A Note on Corporate Criminal Liability

Corporate crimes and frauds have been prevalent for as long as commercial enterprises have been in existence. These involve criminal activity on behalf of a business organization, entailing deceptive techniques, to obtain an unfair advantage to which the perpetrator is not entitled. Corporate crimes and frauds are commonly committed by those outside an organization—third parties, employees, or through the collusion of employees and third parties. While the common law concept of corporate criminal liability is not new, it is anything but straightforward.

In the early sixteenth and seventeenth centuries, court grappled with the difficulty of charging crimes to a fictional being and it was commonly believed that corporations could not be held criminally liable. [1] The extension of liability into this field has been hampered by theoretical and practical obstacles. The first obstacle was attributing acts to a juristic fiction, the corporation. This obstacle was further strengthened by the fact that the eighteenth-century courts and legal thinkers approached corporate liability with an obsessive focus on theories of corporate personality. The second obstacle was that it was not thought possible that corporations could possess the moral blameworthiness necessary to commit crimes of intent. The third obstacle was the ultra-vires doctrine, under which courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters. Finally, the fourth obstacle was courts’ literal understanding of criminal procedure; for example, judges required the accused to be brought physically before the court.

However, Courts in both England and the United States first imposed corporate criminal liability in cases involving non-feasances of quasi-public corporations, such as municipalities, that resulted in public nuisances. [2] By the early 1800s, courts began holding commercial corporations criminally liable for the sorts of public nuisances that were previously inflicted by quasi-public corporations. While corporation have long faced liability in civil actions for the acts of their employees under the doctrine of respondeat superior, [3] it was not until 1909 that the United States Supreme Court extended the corporate liability concept into the Criminal area. The criminal liability of such private corporations ‘was a creature not only if judicial decision but of legislative enactments like ‘The General Turnpike Act’, for instance. [4]

For a corporation to be liable for the acts of an individual the court considers following elements. First, the individual must be acting within the scope of his employment. Second, the individual must be acting to benefit the corporation and third element is the act and intent must be imputed to the corporation.

Corporate Criminal liability under Companies Act:

The Companies Act, 1956 also impose criminal liability on companies as well as on the directors and other officers of the company. The majority of the sections impose liability on the company as well as officers/directors of the company. However, certain section imposes criminal liability exclusively on officers/directors of the company.

If any officer of the company (a) knowingly conceals the name of any creditor entitled to object to the reduction ;(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or (c) abets or is privy to any such concealment or misrepresentation as aforesaid; he shall be punishable with imprisonment for a term which may extend to one year, or with fine, or with both. [5]

Sec. 117-C (5) if default is made in complying with the order of the Company Law Board under sub-section (4) of sec. 117-C (directing the company to redeem the debentures forth with by the payment of principal and interest due thereon), every officer of the company who is in default, shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of not less than five hundred rupees for every day during which such default continues.

Sec. 272 imposes criminal liability on directors under certain circumstances. According to this section, ‘if after the expiry of the said period of two months, any person acts as a director of the company when he does not hold the qualification shares referred to in section 270, he shall be punishable with fine which may extend to five hundred rupees for every day between such expiry and the last day on which he acted as a director’. [6]

If any person who holds office, or acts, as a director of more than fifteen companies shall be punishable with fine which may extend to fifty thousand rupees in respect of each of those companies after the first twenty. [7]

Sec 374 provides that if default is made in complying with the provisions of section 372 or section 373, [8] every officer of the company who is in default shall be punishable with fine which may extend to fifty thousand rupees. Sec. 420-C provides that any officer of a company who, knowingly, contravenes, or authorizes or permits the contravention of, the provisions of section 417, 418 or 419, shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees.

The Companies Act also provides for criminal liability on officers and contributories of a company for falsification of books. [9] According to the section ‘if with intent to defraud or deceive any person, any officer or contributory of a company which is being wound up (a) destroys, mutilates, alters, falsifies or secrets, or is privy to the destruction, mutilation, alteration, falsification or secreting of, any books, papers or securities ; or (b) makes, or is privy to the making of, any false or fraudulent entry in any register book of account or document belonging to the company ; he shall be punishable with imprisonment for a term which may extend to seven years, and shall also be liable to fine.

Sec 541 imposes criminal liability on officers of a company where proper accounts not kept. According to the section ‘where a company is being wound up, if it is shown that proper books of accounts were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter, every officer of the company who is in default shall, unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable, be punishable with imprisonment for a term which may extend to one year.

Sec 630 provides that if any officer or employee of a company (a) wrongfully obtains possession of any property of a company; or (b) having any such property in his possession, wrongfully withholds it or knowingly applies it to purposes other than those expressed or directed in the articles and authorized by this Act; he shall, on the complaint of the company or any creditor or contributory thereof, be punishable with fine which may extend to ten thousand rupees. [10]

Thus, the Companies Act exclusively imposes criminal liability on companies in addition to on its officers and directors under a plethora of situations. However, one must remember that corporate criminal liability in India can and does exist independent of the Companies Act and various other statutes like the Trademarks Act, 1935, the Income Tax Act, 1936 and The Negotiable Instruments Act, 1937 etc also provide for corporate criminal liability in India.

The different High Courts have ruled that if a penal section provides for mandatory imprisonment coupled with fine, then the courts do not have discretion to impose a fine alone, and such sections would not apply to corporations. A three judge bench of the Supreme Court also in ‘The Assistant Commissioner v. Velliappa Textiles Ltd Ors’ [11] by majority held that companies cannot be prosecuted for offences which provide for mandatory imprisonment.

However, a recent constitutional bench of the Supreme Court in ‘Standard Chartered Bank v. Directorate of Enforcement’ [12] by majority of 3:2 overruled Vellaippa Textiles. The court in Standard Chartered observed that ‘in the case of penal code offences, like 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, (i.e. 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 appellant’s plea is accepted that 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. [13]

It was contended by the appellant in Standard Chartered that when an offence is punishable with imprisonment and fine, the court is not left with any discretion to impose any one of them and consequently the company being a juristic person cannot be prosecuted for the offence for which custodial sentence is the mandatory punishment. The court however, held that ‘if the custodial sentence is the only punishment prescribed for the offence, this plea is acceptable, but when the custodial sentence and fine are the prescribed mode of punishment, the court can impose the sentence of fine on a company which is found guilty as the sentence of imprisonment is impossible to be carried out.’ The court placed reliance on the legal maxim that ‘law does not compel a man to do that which cannot possibly be performed’ (impotentia excusat legem) and observed that ‘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 set 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. We do not think that the intention of the Legislature is to give complete immunity from prosecution to the corporate bodies for these grave offences.

The court concluded by ruling that ‘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.

Thus, according to the law declared by the Supreme Court, as of today in India companies can be held liable for offences that provide for mandatory imprisonment as punishment if the penal sections prescribe a fine too. This means that companies in India today can be held liable for almost every offence under the Indian Penal Code with the possible exception of sec. 303 for which the only punishment prescribed is death provided such offences are committed by a company.

Satyam Scam

The Indian outsourcer, Satyam Computer Services entangled in the country’s largest corporate scam has left nothing behind except a negative balance sheet, close to 53000 employees, 690 clients and the physical infrastructure of offices. [14] The infamous acquisition of Maytas infra and Maytas Properties was meant to fill the vacuum in the Satyam books with Maytas assets. The systematic and meticulous fraud involved cooking up the balance sheet to show cash balance of Rs 5361 crore instead of Rs 321 crore only, an accrued interest of Rs 376 crore when no such income existed, overstated debtors who owed Rs. 490 crore and inflated Q2-2008 revenues by Rs 588 crore and concealment of liability of Rs. 1230 crore that he had arranged for the company. [15] The violation includes falsification of accounts [16] , Cheating [17] , Criminal breach of trust [18] and forgery [19] which may result in imprisonment of up to ten years and other serious penalties like S. 23 of the Securities Contract Regulation Act, 1956 imposing an imprisonment of ten years and a fine up to Rs. 25 Crore; Section 24 of the SEBI Act, 1992 imposing a penalty of imprisonment up to one year for infringement of any provisions of the law or rules and regulations, including fraudulent and unfair trade practices; Section 477- A of the Indian Penal Code imposing a penalty of imprisonment up to seven years. And the Company Law Board (Section 397) and Economic Offences Wing (EOW) are empowered to freeze the assets of the promoters.

The investigation of the ROC into the scandal has revealed large scale selling of shares of the company, by the institutional investor, subsequent to the failure of the Maytas deal which raised the suspicion of insider trading. The SFIO would also look into other aspects of the scam, since the initial report of the ROC stated that three books of accounts and corporate filings of the company seem to be unreliable. The executive directors of the company including the signatories to the balance sheets would, ipso facto, be liable to prosecution (subject to their proving lack of knowledge of the impugned transactions). The investigation would also cover all angles including the role of independent directors in the entire scandal and they could be held liable if their complicity is apparent from the records. The internal auditors, external auditors, independent directors on the audit committee have utterly disregarded their roles in the company.

However, many questions remain unanswered and whether the truth would come out is doubtful. What exactly happened? Where were the funds siphoned off from the company? Besides the promoters and their families who else were the beneficiaries? What was the role of the so called independent directors? In December 2008 there have been heavy off loading of satyam shares by the insiders including some of the directors and top executives. Lakhs of shares were reported to have been sold. It means that those who sold the shares had definite information that something was terribly amiss. How the market watchdog did not get alerted by such heavy transactions of the shares of single company? How the accounts were being fudged for well over several years that too for thousands of crores of rupees is indeed a mystery. How it has escaped the attention of the company banker’s or the auditors?

Conclusion

Corporate crimes like satyam inflict severe damage upon the economy. Over the years, the approach to corporate criminal liability has changed from there being no concept of liability for crimes committed by corporate to liability based on identification of some persons as the alter ego of the company.

India endow with for Corporate Criminal Liability in broad terms. As noted earlier, after the recent ruling of the Supreme Court in Standard Chartered, companies in India can be prosecuted for almost every penal offence that exists in any Indian statute. The Companies Act also provided for criminal liability of companies as well as its directors under a host of different circumstances.

The non-observance of corporate governance standards introduced by market regulators has resulted in corporate scams and frauds in current times. To struggle the frauds effectively, one needs the active support of the government at every stage. Governmental authorities must take more forceful actions against fraud, corrupt practices, and other measures designed to manage corporate and white collar crimes. Significant actions are required to redress fundamental weaknesses, in the absence of which, corporate governance practices will continue to remain feeble, which would in turn, render the public hesitant to make investments in corporate houses.

Corporate crimes cannot be dealt by implementing more laws or governance practices, but rather by effective and stringent action against the perpetrators. To combat corporate crimes, the regulatory mechanism would have to be strengthened and provisions would have to be made for imposition of stringent legal penalties.