The Corporate as a Criminal
This is a seminar paper which analyses the complexity surrounding the corporate criminal liability in India as well as its recent stand on the same. By referring to the two landmark rulings by the Indian Supreme Court. The cases being - the Iridium India Telecom Ltd. v. Motorola Inc and Sunil Bharti Mittal v. Central Bureau of Investigation (CBI) and Others.
On November 2015, it was a big day for one of India’s biggest telecom companies Bharti Airtel. The special court on 2G spectrums had dismissed the charges against Sunil Mittal and a few other telecom companies and the then telecom minister Shyamal Ghosh.
In 2002 before Bharti Airtel Initial Public Offering (IPO) the company had been allotted 6.2MHZ a spectrum. The charge of spectrum usage by the government was 3% of the telecoms gross revenue. During the investigation CBI had discovered that there was an irregularity allocation of additional spectrum beyond 6.2MHZ to the companies Bharti Airtel and Vodafone .The spectrum was distributed at minimal incremental revenue share. That is with additional spectrum beyond (i.e. 6.2 MHz) by just paying 1% of revenue instead of 2%, which was alleged to be lower due to supposed bribery and corruption That lead to a loss of Rs 846.44 crore to the exchequer and corresponding gain to the telecom companies (CFO, 2015).
CBI named Mr. Shyamal Ghosh and three companies namely M/s Bharti Cellular Limited, M/s Hutchison Max Telecom (P) Limited and M/s Sterling Cellular Limited as the accused persons in respect of offences under Section 13 (2) read with Section 13 (1) (d) of the Prevention of Corruption Act, 1988 and allied offences.
The Latest 2015 ruling in Sunil Bharti Mittal v. Central Bureau of Investigation ("CBI") and Others by the Supreme Court of India (further discussed on page 6 of this piece) answered in the direction of the corporate criminal liability and banked upon the Iridium case to determine the issue at hand. The complexity enveloping the topic of criminality of a corporation was decided by the Supreme Court ("SC") in Iridium India Telecom Ltd. v. Motorola Inc. case. The apex court settled the matter on January 2015, when it decided upon the criminal liability of corporate officers for the acts of a company and the assessment of the principle of attribution or alter ego.
What is Criminal Liability?
Criminal liability comprises of two elements: actus reus (guilty act) and mens rea (guilty mind). Now the question is whether a corporation as an artificial person is capable of committing a crime and is criminally liable under the law or not.
Corporate criminal liability has evolved from its infancy into an established doctrine. It can be defined as a “socially injurious act committed in the course of employment by people who are managing the affairs of the corporation either to further their business interest” (Siegal, 2000,p.398). In criminal law, corporate liability decides the measure to which a corporation as a fictional person can be accountable for the acts and omissions of the natural persons it hires. Corporate crime has been defined as “the conduct of a corporation or of employees acting on behalf of a corporation, which is prescribed and punishable by law” (Braithwaite, 1984, p.6).
The reason why corporate criminal liability is arduous is because a corporate or company has no physical existence. Hence its actions and decision-making processes are limited to the decisions of human beings it employs. Furthermore the corporate not being physically existent also leads to a problem as it cannot be imprisoned for crimes.
India’s jurisprudential Position
The legal viewpoint on corporate criminal liability in India has been developing over the years. Over time Indian courts have started adopting a stricter approach while deciding on the liability of the corporate bodies by the acts committed either by their directors or other agents employed. Under the Indian Penal Code, 1860, there are three criteria’s to determine liability, as per the express provision of statutes.
Primarily it is the person who is responsible for carrying out business of the company is held liable, to the company for the conduct of its business is held liable, only if the accused can justify that he is oblivious to the crime or that the act was done even though due diligence was instructed to be followed.
Secondly if proven that the offence has been accomplished “with the consent or connivance of”, or is “attributable to” negligence of manager, secretary, director or other officers of the corporate such individuals may be held liable by the court. In progression, the company is held responsible, regardless of whether any individual is held liable or not. The jurisprudence on corporate criminal liability is not only limited to the Indian Penal Code 1860, but it is also spread and dispersed across a surfeit of statutes with specific provisions for the same.
Mens rea is a crucial element for majority of the offenses related to criminal liability in India, the punishment for which offences consists of imprisonment or penalty. In the case Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd , the charge against Zee alleged that it had aired show which was based on falsity. Which thereby lead to defamation of Sahara India. The court rejected the complaint filed against Zee under Section 500 of the IPC. The court adhered to ‘mens rea’ being a fundamental component of the criminal defamation. Instating that a corporate could not have a guilty mind (Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd, 2000).
However, in Standard Chartered Bank v. Directorate of Enforcement, the petitioner opposed the charges and contended that their company was not accountable to be accused under Section 56 of FERA Act 1973.Since the minimum sentence in section 6(1) (i) under the Act states imprisonment for a period which is lesser than six months with fine. Therefore the petitioner applied for a special leave from the Supreme Court and held that no criminal proceeding can begin. The court decided that the statutory intent needed to be taken into consideration also all the penal provisions should be interpreted in accordance with all other statutes to reflect upon the judicial intent stated in the enactment.
Since then the SC has gradually advanced in resolving the problem of corporate criminal liability and has delivered jurisprudential worth through the ruling of Iridium and Sunil Bharti Mittal. Furthermore it has enhanced and added a new element to the jurisprudence concerning corporate criminal liability in India in relation to mens rea (criminal intent). Maintaining the stand that even though it is a legal fiction, a corporation could possess mens rea necessary to commit an offence.
Iridium case and issue of mens rea
The allegation was that Motorola Inc., the respondent in the case and the primary contractor for the Iridium project, floated a Private Placement Memorandum (PPM) to obtain investments to finance the Iridium Inc. project. The ambitious project was allegedly represented as being the world’s first commercial system, which will be devised to offer worldwide digital hand held telephone data. The vision was to provide wireless communication system over an arrangement of 66 satellites to offer digital service to cellphones and other subscriber equipment locally. Iridium India Ltd. and several financial institutions invested in the project based on the information contained in the PPM. However, it was alleged that the representations were false and that the project turned out to be commercially unviable resulting in significant loss to the investors.
Iridium India Ltd had registered a criminal complaint against Motorola, under sections 420 (Cheating) and 120 (Conspiracy) of the Indian Penal Code. On the basis of which the magistrate in Pune started a proceeding against Motorola. In retaliation Motorola moved to the Bombay High Court in order to quash the proceedings started Iridium. The High Court was in support of Motorola and accepted to quash the proceeding at the magistrate level citing numerous explanations .One of them being that a company is not capable of having mens rea. Hence there can be no criminal liability that can be held against Motorola.
Iridium appealed to the Supreme Court. The SC raised two issues for it to dwell upon: Firstly, could a guilty mind be attributed to a corporate, secondly, what is the criminal liability for misrepresentation in the circumstance of securities offerings made to explicit investors on a private basis. This was resolved by method of ‘principle of attribution’. This principle is invoked when the question as to whose mental element shall be attributed to the company for foisting criminal liability, comes up (Shekhawat, 2015). In the verdict passed by SC it held that a person who is in directly in-charge of the undertakings of the corporation and the level of control held is so severe that the business is supposed to act on behalf of the individual, which is essential in attaching corporate criminal liability.
The two principal points on which court passed the ruling were: firstly that a corporation is capable of having mens rea and second that the firm test of labeling of the directing mind of the business has to be identified to ascertain the essential guilty mind.
The court depended on the case of Tesco Ltd. wherein it was established that the individuals who are exclusively entrusted with the powers and duties for the company stated in the, Articles of Association ("AOA") and Memorandum of Association ("MOA"). An individual who is approved by the directors or permitted of control in the general meetings of the corporation will be held accountable and their actions will be influential in assigning criminal liability of the company. The court added that non-declaration of appropriate information would be held as distortion thus establishing corporate criminal liability.
Analysis of Iridium
The exact relevance in the case of the operating brain and drive of the company test is the approach, which is needed at present in the Indian scenario. This is because of the softened approach regarding the requirement of mens rea in India, which is done through legislative interventions and not jurisdictional declarations.
There is no responsibility credited to the individuals who may be liable for mishandling the undertakings of the corporation in comparison to those who are named in the MOA/AOA or supplementary relevant documents. The difficulty in the case of under what conditions would a corporation not be responsible for the actions of the directors, etc. was overlooked by the court.
The dependence on the case Tesco Ltd. offers the possibility of employing the unyielding rule of attribution of criminal liability in harmonization with the principle that vicarious liability cannot be recognized in the criminal cases. Which would lead to the incompletion of the actual aim of corporate criminal liability. It could sieve out the circumstances where the people who remain in charge of the affairs of the company may not have a consequent designation and thus their doings may not get redirected upon the corporate and thus the firm could escape liability such situations.
Though the Supreme Court’s judgment is an imperative step that India has taken towards attributing mens rea to corporates, it is essential to observe that the Supreme Court did not lay down guidelines based on which mens rea of a company can be proved. Furthermore the SC overlooked the risk factors and clauses enclosed in the Private Placement Memorandum of the Iridium project, although these provisions warn the investors of uncertainty.
The decision passed does clarify the SC’s stand on criminal liability of company and the possibility guilty mind that can a corporate could be held liable of having. The prosecution officers of the corporation or promoters for the criminal acts of a company would depend on the facts and circumstances of each case is not likely to be widely applied.
Sunil Bharti Mittal case
This case relates to the asserted wrongdoings in association to the grant of license and allotment of the 2G spectrum. The CBI had allotted summons to the directors of the firms involved immediately after the violations were produced in the charge sheet .The 2G spectrum case’s ruling was contrary to the ruling laid down in the Iridium case. This case deliberates over the premise as to whether the directors or any individual symbolizing the principle of attribution (alter ego) can be accused on the basis of criminal acts of the company.
In the aforesaid case the SC meticulously analyses under what conditions the principle of attribution be used to in order to hold the individual in-charge of the company liable for the offences committed by the company.
Analysis of Sunil Bharti Mittal
The court relied in its judgment on the Iridium case. The ruling announced by Justice AK Sikri (on behalf of the three judge bench) supported the proposition set in the Iridium case, that the businesses could no more seek immunity from sentences under those crimes, which require mens rea. The case does not dwell upon the contrary operation of the alter ego theory as laid down in the Iridium ruling.
The court observed that the directors could be prosecuted for an offence committed by the company only in the following two circumstances. There should either be active involvement and sufficient evidence to adduce the criminal intent of that person, or the legislation should itself impose the liability on the director or person in charge of the affairs of the company. The court noted that there is no such evidence so as to draw an inference that the directors had a criminal intent. Also there is no statutory provision to the effect where the vicarious liability of the director is discussed in context of the offences committed by the company. Thus, it said that mens rea is attributed to the company on the principle of alter ego and it does not apply in reverse where vicarious liability is imputed on the persons dealing with the business of the company.
The principle borrowed from Iridium is limited only to the extent that mens rea can be imputed to the companies and they cannot claim immunity on that ground. This case hence by way of analogy relies on Tesco Ltd. The SC has referred the decision of Tesco Ltd. in many cases and has very clearly laid down that the vicarious liability under strict liability statutes can be attributed to the person who is actually in charge of the company. Hence, clarifying the principle of attribution in cases of vicarious liability where they form part of specific offences in the statutes governing strict liability offences. But this case in general fails to talk about the vicarious liability aspect when it is not clubbed with strict liability offences
It must be further noted that vicarious criminal liability is commonly not accredited. Nonetheless, it could be done, when there is any specific provision in the penal statute specifying for such attribution. Environmental legislations (Air and Water Prevention and Control of Pollution Acts, Environment Protection Act), Section 141 of Negotiable Instruments Act, Section 32 of Industrial Disputes Act, etc. these acts authorize the trial court to try both the company and directors together by operating vicarious liability principle. It should be duly noted that even after suggestions made by Law Commission, no such changes have been made in the IPC. Hence, a director cannot be penalized for IPC-offences committed by a company.
Confusion still prevails
The Supreme Court’s ruling in Sunil Bharti Mittal has further illuminated the contrast between corporate attribution and vicarious liability, while highlighting the fact that the principle of corporate attribution cannot be used to enforce liability on corporate officers but rather only on the companies.
Altering the Supreme Court’s stand on the existing vicarious liability rules will stimulate efficient cooperative programs within companies, and divert it to a more lawful path a legal doctrine that has gone far off course. India has numerous perilous undertakings taking place as a part of the expansion process. The government is focused only on the fiscal aspect of economic development. It is time that the government concentrates on formulating rigorous laws and regulation on this aspect. It is essential to combine diverse methods of punishment, which shall stimulate voluntary self-observance of legal processes and dissuade corporations from indulging in fraudulent practices.
1. 2G spectrum case: Court discharges Bharti, Vodafone, ex-telecom secy | cfo-india.in. (2015, October 15). Retrieved from http://www.cfo-india.in/article/2015/10/15/2g-spectrum-case-court-discharges-bharti-vodafone-ex-telecom-secy
2. Braithwaite, J. (1984). Corporate crime in the pharmaceutical industry (1st ed.). Retrieved from http://www.ivantic.net/Ostale_knjiige/Zdravlje/Braithwaite-John-Corporate-Crime-in-the-Pharmaceutical-Industry.pdf
3. Siegel, L. J. (2000). Criminology. Belmont, CA: Wadsworth/Thomson Learning.
4. Shekhawat, D. S. (2015, August 27). Corporate Criminal Liability: Revisiting Iridium - Criminal Law - India. Retrieved from http://www.mondaq.com/india/x/423044/Corporate Crime/Corporate Criminal Liability Revisiting Iridium