Corporate Criminal Liability - White Collar Crime

By Saurav00001kumar | Views 16841

  10    2    4   Blogger1   pocket3   Digg2

A corporation is considered as a separate legal entity distinct from its shareholders. It can be
described to imply as an association of persons for some common object and it has no strictly
any legal or technical meaning. It is understood that criminal liability is attached where there is
violation as per criminal law. The criminal liability of any act is based on the Latin maxim Actus
non facit reum mens sit rea which means that to make a person or any entity liable it must be
shown that there is an act or omission which is forbidden by law and with mens rea which is
legally understood as having guilty mind. It comes under the category of White-collar crimes.

Corporate criminal liability can be defined as a crime which has been committed by individual or
association of individuals who for pursuing a common purpose or make business gain in course
of their occupation commit such acts or omission which is forbidden by law and with guilty mind
where it is for the benefit of the corporation or any individual out of the association of individuals.
Earlier in many situations when the concept of holding a corporation liable was not introduced
there was not any corporation held liable for any criminal act as the it is an artificial legal person,
so it could not be imprisoned, and corporation not being natural person there was absence of
mens rea.

When a Corporation is hold criminally liable it not only affects the business of corporation but
also the individuals in the corporation who are engaged in criminal conduct it may make them
suffer criminally and financially. However, it has been suggested in case of punishment to be
imposed on corporation it has been suggested that fine should be imposed rather than
imprisonment.

Development of concept of Corporate Criminal Liability-

Corporate crimes are those crimes which are committed by corporations or members of
corporations where liability is imposed for performing any acts or omissions which are punishable
by law. In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd, where a company was discharged
form liability arising out of defamation where there was absence of mens rea which is considered
as an implicit requirement under law. In the case of State of Maharashtra v. Syndicate the High
court had held that company could not be prosecuted for offences which entail corporeal
punishment which entailed corporeal punishment or imprisonment prosecuting a company for
such offences would result in trial with verdict of guilty but no effective order could have been
implemented. However, in case of Iridium v. Motorola a different viewpoint was held then the
above case referred where the Supreme Court held that a company could be held liable for
statutory offences as well as common law offences which includes those offences where there is
a requirement of mens rea.

However, in earlier times major issues were faced for evolution of concept of corporate
criminal liability wherein-
There was a failure to identify presence of mens rea in corporation as there was absence of
criminal in tent by corporations who are fictional and artificial legal person in eyes of law,
A Corporation could not be imprisoned or given death punishment which is usually given in
criminal law.
As per the Court the accused must be physically present in the proceedings which is not possible
in case of corporations as them being artificial legal persons.

However today, the directors or officers are made liable for the acts committed in actual authority
to perform in when they direct their subordinates to commit any crime and failed to exercise any
due care or supervise their acts which falls under the category of accomplice theory and further
this theory also states that due to concept framed of responsible relation that a person will be
made criminally liable due to responsible relation found regardless of whether he possessed the
knowledge that the act was criminally liable. However, it can be said that apart from being an
asset corporation can also be hazardous to the society.

Indian social legislations like the Essential Food commodities Act 1955, The Environment
Protection Act,1986, The Negotiable instruments Act,1881 state that along with the corporation
also its employees shall be held liable for that offence and if pronounced guilty imprisonment
shall be given as punishment to those involved in the crime. In this day of economic progress
such principle has assumed importance in corporate governance.

However, there are certain criticisms attached to the Doctrine of Corporate Criminal Liability in
which the first one would be Imprisonment and second would be Mens Rea.Whenever certain
crimes are committed there is mandatory imprisonment in case of punishing which also includes
Companies along with natural persons. In case of Fraud under section 447 there is mandatory
punishment of imprisonment wherein companies being an artificial legal person cannot be
imprisoned and can be only be punished with fine and not otherwise.

For the Commission of the Crime there has to be requisite Mens rea for committing the Crime,
however in case of Companies there is absence of Mens rea to hold a Company liable for crime.
The Courts have applied the doctrine of Alter ego in order to hold the companies/corporations
liable in case of Mens Rea which is considered as an essential element of Committing a Crime.

The Supreme Court in the case of New York Central and Hudson River Railroad Co. v.
United States which was 1909 case first endorsed that since the corporations were held liable
for civil cases would also be liable under the criminal law. In the case of Municipal Corporation
of Delhi v. J.B Bolting Company (P) Ltd, very interesting question was confronted by the Court
wherein the Company can be awarded with punishment of Fine when mandatory punishment is
both imprisonment and fine.

Doctrines established in Corporate Criminal Liability-

1.The Doctrine of Vicarious Liability-
Under the Doctrine of Vicarious liability as in law of torts its stated that the Master is vicariously
held for the acts committed by the servants. Similarly, in the case of Ranger v. The Great
Western Railway Company it was held that the company is held vicariously liable for the acts
committed by its employees if it is done in the course of its employment. In the case of Gunston
and Tee Ltd v. Ward this doctrine is applicable as same as Respondent Superior was applicable
as in civil law, but it does not find in criminal law as in criminal law it states that every person is
liable for the acts committed by them and not for acts committed by others.

2.The Doctrine of Identification-

Under the Doctrine of Identification the acts of Corporate officers are identified with that of a
company wherein the corporation being a artificial legal person having no physical existence the
acts committed or guilt by senior officers in their official capacity, the company shall be held
accountable.

3.The Doctrine of Collective Blindness-

Under the Doctrine of collective blindness, courts have held that corporations will be held liable
even if single individual was not at fault and considered sum total knowledge of all employees in
order to make a corporation liable.

4.The Doctrine of Wilful Blindness-

Under such doctrine if any illegal or criminal act is committed and the corporate agent does not
take action or measures to prevent happening of such activities then doctrine of wilful blindness
is applicable.

5.The Doctrine of Attribution-

Under the Doctrine of attribution, as in case of sentencing or imprisonment in event of act or
omission leading to violation of criminal law, the mens rea i.e. the guilty mind is attributed
towards the directing mind and will of the corporations. This doctrine is being used in India
however this doctrine was developed in United Kingdom.

6. The Doctrine of Alter Ego-

Under the Doctrine of Alter Ego, it is described as someone’s personality which is not seen by
others. The owners and persons who manage the affairs of the Company are considered as the
Alter Ego of the Company. The Directors and other persons who mange the affairs of the
company can be held liable for the acts committed by or on behalf of the Company under this
doctrine since the corporation has no mind, body or soul so the people are the directing mind
and will. However, it has always been relied that the principle of Alter ego has been acted in
reverse so the acts of individuals who are managing the affairs of the Company are attributed to
the Company and not vice-versa.

Models of Corporate Criminal Liability-

The models under the Corporate Criminal Liability are as follows-

1.The Identification Doctrine-

It is an English law Doctrine wherein it tries to identify that certain persons who acts on behalf of
corporation and whose directing mind and conduct can be attributed to the corporation. The
liability of these persons where the persons acting on behalf of corporation is limited to the scope
of them working in employment or authority.

2.The Organizational Model-

In terms of criminal cases model of corporate criminal liability in India focuses on organizing
model while defining the corporate criminal liability of an organization. The Corporate culture may
provide an environment for which will lead to Commission of Crime.

3.The Derivative Model-

The liability of an organization is derived liability in terms of Corporate Criminal liability wherein
the liability is put on the organisation because the individuals who commit the crime are in
connection with the organization.

Concept of corporate criminal liability in India-

Until the concept of corporate criminal liability was established, Courts in India did not punish
corporations as they felt that essential ingredient ie. Mens rea is absent in corporation it being a
fictitious legal entity having no physical existence so also could not be brought physically for the
proceedings. However due to such concept many legal difficulties started arising which was
noticed by the Law Commission in its 41st report of Law Commission of India where amendment
was suggested in section 62 of the IPC but the bill which was made was lapsed but the view of
Courts in terms with this concept changed in a landmark case of Standard Chartered Bank and
Ors. v. Directorate of Enforcement , the bank was prosecuted for violation of provisions of the
Foreign Exchange Regulation Act ,1973 where the Supreme Court did not go by the strict penal
provisions and held that a corporation can be held liable regardless of the mandatory punishment
as under the statue.

When a corporation is held criminally liable, the criminal conduct of employees may make them
suffer criminally and financially. Everyone in the corporate entity is held liable be its officers,
directors and even corporation where the penalties include civil penalties, criminal penalties, loss
of government contracts, permanent or temporary loss of deposit insurance, conservatorship etc.

In the case of Assistant Commissioner v. Velliappa Textiles Ltd, it was held that the
corporations cannot be imprisoned as they cannot be punished and prosecuted under IPC which
directs imprisonment. The concept of corporate criminal liability has been established under the
Companies Act. The liability of Directors under the Companies Act 2013 has been increased
which has replaced the Companies Act 1956.Under the Companies Act 2013 it holds not only the
Directors liable but also include the officer in default wherein it includes in broad framework a
whole-time director, key managerial personnel and such other officers in absence of KMP who
have been specified by the Board of directors and every other director who has information
related to it or has participated to be part of that act without raising the objection under the
concept of corporate criminal liability in India.

The concept of Corporate Criminal Liability has been recognised under the
Companies Act 2013 under-
Section 53-Prohibition of shares at a discount.
Section 118(12)-Minutes of proceedings of General Meeting, Meeting of Board of Directors and
other meetings and resolutions passed by Postal Ballot.
Section 128(6)-Books of Account, etc, to be kept by Company.
Section 129(7)- Financial Statement.
Section 134- Financial Statement, Boards report, etc.
Section 188(5)- Related Party transactions.
Section 57-Punishment for personation of Shareholder.
Section 58(6)- Refusal for registration and appeal against refusal.
Section 182(4)- Prohibitions and restrictions regarding Political Contributions.
Section 184(4)- Disclosure of Interest by Director.
Section 187(4)- Investments of the Company to be held in own name.
Section 447- Punishment for fraud.

Section 21 in the Transplantation of Human Organs Act 1994 states about

Offences by Companies as-
(1). Where any offence, punishable under this Act, has been committed by a company, every
person who, at the time the offence was committed was in charge of, and was responsible to the
company for the conduct of the business of the company, as well as the company, shall be
deemed to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly: Provided that nothing contained in this sub-section shall render any such person
liable to any punishment, if he proves that the offence was committed without his knowledge or
that he had exercised all due diligence to prevent the commission of such offence.

(2). Notwithstanding anything contained in sub-section (1), where any offence punishable under
this Act has been committed by a company and it is proved that the offence has been committed
with the consent or connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.

Explanation: For the purposes of this section:

(a) “Company” means any body corporate and includes a firm or other association of individuals.

As per Section 66 of the Food and Safety Standard Act 2006 offences by
Companies:
(l) Where an offence under this Act which has been committed by a company, every person who
at the time the offence was committed was in charge of, and was responsible to, the company for
the conduct of the business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Provided that where a company has different establishments or branches or different units in any
establishment or branch, the concerned Head or the person in-charge of such establishment,
branch, unit nominated by the company as responsible for food safety shall be liable for
contravention in respect of such establishment, branch or unit.
Provided further that nothing contained in this sub-section shall render any such person liable to
any punishment provided in this Act, if he proves that the offence was committed without his
knowledge or that he exercised all due diligence to prevent the commission of such offence. (2)
Notwithstanding anything contained in sub-section (1), where an offence under this Act has been
committed by a company and it is proved that the offence has been committed with the consent
or connivance of or is attributable to any neglect on the part of, any director, manager, secretary
or other officer of the company, such director, manager, secretary or other officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded against and punished
accordingly. Explanation. -For the purpose of this section, - (a) “company” means anybody
corporate and includes a firm or other association of individuals.

As per section 305 of the Code of Criminal Procedure mentions Procedure

when corporation or registered society is an accused.-