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Review: Corporate Criminal Liability

"Corporate crime kills far more people and costs, taxpayers, far more money than a street crime"-Anita Roddick

A corporate crime is a type of white-collar crime; which mainly related to crimes committed for dishonest monetary gain. A corporate crime is a crime committed by a corporation (an artificial juristic person who is different from a natural person) in pursuance for the gain of the company. In simpler terms, an unlawful act committed by an individual or a group of individuals, for the gain of the company constitutes a corporate crime.

When a crime is committed by individuals who work for the company; the main dilemma before the court while trying the case stands on identifying the main culprit. The corporation itself cannot commit a crime so it's obvious that the people working for the company are behind the unlawful act. And it becomes easy for the actual perpetrators to hide behind the veil of artificial legal entity.

The court faces another problem while dealing with cases regarding corporate crime and that is the pronouncement of punishment. A corporation whose existence is intangible can't be awarded the punishment of imprisonment.

In the case of State of Maharashtra v. Syndicate [1] there was a hire and purchase agreement between the plaintiff and defendant that a certain bus is to be transferred to the plaintiff's company for payment on a certain date. But on the date of the agreement, the bus was not transferred to the plaintiff. The plaintiff alleged the defendant u/s 405, 406 and 420 of IPC; for violating the terms and conditions of the agreement. The court was of the view that since the party to the case from the defendant's side is a company the corporeal punishment mentioned in the above-mentioned sections cannot be pronounced.

Actus Non Facit Reum Nisi Mens It Rea

This maxim means that an act doesn't make one guilty till there is ill intent for doing the unlawful act.

In criminal law there are two important factors in a crime:

  • The guilty intent of the culprit (Mens Rea)
  • The unlawful act committed with that intention (Actus Reus)
When it comes to corporate crime the Actus Reus is easily established, but when it comes to proving mens rea it becomes an impossible task.

In the case of Zee telefilms Ltd v. Sahara India Co. Corp Ltd[1] a company charged with defamation was discharged of its liability because of the absence of mens rea.
So how can the actual perpetrators be caught? Who should be awarded the punishment of imprisonment if not the corporation? Who shall be responsible for the unlawful acts committed in the name of the corporation? The next part of the article will clear all these doubts.

Current scenario of Corporate Criminal Liability in India

In the current Indian scenario, the position regarding corporate criminal liability has changed to a great extent. Over time courts have developed certain doctrines which aid as the deciding factor in the pronouncement of punishment and on who will the liability of the crime will lie. In the case of Municipal Corporation of Delhi v. J.B Bottling Company[2], the court said that wherein punishment is both fine and imprisonment, the company can be awarded the punishment of only fine.

Doctrines related to corporate criminal liability

  1. The doctrine of Vicarious Liability

    Vicarious liability is a concept under the law of torts, it simply means 'if an act is committed by X, the responsibility and the liability of the act will fall upon Y'. This kind of liability mainly exists where the type of relationship is of principle-agent nature, wherein the principle will be liable for the acts committed by the agent.

    When we look at corporate criminal liability through the glass of vicarious liability, we can understand the fact that the relationship of a company with its employee is similar to principal and agent.

    The concept of corporate criminal liability has also been included in the companies act, 2013, by increasing the liability of the directors. It holds that not only the directors but also the officers involved in the unlawful act and every key managerial personnel within the corporation who knows did not move to stop the act will also be held responsible for the crime.

    The Supreme Court while referring to section 145 of the Negotiable instruments act, said that the person who is responsible for the performance of the business of the company can be held vicariously liable.
  2. The doctrine of Identification

    This doctrine means that the corporations will have to take responsibility for the person with authority who makes policies on behalf of the corporation. This theory focuses on the fact that the function and performance of the company are the results of its employees.
  3. The doctrine of Collective Blindness

    Courts have found that even when a single person of the company wasn't at fault the company was still held liable. So the collective knowledge of all the employees is attributed towards the corporate crime.
  4. The doctrine of willful blindness

    Under this doctrine, if an unlawful act has been committed in the company and the authority of such company does not take action against the act then this doctrine can be applied.
  5. The doctrine of attribution

    This doctrine has proved to be revolutionary. It means that the people working on the behalf of the company such as directors and key managerial personnel if commit a crime being the agent of the company then the company can be held liable. In this doctrine, the guilty mind or mens rea will be attributed towards the directing mind and will behind a corporation.

    In the case of Iridium India Telecom Ltd v. Motorola[3], Motorola sold a piece of technology to Iridium accompanied by promises and assertions; which turned out to be false. Iridium filed a case of cheating against Motorola.

    Under IPC, cheating requires that there should be an intention to deceive. So Motorola contended that Motorola Inc. being an artificial juristic person cannot be held liable for an offence like cheating. Here Supreme Court held that in all jurisdictions wherein a party to a case is an artificial person; can no longer claim that being an artificial person they are not capable of possessing mens rea. In such a case doctrine of attribution can be applied.
  6. The doctrine of Alter Ego

    This doctrine can be better explained with the following case:

    Tesco Supermarket Ltd v. Nattrass [4]

    In this case, it was held that a corporation is an artificial entity that is different from its members. Such an entity is not acting with the help of its employees or agents but it's performing and conducting itself in the form of its alter ego that is in the embodiment of the corporation and the mind of these members or agents is the mind of the company. So if the mind of the members and agents is found to be guilty then the company will also be held guilty.

    Over the course of years even after strict laws and doctrines established people working for corporations have committed scams which are very important events in the history of corporate governance. One such scam was the Satyam scam, where there was nearly 7000 crore of misappropriation of funds. It is considered one of the biggest corporate scam in the history of corporate governance. Let's look into it in detail.

    Satyam Scam

    Satyam computer services Ltd was an IT company started in 1987 in Hyderabad by the Raju brothers, Ramalinga Raju and Rama Raju. After the successful running of the company for many years, Ramalinga Raju's interest sided towards the real estate sector which was booming. He then started buying properties thinking that when real estate prices reach their peak he'll sell them to make more profits.

    After a while the funds for buying property ran low, so what Ramalinga Raju did was; he started misleading investors by dishonestly inflating his financial statements. They showed that their company revenues, operating profits, interest, assets and cash balance are very high and hence their company was growing, which was not the case in reality.

    With the dishonest inflation shown in the company financial records, the share prices of the company also boomed. Looking at this increase in stock prices of their shares, Ramalinga Raju and his brother sold their shares and by keeping the rest of the shares as collateral in the bank they took loans. Ramalinga Raju also appointed a few of his employees as the directors of the company and brought property in their name.

    After selling a few of his properties brought illegally. He used those funds in Satyam and again manipulated company funds to show exaggerated financial figures. He also forged fake sale invoices to show sale revenues. But to show that the company is also making profits, he forged fake bank statements showing that there is cash reserve in the bank. By showing fake financial figures he kept attracting investors to invest money and the difference between fake figures and original figures kept increasing.

    During the recession in 2008, Ramalinga Raju's plan to sell the real estate properties and fill the gap between his fake and original figures failed. In 2009 Ramalinga Raju confessed that Satyam Computers Services Inc has been manipulating financial figures for more gains. After this confession, Ramalinga Raju, his brother Rama Raju along with 9 other people were found guilty of criminal conspiracy, cheating and criminal breach of trust and were punished with 7 years of rigorous imprisonment and 5 crore Rs.
Corporate governance is a very shaky term when it comes to applicability. It looks good in speeches and articles but when it comes to following basic corporate etiquette, many companies fail. The rise of corporate scams has rendered us thinking that there is an immediate need for stricter laws.

With the rise in people like Neerav Modi and Mehul Choksi, we need to rethink the laws that govern our corporate system. Such crimes not only affect the working class but all the sections and disturb the strata of society. Even though certain acts make the directors and key managerial personnel responsible for a corporate crime, but there are no unbending laws that directly punish the actual perpetrator.

The increasing numbers of corporate crimes also not only injures the economy of the nation but also shows the great number of loopholes present in our laws. This should be reason enough to motivate the authoritative people to take immediate action and consider this issue of paramount importance.

  1. 2004 Cri LJ 1576
  2. 1975 Cri LJ 1148
  3. AIR 2011 SC 20
  4. UKHLI (31st March 1971)
  5. AIR 1970 SC 1776

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