had made the scenario crystal clear. It overruled the previous

views regarding the Corporate Criminal Liability and had given a new touch to the said doctrine.

Standard Chartered Bank and Ors v Directorate of Enforcement9 the company was being

prosecuted for offence under Section 56 of the FERA Act, 1973.10 The Court pointed out that

going by the view expressed in Velliappa Textiles, the company could be prosecuted for an

offence involving rupees one lakh or less and be punished as the option is given to the court to

impose a sentence of imprisonment or fine, whereas in the case of an offence involving an

amount or value exceeding rupees one lakh, the court is not given a discretion to impose

imprisonment or fine and therefore, the company cannot be prosecuted as the custodial sentence

cannot be imposed on it.

This does not seem to be the intention of the legislature and thus certainly interpretation by larger

bench was required.

8 2005 4 CLJ 464: AIR2005SC26229 Ibid10 Section 56: Provided as Offences and prosecutions - (1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes any of the provisions of this Act (other than Section 13, clause (a) of sub-section (1) of section 18, Section 18A, clause (a) of sub-section (1) of section 19, sub- section (2) of section 44 and sections 57 and 58, or of any rule, direction or order made thereunder, he shall, upon conviction by a court, be punishable, --(i) in the case of an offence the amount or value involved in which exceeds one lakh of rupees, with imprisonment for a term which shall not be less than six months, but which may extend to seven years and with fine:Provided that the court may, for any adequate and special reasons to be mentioned in the judgment, impose a sentence of imprisonment for a term of less than six months.

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The question that arises for consideration was whether a company or a corporate body could be

prosecuted for offences for which the sentence of imprisonment is a mandatory punishment? In

Velliappa Textiles’ case , by a majority decision it was held that the company cannot be

prosecuted for offences which require imposition of a mandatory term of imprisonment coupled

with fine. It was further held that where punishment provided is imprisonment and fine, the court

cannot impose only a fine. The majority was of the view that the legislative mandate is to

prohibit the courts from deviating from the minimum mandatory punishment prescribed by the

Statute and that while interpreting a penal statute, if more than one view is possible, the court is

obliged to lean in favour of the construction which exempts a citizen from penalty than the one

which imposes the penalty.

In State of Maharasthra v. Syndicate Transport11 it was held that the company cannot be

prosecuted for offences which necessarily entail consequences of a corporal punishment or

imprisonment and prosecuting a company for such offences would only result in the court

stultifying itself by embarking on a trial in which the verdict of guilty is returned and no

effective order by way of sentence can be made.

The legal difficulty arising out of the above situation was noticed by the Law Commission and in

its 41st Report, the Law Commission suggested amendment to Section 62 of the Indian Penal

Code by adding the following lines:

In every case in which the offence is only punishable with imprisonment or with imprisonment

and fine and the offender is a company or other body corporate or an association of individuals,

it shall be competent to the court to sentence such offender to fine only.

This recommendation got no response from the Parliament and again in its 47th Report, the Law

Commission in paragraph 8(3) made the following recommendation:

In many of the Acts relating to economic offences, imprisonment is mandatory. Where the

convicted person is a corporation, this provision becomes unworkable, and it is desirable to

provide that in such cases, it shall be competent to the court to impose a fine. This difficulty can

arise under the Penal Code also, but it is likely to arise more frequently in the case of economic

11 1963 Bom. L.R. 197

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laws. We, therefore, recommend that the following provision should be inserted in the Penal

Code as, say, Section 62:

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.

But the Bill prepared on the basis of the recommendations of the Law Commission lapsed and it

did not become law. However few of these recommendations were accepted by the Parliament

and by suitable amendment some of the provisions in the taxation statutes were amended.

But, after the 2005 judgment of Apex Court, i.e., Standard Chartered Bank and Ors. etc. v.

Directorate of Enforcement and Ors. etc. the law has taken a settled position and it is basically

much more logical and good judgment. It was expressly stated in this case that the company is

liable to be prosecuted even if the offence is punishable both with a term of imprisonment and

fine. In case the company is found guilty, the sentence of imprisonment cannot be imposed on

the company and then the sentence of fine is to be imposed and the court has got the judicial

discretion to do so. This course is open only in the case where the company is found guilty but if

a natural person is so found guilty, both sentence of imprisonment and fine are to be imposed on

such person. There is no dispute that a company is liable to be prosecuted and punished for

criminal offences. Although there are earlier authorities to the effect that corporations cannot

commit a crime, the generally accepted modern rule is that except for such crimes as a

corporation is held incapable of committing by reason of the fact that they involve personal

malicious intent, a corporation may be subject to indictment or other criminal process, although

the criminal act is committed through its agents.

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Recently, the Hon’ble Supreme Court in Iridium India Telecom Ltd. vs. Motorola Inc.12 set at

rest the issue as to whether a company can be prosecuted for criminal offences involving mens

rea (mental element)?

The general perception about a Company being criminally prosecuted is that it being a juristic

person cannot be prosecuted for criminal offence involving mens rea. The Hon’ble Supreme

Court however, clearing the smoke on the issue held that a Company/Corporation cannot escape

liability merely because the punishment prescribed is that of imprisonment. A Company is

virtually on the same footing as any individual and may be convicted of offences including those

requiring mens rea. Setting aside the plea that the company could not have the necessary mens

rea, the Hon’ble Supreme Court allowed the prosecution against the Motorola.

In this brief factual background Iradium filed criminal complaint dated 03.10.2001 and the Ld.

Magistrate took cognizance of the criminal complaint and issued process against Motorola.

Motorola moved the Bombay High Court against the prosecution. The Hon’ble High Court vide

order dated 8.8.2003 quashed the proceedings inter-alia for the reasons that a corporation was

incapable of committing the offence of cheating as it has no mind; although a company can be a

victim of deception, it cannot be the perpetrator of deception. Only a natural person is capable of

having a guilty mind to commit an offence. Hence, Iridium, the complainant approached the

Hon’ble Supreme Court against the order dated 08.08.2003 of the Hon’ble Bombay High Court

against the quashing of the complaint filed by the Iridium against Motorola.

The Hon’ble Supreme Court decided the petition vide its judgment dated 20.10.2010, setting

aside order of the Hon’ble High Court. The Judgment of the Hon’ble Supreme Court is based on

the two aspects of the matter:

The scope of jurisdiction of the High Court in quashing criminal proceedings under

Section 482 of the Criminal Procedure Code; and

The fact that companies can be prosecuted for offences involving mens rea. The

criminal liability of a corporation would arise when an offence is committed in relation

12 2011(1) SCC 74

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to the business of the corporation by a person or a body of persons in controlling its

affairs.13

The Hon’ble Supreme Court held that a Corporate body can be prosecuted for cheating and

conspiracy under IPC. The offences for which Companies can be criminally prosecuted are not

limited only to the specific provisions made in the I.T. Act, Prevention of Food Adulteration Act

etc. Several other statutes also make a Company liable for prosecution, conviction and sentence.

The prosecution was allowed to go on, for the reason that the Companies can no longer claim

immunity from criminal prosecution on the ground that they are incapable of possessing the

necessary mens rea for the commission of criminal offences. The criminal liability of the

Corporation would arise when an offence is committed in relation to the business of the

Corporation by a person or body of persons in control of its affairs. In such circumstances, it

would be necessary to ascertain that the degree and control of the person or body of persons is so

intense that a Corporation may be said to think and act through the person or the body of

persons. Mens rea is attributed to the Corporations on the principle of “alter ego’ of the

Company meaning thereby that the criminal intent of the persons that guide the business of the

Company, would be imputed to the Corporation.

As such Iridium was entitled to an opportunity to establish that Motorola and its representatives

were aware of the falsity of the representations at the time when they were made. The Hon’ble

Supreme Court allowed the prosecution against the Motorola setting aside the defence plea that it

could not have the necessary mens rea. A Company/Corporation is virtually in the same position

as any individual and may be convicted of offences including those requiring mens rea. It cannot

escape liability for a criminal offence merely because the punishment prescribed is that of

imprisonment. The criminal intent of the alter ego of the company i.e. the persons or group of

persons that guide the business of the Company, would be imputed to the corporation, depending

upon degree of control exercised by persons in charge of affairs of company. Held if degree of

control is so intense that a corporation may be said to think and act through a person or body of

persons, mens rea of person or persons in control is attributable to the corporation.

If a corporate body is found guilty of the offence committed, the court, though bound to impose

the sentence prescribed under law, has the discretion to impose the sentence of imprisonment or

13 Supra 8, page no. 4

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fine as in the case of a company or corporate body the sentence of imprisonment cannot be

imposed on it and as the law never compels to do anything which is impossible, the court has to

follow the alternative and impose the sentence of fine. This discretion could be exercised only in

respect of juristic persons and not in respect of natural persons. There is no blanket immunity for

any company from any prosecution for serious offences merely because the prosecution would

ultimately entail a sentence of mandatory imprisonment. The corporate bodies, such as a firm or

company undertake series of activities that affect the life, liberty and property of the citizens.

Large scale financial irregularities are done by various corporations. The corporate vehicle now

occupies such a large portion of the industrial, commercial and sociological sectors that

amenability of the corporation to a criminal law is essential to have a peaceful society with

stable.

CORPORATE CRIMINAL LIABILITY IN OTHER COUNTRIES:

Corporate Criminal Liability in America

Although some earlier cases took the position that a Corporation is not indictable, but the

particular members of it are liable, the rule is now well established that a corporation may be

held criminally liable. It is immaterial that the act constituting the offence was ultra virus. The

Corporation may be held responsible, even though its employees or agents acted contrary to

express instructions when they violated the law, so long as they were acting for the benefit of the

corporation and within the scope of their actual or apparent authority. A corporation is

accountable for its employee’s conduct if it motivated, at least in part, by desire to serve the

Corporation but this need not be the sole motivation. And even if, the employees were acting in

their own interests when they committed a crime, the corporation may still be criminally liable

for the failure of its supervisors to detect and stop the wrongdoing, either in intentional disregard

of the law or in plain indifference to its requirements .

Corporations can be held criminally responsible for a wide variety of crimes:

Contempt in disobeying decrees and other court orders, directed to it.

Conspiracy.

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Bribery or conspiracy to bribe public officials.

The illegal practice of medicine.

Maintaining public nuisance.

Violations of licensing and regulatory statutes.

Violations of consumer protection laws.

Antitrust law violations.

Liquor law violations.

Larceny, if corporate officers authorized or acquiesced in criminal act.

Extortion, assuming that it was authorized, requested or commanded by a managerial

agent having supervisory responsibility.

Obtaining money by false pretenses.

Selling or exhibiting obscene matter.

Statutory federal crimes and such as violations of the Occupational Safety and Health

Act.

Most of the above crimes are economically motivated and it has been note that corporate liability

for criminal offences is often found where the offence is commercial and motivated by a desire

to enhance profits. A corporation may not receive direct economic benefits from a crime against

the person, it may still receive a direct economic benefit obtained by not taking expensive safety

precautions, and if a corporation takes such risks, the corporation becomes a proper criminal

defendant.

Punishments.

A corporation may be punishment by fine, indeed the only punishment that can be inflicted on a

corporation for a criminal offence, is a fine or seizure of its property which can be levied by an

execution issued by the court. A corporation cannot be imprisoned and is not amenable to

prosecution for a criminal offence which is only punishable by death or imprisonment. However,

the fact that the penalty provided for the violation of a statute is a fine or imprisonment, or both

in the discretion of the court, does not render it inapplicable to a corporation, and the same rule

applies where the statute creating the offence provides for imprisonment if the fine imposed not

paid. Sometimes, a statute providing that the penalty for a particular crime is imprisonment may

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be read in conjunction with a general statute allowing the imposition of a fine, and the fine may

be imposed on the corporation in lieu of imprisonment.

Corporal Criminal Liability in Europe.

While the preceding philosophical and policy debate has been occurring in the United States, a

debate of a different kind has been occurring in Western European countries. Western European

legal systems fundamentally resisted the imposition of criminal liability on legal entities

throughout most of the last century. This opposition was expressed in the principle societas

delinquere non potest, which means, ‘a legal entity cannot be blameworthy ’.

The modern trend in Western Europe of imposing criminal responsibility on corporations began

in 1970 and continues to the present time.

The Netherlands

In 1976, the Netherlands became one of the first Western European countries to adopt legislation

enacting comprehensive corporate criminal liability. The legislation made corporations liable for

all offenses, expanding on criminal liability that had previously been limited to economic crimes.

The 1976 legislation also dispensed with the requirement that liability be predicated on the

actions of natural persons acting on the corporation’s behalf, which was a requirement of the

previous 1951 law . Liability may be predicated on deficient decision-making structures within

the corporation or on the aggregate knowledge of multiple individuals.

Denmark

In 1926, with the passage of the Butter Act, Denmark introduced corporate criminal liability for

some offenses. By the end of the century, Denmark had greatly expanded the list of enterprise

offenses.

Switzerland

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In late 2003, Switzerland imposed criminal liability on corporations, having previously rejected

such liability for doctrinal reasons. Swiss criminal liability is based on the concept of ‘subsidiary

liability’: a corporation can be held liable for offenses committed on its behalf only if fault

cannot be attributed to a specific individual ‘because of a lack of organization within the

enterprise.’ The offense must be ‘in furtherance of a business activity consistent with the purpose

of the enterprise,’ a requirement which undoubtedly will need to be defined by the courts.

Criminal fines can range up to 5 million Swiss francs.

Such liability is predicated on management’s failure to properly organize and manage the

corporation’s affairs.

Conclusion

Absent the possibility of criminal liability, corporations would escape moral conviction for

wrongdoing, and the retributive import of criminal liability to the community would be lost. For

under a civil liability regime for the corporation qua corporation, there would be no moral

condemnation equivalent to a criminal conviction: if found civilly liable, a corporation might be

deemed negligent, or perhaps reckless, but no statement, in the form of a conviction, would attest

to the proper valuation of the persons or goods at issue. In the end, the financial liability imposed

would come to be viewed, by both the corporation and the community, merely as a cost of doing

business. In effect, then, a corporate civil liability regime that paralleled ordinary criminal

liability for individuals charged with the same wrongdoing would allow the corporation qua

corporation to purchase exemption from moral condemnation. Such exemption would affect the

expressive significance of criminal liability, as the vindication of the proper valuations of

persons and goods would vary not with the conduct alleged a distinction that rightly could affect

the evaluative standard employed but, rather, with the identity of the offender.

The Supreme Court has now settled the controversy, which was a disputed question of criminal

liability of a corporation. A corporation obviously cannot be sent to prison for serving a sentence

as it does not have a physical body that can be confined and thus many offences in which the

accused had to be imprisoned where not enforceable. The courts all over the country interpreted

it to mean that the legislature intended that the corporations are not to be prosecuted, as the

legislative mandate cannot be enforced against them and therefore there was no point in trying

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them for such an offence. This is however a clear violence to legislative intent and very rightly

out right by the Supreme Court in Standard Chartered case, whereby its seems clear that for

punishing a crime, intention needs to be imputed and in case of corporation this can be gathered

from the acts which they do in furtherance of a crime, thus corporate are capable of forming

intention.14

14 A Corporation intends killing of a person for which it pays some money, which is paid from the accounts of the company itself. Meanwhile murder of that person takes place, it cannot be said that corporation is not liable since means rea cannot be imputed, but by the interpretation by Supreme Court in Standard Chartered case, the acts of corporation speaks for the crime committed.

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