LAW SUBSTANTIVE CRIMINAL LAW CORPORATE CRIMINAL LIABILITY

Transcription

1 LAW SUBSTANTIVE CRIMINAL LAW CORPORATE CRIMINAL LIABILITY

2 CORPORATE CRIMINAL LIABILITY Quadrant I: Description of Module Description of Module Subject Name Law Paper Name Substantive Criminal Law Module Name/Title Corporate Criminal Liability Module Id 26 Pre-requisites A general understanding of the fundamental of criminal law and company law. Objectives To introduce theoretical analysis of law To enable students to acquaint students with the diversity of conceptual perspectives informing the discipline of law Key Words Criminal Liability, Corporate, Punishment, Theories of Criminal Liability Quadrant II: E-Text INTRODUCTION: Corporations have a separate legal entity. They are treated in law as having a legal personality distinct from the natural persons members, directors, employees etc. - who make the corporation. 1 Due to this, liability is imposed on the corporation separately from any criminal liability which may be imposed on the individual members for any wrongdoing. The basic rule of criminal liability is based on the Latin maxim actus non facit reum nisi mens sit rea (an act is not wrongful unless accompanied by a wrongful state of mind). 2 Thus, central to the criminal law are the concepts of actus reus (wrongful act) and mens rea (wrongful state of mind). Companies should be subject to criminal liability for offences that occur in the course of their business operation for which they bear responsibility. A corporation may be convicted in a criminal court for acts that violate the penal law of the jurisdiction in which it is tried. The crimes that a corporation may commit include murder as well as offenses of omission, such as the 1 David Ormerod, Smith & Hogan s Criminal Law, 13 th Edition, 2011, Oxford University Press, Oxford, p John Minkes and Leonard Minkes Corporate and White-collar Crime, 2008, Sage Publications, Delhi, p.61

3 failure to install safety precautions in a factory. A corporation presumably cannot be convicted for rape, and it cannot be imprisoned. 3 CORPORATE LIABILITY: A corporation may be criminally liable for crimes which involve a specific element of intent as well for those which do not, and, although some crimes require such a personal, malicious intent, that a corporation is considered incapable of committing them, nevertheless, under the proper circumstances the criminal intent of its agent may be imputed to it so as to render it liable, the requisites of such imputation being essentially the same as those required to impute malice to corporations in civil actions. 4 The current legal rules regarding corporate criminal liability came into being after earlier debate about the propriety of criminally punishing a corporate entity. A major argument was that a corporation lacked the required mens rea that is usually essential for a determination of criminal guilt. The most significant reason was that corporations were more readily identifiable than the humans within them who might have been responsible for criminal behaviour. Second, the economic power accumulated by the corporate world seemed to demand that reins be imposed on it to restrain free-wheeling and destructive acts. 5 Under the current penal structure, for an offence by the corporation, both the corporation and its officer can be made liable. However, the law on corporate criminal liability is not limited to the general criminal law in the Indian Penal Code but it is scattered over a number of statutes with specific provisions for the same. 6 With regard to corporate criminal liability, the Supreme Court has observed that there is a need for proper law relating to it in India. In India, several statutes impose vicarious responsibility (for strict liability offences) on officers who are in charge of and responsible to the company for the management of its affairs. Actus Reus Mens rea Crime 3 Lawrence Salinger, Encyclopedia Of White-Collar & Corporate Crime, Vol. 1, Sage Publications, New Delhi, p Iridium Motorola Case (SC) 5 Lawrence Salinger, Encyclopedia Of White-Collar & Corporate Crime, Vol. 1, Sage Publications, New Delhi, p Sumit Sharma, Corporate Crimes & Financial Frauds, 2013, Authors Press, New Delhi, p.28

4 Legal Position in England & U.S.A. In England and the United States, the legal position is that a corporation would be liable for crimes of intent. In the year 1909, the United States Supreme Court stated the principle thus: 7 It is true that there are some crimes which, in their nature, cannot be committed by corporations. But there is a large class of offences, of which rebating under the federal statutes is one, wherein the crime consists in purposely doing the things prohibited by statute. In that class of crimes we see no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them. If it were not so, many offences might go unpunished and acts be committed in violation of law where, as in the present case, the statute requires all persons, corporate or private, to refrain from certain practices, forbidden in the interest of public policy. We see no valid objection in law, and every reason in public policy, why the corporation, which profits by the transaction, and can only act through its agents and officers, shall be held punishable by fine because of the knowledge and intent of its agents to whom it has entrusted authority to act in the subject-matter of making and fixing rates of transportation, and whose knowledge and purposes may well be attributed to the corporation for which the agents act. While the law should have regard to the rights of all, and to those of corporations no less than to those of individuals, it cannot shut its eyes to the fact that the great majority of business transactions in modern times are conducted through these bodies, and particularly that inter-state commerce is almost entirely in their hands, and to give them immunity from all punishment because of the old and exploded doctrine that a corporation cannot commit a crime would virtually take away the only means of effectually controlling the subject-matter and correcting the abuses aimed at. Lord Holt is reported 8 to have said that `a corporation is not indictable, but the particular members of it are'. On the strength of this statement it was said by the early writers that a corporation is not indictable at common law, and this view was taken by the courts in some of the earlier cases. The broad general rule is now well established, 7 New York Central and Hudson River Railroad Co. v. United States, 53 L Ed Anonymous, 12 Mod 559, 88 Eng Reprint 1164

5 however, that a corporation may be criminally liable. This rule applies as well to acts of misfeasance as to those of nonfeasance, and it is immaterial that the Act constituting the offence was ultravires. It has been held that a de facto corporation may be held criminally liable. 9 As in case of torts the general rule prevails that a corporation may be criminally liable for the acts of an officer or agent, assumed to be done by him when exercising authorized powers, and without proof that his act was expressly authorized or approved by the corporation. A specific prohibition made by the corporation to its agents against violation of the law is no defence. The rule has been laid down, however, that corporations are liable, civilly or criminally, only for the acts of their agents who are authorized to act for them in the particular matter out of which the unlawful conduct with which they are charged grows or in the business to which it relates. A corporation may be criminally liable for crimes which involve a specific element of intent as well for those which do not, and, although some crimes require such a personal, malicious intent, that a corporation is considered incapable of committing them, nevertheless, under the proper circumstances the criminal intent of its agent may be imputed to it so as to render it liable, the requisites of such imputation being essentially the same as those required to impute malice to corporations in civil actions. 10 The Courts in England have emphatically rejected the notion that a body corporate could not commit a criminal offence which was an outcome of an act of will needing a particular state of mind. The aforesaid notion has been rejected by adopting the doctrine of attribution and imputation. In other words, 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. It may be appropriate at this stage to notice the observations made by the MacNaghten, J.: A body corporate is a `person' to whom, amongst the various attributes it may have, there should be imputed the attribute of a mind capable of 9 19 American Jurisprudence 2d para Corpus Juris Secundum, para 1363

6 knowing and forming an intention -- indeed it is much too late in the day to suggest the contrary. It can only know or form an intention through its human agents, but circumstances may be such that the knowledge of the agent must be imputed to the body corporate. Counsel for the respondents says that, although a body corporate may be capable of having an intention, it is not capable of having a criminal intention. In this particular case the intention was the intention to deceive. If, as in this case, the responsible agent of a body corporate puts forward a document knowing it to be false and intending that it should deceive, I apprehend, according to the authorities that Viscount Caldecote, L.C.J., has cited, his knowledge and intention must be imputed to the body corporate. 11 The principle has been reiterated by Lord Denning in the case of H.L. Bolton (Engg.) Co. Ltd. v. T.J. Graham and Sons 12 in the following words: 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 the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company. That is made clear in Lord Haldane's speech in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. AC at pp. 713, 714. So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company themselves guilty. The aforesaid principle has been firmly established in England since the decision of House of Lords in Tesco Supermarkets Ltd. v. Nattrass 13. In stating the principle of 11 Director of Public Prosecutions v. Kent and Sussex Contractors Ltd All ER (3) All ER All ER 127

7 corporate liability for criminal offences, Lord Reid made the following statement of law: I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. 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 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. It becomes evident that a corporation is virtually in the same position as any individual and may be convicted of common law as well as statutory offences including those requiring mens rea. The criminal liability of a 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. The position of law on this issue in Canada is almost the same. Mens rea is attributed to corporations on the principle of `alter ego' of the company. It has been laid down that in general, a corporation is in the same position in relation to criminal liability as a natural person and may be convicted of common law and statutory offences including those requiring mens rea. 14 While dealing with liability in respect of criminal prosecution, it has been stated that a corporation shall be liable for 14 Halsbury's Laws of England, Volume 11(1), para. 35

8 criminal prosecution for crimes punishable with fine; in certain jurisdictions, a corporation cannot be convicted except as specifically provided by statute. 15 Legal Position in India: Judicial Trends So far as India is concerned, the legal position has been clearly stated by the Constitution Bench judgment of this Court in the case of Standard Chartered Bank v. Directorate of Enforcement. 16 On a detailed consideration of the entire body of case laws in this country as well as other jurisdictions, it has been observed as follows: 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. The Court also rejected the submission that a company could avoid criminal prosecution in cases where custodial sentence is mandatory. Upon examination of the entire issue, it is observed as follows: In the case of Penal Code offences, for example under Section 420 of the Indian Penal Code, for cheating and dishonestly inducing delivery of property, the punishment prescribed is imprisonment of either description for a term which may extend to seven years and shall also be liable to fine; and for the offence under Section 417, that is, simple cheating, the punishment prescribed is imprisonment of either description for a term which may extend to one year or with fine or with both. If the appellants' plea is accepted then for the offence under Section 417 IPC, which is an offence of minor nature, a company could be prosecuted and punished with fine whereas for the offence under Section 420, which is an aggravated form of cheating by which the victim is dishonestly induced to deliver property, the company cannot be prosecuted as there is a mandatory sentence of imprisonment. So also there are several other offences in the Indian Penal Code which describe offences of serious nature whereunder a corporate body also may be found guilty, and the punishment prescribed is mandatory custodial sentence. There Corpus Juris Secundum, para AIR 2005 SC 2622

9 are a series of other offences under various statutes where the accused are also liable to be punished with custodial sentence and fine. As the company cannot be sentenced to imprisonment, the court has to resort to punishment of imposition of fine which is also a prescribed punishment. As per the scheme of various enactments and also the Indian Penal Code, mandatory custodial sentence is prescribed for graver offences. If the appellants' plea is accepted, no company or corporate bodies could be prosecuted for the graver offences whereas they could be prosecuted for minor offences as the sentence prescribed therein is custodial sentence or fine. As the company cannot be sentenced to imprisonment, the court cannot impose that punishment, but when imprisonment and fine is the prescribed punishment the court can impose the punishment of fine which could be enforced against the company. Such discretion is to be read into the section so far as the juristic person is concerned. Of course, the court cannot exercise the same discretion as regards a natural person. Then the court would not be passing the sentence in accordance with law. As regards company, the court can always impose a sentence of fine and the sentence of imprisonment can be ignored as it is impossible to be carried out in respect of a company. This appears to be the intention of the legislature and we find no difficulty in construing the statute in such a way. We do not think that there is 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 a 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 economy. B.N.Krishna, J, in dissent, pointed out that the judicial function is limited to finding solutions within specified parameters. Anything more than that would be 'judicial heroics' and 'naked usurpation of legislative function. He further cited Kenny in "The Outlines of Criminal Law" which states that a corporation is devoid not only of mind, but also of body; and therefore incapable of the usual criminal punishments. "

10 In Anil Gupta v. Star India Pvt. Ltd., 17 where the matter was related to dishonour of cheques under sections 138 and 141 of the Negotiable Instruments Act, 1881, the Supreme Court observed that arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the drag-net on the touchstone of vicarious liability as the same has been stipulated in the provision itself. In Gunmala Sales Private Ltd. v. Anu Mehta, 18 the Supreme Court observed that the vicarious liability is contemplated in the NI Act to ensure greater transparency in commercial transactions. This object has to be kept in mind while considering individual cases and hardship arising out of a particular case cannot be the basis for Directors to try to wriggle out of prosecution. The Court referred to the following principles laid down in various cases with reference to vicarious liability of a company under the Negotiable Instruments Act: 19 (i) The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction. (ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company. (iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with averments in the petition containing that accused were in-charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with. (iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred. (v) If accused is a Managing Director or a Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with. (vi) If the accused is a Director or an Officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in complaint. (vii) The person sought to be made liable should be in charge of and responsible for the 17 AIR 2014 SC (12)SCALE (12)SCALE270

11 conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases. In Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd, 20 the Supreme Court noted that the Negotiable Instrument Act (NIA) is one where the company itself and certain categories of officers in certain circumstances are deemed to be guilty of the offence. Further, the court observed that it is the bounden duty of the court to ascertain for what purpose the legal fiction has been created. It is also the duty of the court to imagine the fiction with all real consequences and instances unless prohibited from doing so. Section 141, NIA clearly stipulates that when a person which is a company commits an offence, then certain categories of persons in charge as well as the company would be deemed to be liable for the offences under Section 138, NIA. The word 'deemed' used in Section 141, NIA applies to the company and the persons responsible for the acts of the company. It crystallizes the corporate criminal liability and vicarious liability of a person who is in charge of the company. When a statute enacts that something shall be deemed to have been done, which, in fact and truth was not done, the Court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to. Aneeta Haada v. M/s Godfather Travels & Tours, 21 the Supreme Court discussed the extent of corporate criminal liability in case of a company where the matter was related to liability of the company in case of dishonour of cheque. The Court observed that the conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. A company being a juristic person, all its deeds and functions are the result of acts of others. In Iridium India Telecom Ltd. v. Motorola Inc., 22 wherein it has been held that in all jurisdictions across the world governed by the rule of law, companies and corporate houses can no longer claim immunity from criminal prosecution on the ground that they are not capable of possessing the necessary mens rea for commission of criminal offences. It has been observed that the legal position in England and United States has now been crystallized to leave no manner of doubt that the corporation would be 20 AIR2012 SC (2008) 13 SCC (2011) 1 SCC 74

12 liable for crimes of intent. In the said decision, the two-judge Bench has observed thus: The courts in England have emphatically rejected the notion that a body corporate could not commit a criminal offence which was an outcome of an act of will needing a particular state of mind. The aforesaid notion has been rejected by adopting the doctrine of attribution and imputation. In other words, the criminal intent of the "alter ego" of the company/body corporate i.e. the person or group of persons that guide the business of the company, would be imputed to the corporation. In Standard Charted Bank v. Directorate of Enforcement, 23 the majority has laid down the view that there is no dispute that a company is liable to be prosecuted and punished for criminal offences. Although there are earlier authorities to the fact that the corporation cannot commit a crime, the generally accepted modern rule is that a corporation may be subject to indictment and other criminal process although the criminal act may be committed through its agent. It has also been observed that there is no immunity to the companies from prosecution merely because the prosecution is in respect of offences for which the punishment is mandatory imprisonment and fine. The Court also observed the fact that a corporation cannot be hanged or imprisoned sets a limit to the range of its criminal liability. A corporation can only be prosecuted, as such, for offences which can be punished by a fine." The company can have criminal liability and further, if a group of persons that guide the business of the companies have the criminal intent that would be imputed to the body corporate. 24 THEORIES OF CRIMINAL LIABILITY: 1. Vicarious Liability: The doctrine of vicarious liability is a means by which the attributes blame for the acts of another. Vicarious liability is the general rule in the law of tort where an employer can be held liable for all acts of his employee done in the course of his employment. In criminal law also the doctrine of vicarious liability is applied. Respondeat Superior establishes the notion of vicarious liability where a master is responsible for the illegal conduct of his servant. 25 This doctrine of vicarious liability is applicable to corporations as a corporation cannot commit a crime but it can be held 23 AIR 2005 SC AIR 2012 SC Sanjeev Kumar, Corporate Offences, 2005, Bharat Law House, New Delhi, p.261

13 criminally liable where the only punishment sought is a fine or seizure of property. However, the officers of the corporation can be punished by imprisonment when the corporation has been held criminally liable if such officer has been found guilty of misfeasance etc. by the corporation, and the officer causes or authorises the illegal act to be committed. Vicarious liability on the corporation can be attributed not only when the particular employee is found to have committed the crime with the requisite state of mind, i.e., if mens rea is established it is imputed to the corporation; but also when such an employee has committed the crime during the course of his employment. In other words, for application of doctrine of vicarious liability, the act and intent of the employee must be imputed to the company and the employee must be acting within the scope and during the course of his employment and that he must be acting for the benefit of the company. 26 The application of vicarious liability doctrine has been criticised on the ground that it ignores the corporation s efforts to prevent illegal activity by employees. Referring to Section 141 of the Negotiable Instruments Act, 1881 provides for the vicarious liability, the Supreme Court has observed that a person who can be made vicariously liable is a person who is responsible to the company for the conduct of the business of the company and is also in charge of the business of the company Identification Theory: The identification theory requires that the corporation should take responsibility for the persons having decision-making authority over the policy of the corporation rather than the persons implementing such a policy. The identification theory focuses on the actions of the directing minds of the corporation and merges individual and corporate persons in order to assign criminal liability to the latter. 28 The identification theory stipulates that the actions and mental stage of the company is found in the actions and state of mind of employees of the company who are considered to be directing minds of the company. The underlying principle of this theory is the detection of the guilty mind, the recognition of the individual who will be 26 U.S. v. One Parcel of Land, 965 F. 2d K.K.Ahuja v. V.K.Vohra, (2009) 10 SCC Sanjeev Kumar, Corporate Offences, 2005, Bharat Law House, New Delhi, p.262

14 identified as the company itself. 29 Lord Denning had observed that a company is linked to a human body and it had a brain which controls what it does. The directors and managers of the company represent the mind or will of the company and control what it does. The state of mind of these directors and managers is the state of mind of the company and is treated by the law as such. 30 However, the theory has been criticised for its limited application. 3. Sanctioning Theory: The sanctioning theory requires imposition of fine on the corporation with respect to any criminal liability. However, the imposition of fines creates problems mainly because it can prove difficult to determine that which amount of fine is both fair and effective while punishing a corporation for criminal liability. 31 The monetary sanctions are being widely used for imposing penalties on corporations. 4. Direct Liability Doctrine: The direct liability doctrine seeks to imitate the imposition of criminal liability on human beings and relies on the notion of personification of the legal body. 32 This doctrine identifies the actions of certain individuals within the company 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. The company can be held criminally liable for very perpetration of the offences resembling the liability imposed on a human perpetrator. Vicarious Liability Direct Liability Theories of Criminal Liability Identification Theory Sanctioning Theory Figure 1: Theories of Criminal Liability 29 Sumit Sharma, Corporate Crimes & Financial Frauds, 2013, Authors Press, New Delhi, p Bottom Engineering v. Grahm, (1957) 1 QB 15 CA 31 Sanjeev Kumar, Corporate Offences, 2005, Bharat Law House, New Delhi, p Sumit Sharma, Corporate Crimes & Financial Frauds, 2013, Authors Press, New Delhi, p.19