Corporate Criminal Liability: A Need of the Hour
The purpose of this article is to throw light on the current need for a legislation to deter the crimes committed by corporate firms. The paper describes the concept of corporate criminal liability, its diverse interpretation adopted over the years and the current scenario of corporate crimes in India. It discusses the need to intensify the current punishment given to corporations and proposes alternative sanctions which would further discourage corporations from indulging in corporate crimes.
Introduction:
By Aanchal Lamba and Aditi Khanna students of Law in ILS Law College, Pune, India.
Today, corporations play an indispensable role in the society and their actions have a direct or indirect effect on individuals all over the world. It is therefore necessary to control and supervise the actions of a corporation and also to make them accountable and responsible in cases which have an adverse effect on the society. The prevention of corporate misconduct is also a matter of concern for all since we are dependent on large firms to provide us with day –to-day facilities. The concept of corporate criminal liability has its origin in ancient law. However, the controversy involving corporate criminal liability gained momentum at the end of 19thcentury, after countries all over the world started facing a number of alarming crimes involving corporations.
Concept
To understand the concept of corporate criminal liability, it is fundamental to break down the term to its basic meaning. A corporation is a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. An act or the commission of an act that is forbidden or the omission of a duty that is commanded by a public law and that which makes the offender liable to punishment by that law is the definition of a crime. The term crime denotes an unlawful act punishable by a state. Hence, Corporate Criminal Liability can be understood as the liability which is attached with the corporations as a punishment, when corporations commit a crime.
Can a corporation be a Criminal?
The walls of a number of rules of criminal liability are built by the bricks of various Latin Maxims. The maxim, “actus non facit reum, nisi mens sit rea”, is a profound jurisprudential doctrine having a recognised legal application. It means that to make one liable, it must be shown that an act or omission has been committed with an intent or guilty mind. This maxim demands that to hold one liable for a crime, it is necessary to prove two elements.
One is the physical element of a crime (commission/omission) committed by a corporation which is a matter of proof. The second element of mens rea (mental element) was difficult to prove as the over generalized rationale prevalent at the time was that a corporation could not possess the requisite mens rea. Further, in the light of a number of case laws and case studies it was observed that a corporation cannot be prosecuted in the crimes requiring mandatory imprisonment as it has no physical body i.e a Corporation has ‘no soul to damn, and no body to kick.’
“Societasdelinquere non potest”
Societasdelinquere non potest is a locution Latin , meaning "societies cannot commit a crime”. This maxim is used in criminal law for referring to the criminal liability of legal persons . According to this principle, a legal person, such as a society cannot commit crimes because it lacks the will which forms the subjective will of their actions.
'Judicisest just dicere, non dare'
This Latin maxim expounds the role of the court. The court is to interpret the law, not to make it. This read with the Doctrine of Separation of Powers has bound the Court’s hands in imposing various kinds of other punishments.
In State of Maharasthra v. Syndicate Transport, the Bombay High Court had held that the company could not be prosecuted for offenses which necessarily entailed corporal punishment or imprisonment; prosecuting a company for such offenses would only result in a trial with a verdict of guilty and no effective order by way of a sentence. The learned Extra Additional Sessions Judge was of the view that a corporate body acts only through its agents or servants and the mens rea of such agents or servants cannot be attributed to the Company.
In Zee Telefilms Ltd v Sahara India Co. Corp. Ltd, Sahara alleged that Zee had telecast a program which was false thereby bringing disrepute to and defaming Sahara. Sahara filed a complaint under Section 500 of the IPC which relates to punishment for defamation. However the court came to a conclusion that mens rea was an essential element to crime and since a company couldn’t have the required mens rea, it was not liable to be prosecuted for the crime.
It was soon perceived that such decisions of the courts were not only working against the concept of public policy but also encouraged corporate misconduct. The need for a regulation to forefend such acts of the corporations was then highlighted.
The current scenario:
“A company can only act through human beings and a human being who commits an offence on account of or for the benefit of a company will be responsible for that offence himself. The importance of incorporation is that it makes the company itself liable in certain circumstances, as well as the human beings.” - Glanville Williams
It was necessary to counter this practical difficulty of sentencing companies with imprisonment created by such a legal fiction. To plug this loophole, the courts in England pierced the corporate veil and held that corporations should be held liable for criminal and civil wrongdoings in cases where the offences are committed through “directing mind and will” of the corporation.
The present Indian law on the subject of corporate criminal responsibility was being greatly influenced by developments in English law, the historical development of the attribution of mens rea to corporations can be traced back to English law. The first significant case on attribution of corporate responsibility was DPP v. Kent and Sussex Contractors Ltd, in which it was held that a company identified with those officers who are its ‘directing mind and will’. The case concerned two offences, making a statement known to be false and using a false document with intent to deceive. It was held the company was liable on both counts, laying down what is today known as the ‘Identification Principle’. This formulation received acceptance immediately and was further crystallised by Lord Denning in H.L. Bolton Co. Ltd. v. T.J. Graham & Sons, where he compared a company to a human body, likening the directors and managers to the ‘brain’ of the company and thereby allowing attribution.
The position of law in India regarding the culpability of corporations in offences requiring mandatory imprisonment in cases of corporate criminal liability was however, imprecise and ambiguous. The legal difficulty arising out of the above situation was noticed and discussed by the Law Commission of India. It proposed an amendment to the Indian Penal Code to allow the prosecution of corporations for such offences. To that end, the Indian Penal Code (Amendment) Bill, 1972 was introduced, purporting to and make imposition of fine the sole punishment for corporations in the aforementioned cases. However, the bill lapsed and was never re-introduced.
The courts in India also recognised the need for modification in the interpretation of the statutes in cases relating to corporate criminal liability so that the aggrieved should not be prejudiced in the garb of corporate personality.
Further, the principle of strict and absolute liability was a pertinent concept gaining momentum at the end of 19th century. This concept was applied in a number of cases which were planted on corporate crime. These cases hold precedential value even today. One of the earliest example of such a case is the controversy of the Bhopal Gas Tragedy. After which a number of cases, especially those involving environment issues, based their decision on these principles.
In The Assistant Commissioner... v. M/S. Velliappa Textiles Ltd. & Anr, under the Income Tax Act some sections were violated by a private company. Section 276C and 277 of the said Act, imposed a fine along with imprisonment. The Supreme Court discussed the controversy related to mens rea and held that the mens rea of person in charge is liable to be extrapolated to the corporation, enabling an artificial person to be prosecuted. Srikrishna J. in majority observed:
“The doctrine of alter ego identifies actions and thought patterns of certain individuals within the corporation called corporate organs who act within the scope of their authority and on behalf of the corporate body, as the behaviour of the legal body itself. Hence, the name of the doctrine: the theory of corporate organs or the alter ego doctrine referring to these individuals as the embodiment of the legal body. We hold that there is no immunity to the companies from prosecution merely because the prosecution is in respect of offences for which punishment prescribed is mandatory imprisonment.”
In the landmark judgment of Standard Chartered Bank and Ors v. Directorate of Enforcement, the bank had violated certain provisions of the Foreign Exchange Regulation Act, 1973 and was held liable for the same. Supreme Court held that a corporation could be held liable, prosecuted and punished with fines regardless of the fact that mandatory punishment is laid down in a particular law. The Apex Court took a wide interpretation of the provisions in order to deliver full and fair justice by imposing a fine on the corporate. It was held that the interpretation of the statutes must not be in the strict sense but must be wide so as not to exclude from its ambit what the framers would not have ordinarily or knowingly excluded from the meaning of that section.
In Iridum India Telecom v. Motorola Incorporated, a criminal case under section 420 and section 120B of Indian Penal Code was filed by Iridum India Telecom against Motorola Incorporated. In this case, the alleged offence being one requiring definite presence of mens rea, it was argued that it could not be imputed to a company at all. However, in light of the decision of the Court in the above mentioned Standard Chartered Bank Case and other foreign authorities, it was held was in favour of the proposition that corporations are capable of possessing mens rea. It is important to distinguish the present matter from the facts of Standard Chartered in so far as in that case, the offence in question was under Section 51 of the Foreign Exchange Regulation Act, 1973 which imposes strict liability and therefore requires no enquiry into the mens rea of the corporation. In the present case however, Section 420 of the Indian Penal Code uses the terms ‘dishonestly induces’ and necessitates the presence of mens rea.
All in all, the present day situation of corporate criminal liability ingrained by the Indian courts is that corporations can be prosecuted for corporal crimes and punished with fines despite the fact that a certain provision of law which is applicable provides for mandatory imprisonment. However, until now, the Courts have been able to impose only fine as a form of punishment because of statutory inadequacy and lack of new forms of punishments which could be imposed upon corporates. There is a desperate need for a legislative framework as a remedy for this situation.
Is Fine an efficacious punishment for corporations?
The mullet which is ruinous to the labourer is easily borne by a tradesman and is absolutely unfelt by a rich zamindar. The issue of what sanctions are appropriate for corporate criminal activities has been a matter of contention and doctrinal debates. Initially it had been one of the arguments for rejecting corporate criminal liability. One of the issues that corporate criminal liability is related to is, the criminal fines. Customarily, the typical punishment imposed on corporates is that of fines. The reasoning adopted for this being most statutes (for example: Indian Penal Code) talk about kinds of punishments that can be imposed upon the convict which include death, life imprisonment, rigorous and simple imprisonment, forfeiture of property and fine. In certain cases, where the sections speak only of imprisonment as a punishment the courts have to resort to judicial activism to ensure justice. Hence, all other sanctions except that of a fine are practically inapplicable in case of corporations.
Fine being an individual character in this game of corporate responsibility, courts today invariably respond to corporate convictions by fining the corporation. However, it is essential to consider the consequences that follow such fines. The corporation shifts the burden of these fines on individuals who are engaged with the corporation and its business. The liability is shifted on the people behind the face of the company having a mind, body and authority to execute the activities of the company like the employees by way of salary cuts and employment cuts and on the shoulders of the consumers or the customers of the company. Additionally, even when the management and the ownership of the company are vested in separate hands, the liability of the owners being more than that of the management, the owners have to bear the brunt of such fine.
The purpose of imposing punishment or of making an offender responsible for his acts is apparent on the face of criminal jurisprudence. The justifications for punishments given in crimes can be identified in the principles of deterrence, rehabilitation and retribution. When a corporation is made to pay a fine as a punishment, it is of utmost importance to consider whether such a fine serves the purpose of punishments.
Introduction:
By Aanchal Lamba and Aditi Khanna students of Law in ILS Law College, Pune, India.
Today, corporations play an indispensable role in the society and their actions have a direct or indirect effect on individuals all over the world. It is therefore necessary to control and supervise the actions of a corporation and also to make them accountable and responsible in cases which have an adverse effect on the society. The prevention of corporate misconduct is also a matter of concern for all since we are dependent on large firms to provide us with day –to-day facilities. The concept of corporate criminal liability has its origin in ancient law. However, the controversy involving corporate criminal liability gained momentum at the end of 19thcentury, after countries all over the world started facing a number of alarming crimes involving corporations.
Concept
To understand the concept of corporate criminal liability, it is fundamental to break down the term to its basic meaning. A corporation is a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. An act or the commission of an act that is forbidden or the omission of a duty that is commanded by a public law and that which makes the offender liable to punishment by that law is the definition of a crime. The term crime denotes an unlawful act punishable by a state. Hence, Corporate Criminal Liability can be understood as the liability which is attached with the corporations as a punishment, when corporations commit a crime.
Can a corporation be a Criminal?
The walls of a number of rules of criminal liability are built by the bricks of various Latin Maxims. The maxim, “actus non facit reum, nisi mens sit rea”, is a profound jurisprudential doctrine having a recognised legal application. It means that to make one liable, it must be shown that an act or omission has been committed with an intent or guilty mind. This maxim demands that to hold one liable for a crime, it is necessary to prove two elements.
One is the physical element of a crime (commission/omission) committed by a corporation which is a matter of proof. The second element of mens rea (mental element) was difficult to prove as the over generalized rationale prevalent at the time was that a corporation could not possess the requisite mens rea. Further, in the light of a number of case laws and case studies it was observed that a corporation cannot be prosecuted in the crimes requiring mandatory imprisonment as it has no physical body i.e a Corporation has ‘no soul to damn, and no body to kick.’
“Societasdelinquere non potest”
Societasdelinquere non potest is a locution Latin , meaning "societies cannot commit a crime”. This maxim is used in criminal law for referring to the criminal liability of legal persons . According to this principle, a legal person, such as a society cannot commit crimes because it lacks the will which forms the subjective will of their actions.
'Judicisest just dicere, non dare'
This Latin maxim expounds the role of the court. The court is to interpret the law, not to make it. This read with the Doctrine of Separation of Powers has bound the Court’s hands in imposing various kinds of other punishments.
In State of Maharasthra v. Syndicate Transport, the Bombay High Court had held that the company could not be prosecuted for offenses which necessarily entailed corporal punishment or imprisonment; prosecuting a company for such offenses would only result in a trial with a verdict of guilty and no effective order by way of a sentence. The learned Extra Additional Sessions Judge was of the view that a corporate body acts only through its agents or servants and the mens rea of such agents or servants cannot be attributed to the Company.
In Zee Telefilms Ltd v Sahara India Co. Corp. Ltd, Sahara alleged that Zee had telecast a program which was false thereby bringing disrepute to and defaming Sahara. Sahara filed a complaint under Section 500 of the IPC which relates to punishment for defamation. However the court came to a conclusion that mens rea was an essential element to crime and since a company couldn’t have the required mens rea, it was not liable to be prosecuted for the crime.
It was soon perceived that such decisions of the courts were not only working against the concept of public policy but also encouraged corporate misconduct. The need for a regulation to forefend such acts of the corporations was then highlighted.
The current scenario:
“A company can only act through human beings and a human being who commits an offence on account of or for the benefit of a company will be responsible for that offence himself. The importance of incorporation is that it makes the company itself liable in certain circumstances, as well as the human beings.” - Glanville Williams
It was necessary to counter this practical difficulty of sentencing companies with imprisonment created by such a legal fiction. To plug this loophole, the courts in England pierced the corporate veil and held that corporations should be held liable for criminal and civil wrongdoings in cases where the offences are committed through “directing mind and will” of the corporation.
The present Indian law on the subject of corporate criminal responsibility was being greatly influenced by developments in English law, the historical development of the attribution of mens rea to corporations can be traced back to English law. The first significant case on attribution of corporate responsibility was DPP v. Kent and Sussex Contractors Ltd, in which it was held that a company identified with those officers who are its ‘directing mind and will’. The case concerned two offences, making a statement known to be false and using a false document with intent to deceive. It was held the company was liable on both counts, laying down what is today known as the ‘Identification Principle’. This formulation received acceptance immediately and was further crystallised by Lord Denning in H.L. Bolton Co. Ltd. v. T.J. Graham & Sons, where he compared a company to a human body, likening the directors and managers to the ‘brain’ of the company and thereby allowing attribution.
The position of law in India regarding the culpability of corporations in offences requiring mandatory imprisonment in cases of corporate criminal liability was however, imprecise and ambiguous. The legal difficulty arising out of the above situation was noticed and discussed by the Law Commission of India. It proposed an amendment to the Indian Penal Code to allow the prosecution of corporations for such offences. To that end, the Indian Penal Code (Amendment) Bill, 1972 was introduced, purporting to and make imposition of fine the sole punishment for corporations in the aforementioned cases. However, the bill lapsed and was never re-introduced.
The courts in India also recognised the need for modification in the interpretation of the statutes in cases relating to corporate criminal liability so that the aggrieved should not be prejudiced in the garb of corporate personality.
Further, the principle of strict and absolute liability was a pertinent concept gaining momentum at the end of 19th century. This concept was applied in a number of cases which were planted on corporate crime. These cases hold precedential value even today. One of the earliest example of such a case is the controversy of the Bhopal Gas Tragedy. After which a number of cases, especially those involving environment issues, based their decision on these principles.
In The Assistant Commissioner... v. M/S. Velliappa Textiles Ltd. & Anr, under the Income Tax Act some sections were violated by a private company. Section 276C and 277 of the said Act, imposed a fine along with imprisonment. The Supreme Court discussed the controversy related to mens rea and held that the mens rea of person in charge is liable to be extrapolated to the corporation, enabling an artificial person to be prosecuted. Srikrishna J. in majority observed:
“The doctrine of alter ego identifies actions and thought patterns of certain individuals within the corporation called corporate organs who act within the scope of their authority and on behalf of the corporate body, as the behaviour of the legal body itself. Hence, the name of the doctrine: the theory of corporate organs or the alter ego doctrine referring to these individuals as the embodiment of the legal body. We hold that there is no immunity to the companies from prosecution merely because the prosecution is in respect of offences for which punishment prescribed is mandatory imprisonment.”
In the landmark judgment of Standard Chartered Bank and Ors v. Directorate of Enforcement, the bank had violated certain provisions of the Foreign Exchange Regulation Act, 1973 and was held liable for the same. Supreme Court held that a corporation could be held liable, prosecuted and punished with fines regardless of the fact that mandatory punishment is laid down in a particular law. The Apex Court took a wide interpretation of the provisions in order to deliver full and fair justice by imposing a fine on the corporate. It was held that the interpretation of the statutes must not be in the strict sense but must be wide so as not to exclude from its ambit what the framers would not have ordinarily or knowingly excluded from the meaning of that section.
In Iridum India Telecom v. Motorola Incorporated, a criminal case under section 420 and section 120B of Indian Penal Code was filed by Iridum India Telecom against Motorola Incorporated. In this case, the alleged offence being one requiring definite presence of mens rea, it was argued that it could not be imputed to a company at all. However, in light of the decision of the Court in the above mentioned Standard Chartered Bank Case and other foreign authorities, it was held was in favour of the proposition that corporations are capable of possessing mens rea. It is important to distinguish the present matter from the facts of Standard Chartered in so far as in that case, the offence in question was under Section 51 of the Foreign Exchange Regulation Act, 1973 which imposes strict liability and therefore requires no enquiry into the mens rea of the corporation. In the present case however, Section 420 of the Indian Penal Code uses the terms ‘dishonestly induces’ and necessitates the presence of mens rea.
All in all, the present day situation of corporate criminal liability ingrained by the Indian courts is that corporations can be prosecuted for corporal crimes and punished with fines despite the fact that a certain provision of law which is applicable provides for mandatory imprisonment. However, until now, the Courts have been able to impose only fine as a form of punishment because of statutory inadequacy and lack of new forms of punishments which could be imposed upon corporates. There is a desperate need for a legislative framework as a remedy for this situation.
Is Fine an efficacious punishment for corporations?
The mullet which is ruinous to the labourer is easily borne by a tradesman and is absolutely unfelt by a rich zamindar. The issue of what sanctions are appropriate for corporate criminal activities has been a matter of contention and doctrinal debates. Initially it had been one of the arguments for rejecting corporate criminal liability. One of the issues that corporate criminal liability is related to is, the criminal fines. Customarily, the typical punishment imposed on corporates is that of fines. The reasoning adopted for this being most statutes (for example: Indian Penal Code) talk about kinds of punishments that can be imposed upon the convict which include death, life imprisonment, rigorous and simple imprisonment, forfeiture of property and fine. In certain cases, where the sections speak only of imprisonment as a punishment the courts have to resort to judicial activism to ensure justice. Hence, all other sanctions except that of a fine are practically inapplicable in case of corporations.
Fine being an individual character in this game of corporate responsibility, courts today invariably respond to corporate convictions by fining the corporation. However, it is essential to consider the consequences that follow such fines. The corporation shifts the burden of these fines on individuals who are engaged with the corporation and its business. The liability is shifted on the people behind the face of the company having a mind, body and authority to execute the activities of the company like the employees by way of salary cuts and employment cuts and on the shoulders of the consumers or the customers of the company. Additionally, even when the management and the ownership of the company are vested in separate hands, the liability of the owners being more than that of the management, the owners have to bear the brunt of such fine.
The purpose of imposing punishment or of making an offender responsible for his acts is apparent on the face of criminal jurisprudence. The justifications for punishments given in crimes can be identified in the principles of deterrence, rehabilitation and retribution. When a corporation is made to pay a fine as a punishment, it is of utmost importance to consider whether such a fine serves the purpose of punishments.
Deterrence is a measure to prevent people from committing an offence. This punishment is intended to be such that people should choose not to commit the crime over experiencing the punishment. In a corporation, the impact of the fine is felt by the guilty as well as the innocent. Such fines cause agitation and frustration in the minds of the innocent. Hence, fines only serve to remove the ill-gotten gains of prohibited conduct. To have an effective deterrence on corporations one should adopt a more prospective course of action.
Rehabilitation is the punishment intended to reform an offender and to reintroduce him (the corporate, in this case) in society by making him behave in a more socially accepted manner. Where a collective punishment is given to the accused and guilty, the aim of rehabilitation cannot be met. Further, it amounts to restricting individuals’ right to liberty which is not justified in any legal system.
Retribution can be well explained by the phrase “an eye for an eye”. Retribution is only justified when the actual person who commits a crime is punished himself/herself. Fine paid by a corporation on the whole will not comply with the principle of punishment.
All in all, fines are a very restrictive scope and often an inadequate form of penalty. The following are few of the reasons that make the imposition of fines counterproductive.
Often the amount of fine imposed by the court is inadequate.
Fines rarely affect the profitability of a company and the payment of dividends so shareholders are unlikely to be affected.
Companies making limited profit or facing difficult financial circumstances may cut back on safety improvements and quality in order to pay the fine.
It may or may not regulate the conduct of corporations.
Does not the general purpose of punishment.
A New Approach:
As the purpose to any legislation is to reduce the number of crimes alternative, more flexible and innovative penalties need to be considered. For the purpose of this submission, the following can be considered to serve as a more legitimate and productive purpose of punishment:
Corporate Probation/Intensive Supervision Probation: It is a supervision Order imposed by the court on a company that has committed a criminal offence. The United States of America and Canada introduced this sentencing option. An expert or a body of experts can be appointed by the court to keep a check on the activities of a corporation that has previously defaulted.
Compulsory Cells: Corporations whose activities have far reaching effects on the general masses should be required to establish their own cells or societies whose members should not be directly or indirectly involved in the activities of the corporation. Such a body should supervise the actions of the individuals working in the corporation. Such bodies should be questioned by the courts in cases of criminal activities and should be held liable in certain cases.
Scarlet Letter Punishment: Goodwill is the heart and soul of the company. Loss of goodwill connotes sense of shame and also makes others reluctant to do business in the future with the defaulter. The crimes committed by the corporations should be published in newspapers as well as the websites of the corporations so that people who would engage in doing business with such corporations are aware.
Asset Forfeiture/ Equity Fines: To serve the purpose of restitution, the assets of a company should be forfeited and the same should be auctioned by the government. The monetary gain from these assets should be allocated to the victims as compensation. Equity fines are sort of fines wherein the company doesn’t make any cash payment but instead is required to issue shares to the victims as compensation.
In a case where a corporation is a regular offender, sanctions like corporate death or permanent closure i.e winding up of the firm and temporary closure should be adopted.
As the footsteps taken by the courts and the statues that are in force today are far away from reaching the destination of punishing corporate criminals severely, it is the need of the hour to introduce new forms of punishments and amend the legislature in order to obligate and regulate the conduct of corporations.
By Aanchal Lamba and Aditi Khanna students of Law in ILS Law College, Pune, India.
Tags : Corporate and Commercial