By Manisha Chaudhary, Advocate (July 9, 2010)
UKCA Law Chambers, New Delhi
The world today is a “global village” and corporations, domestic and multinationals effect equally all the concerned economics without the constrains of borders as the economic and political problems faced by one nation usually affect the others. In the era of globalization, multinational and cross border corporations are the defining business and commercial force on the global scene. The magnitude of operations of some of these corporate houses is fully comparable to that of a Nation State. These transnational corporations have subtle and sometimes not so subtle dominance in our lives and in doing so may violate national and international laws leading to criminal liability. However, such corporations being only legal entities, their behaviour is in variance with the individuals violating the laws leading to criminal liability. It is therefore, a difficult issue as to how to impose adequate control and achieve accountability for their acts and conduct both at home and abroad.
It is undeniable that a corporate has its own legal entity. A corporation, as a body corporate, can hold property, sue and can be sued and can also be independently liable for a criminal offence. Legal scholars have provided various theories for treating corporations as responsible actors and thus fit subjects for penal sanctions. Fauconnet’s theory relies on a corporation’s distinct legal personalityi; French argues legal personality alone is inadequate and he articulates a theory of a corporation as a moral or intentional actorii; and Fisse and Wells argue that it is unnecessary to frame corporate responsibility in terms of moral notions that apply to humans, that a corporation can and often does exceed the sum of its individual parts and that a corporation’s true responsibility can be located in its organisational structure, policy, procedures and cultureiii.
For a very long time, common law countries like England and Canada did not generally let a corporation to be convicted of a crime (as opposed to regulatory offences). There were exceptions and these exceptions were usually based on the doctrine of respondeat superior (vicarious liability). The doctrine of vicarious liability was however, only used for tort compensation and was completely rejected for crimes. The main reason for this was that crime requires mens rea (guilty intent) and it was not always viable to prove so in a master-servant relation. However in crimes pertaining to the regulations made under statues and common law crimes of public nuisance, criminal libel and contempt of court, mens rea was not necessary to be proved. The court applied the doctrine of vicarious liability to decide these cases, and the master could either be an individual or a corporation. On the other hand, a large number of European Continental Law countries were not willing to incorporate the concept of Corporate Criminal Liability into their legal systems whatsoever.
The hurdles which were faced while developing the concept of Corporate Criminal Liability are as follows:
1. The foremost issue was that of determining mens rea (guilty mind or personal fault). It was not clear as to whom to hold guilty for the crimes committed by a corporation.
2. The second issue related to sanctions imposed, therefore saying that the threat of imprisonment was of no importance to a corporation as it is a non-human entity.
3. Also, a corporation could not be produced in court has it has ‘no soul to damn, and no body to kickiv.’
It was in the beginning of the 20th century that the courts began to eliminate this corporate immunity from criminal law. The courts observed that ‘everyone’ in criminal law statues include corporationsv. Moreover, if the criminal code, for an offence, provided imprisonment as the only penalty, then the courts could impose a fine on the corporationvi and punish its officers-in-default. Thus corporations were now not free from the purview of criminal law. Also procedures to bring the corporation in court and other evidentiary rules were also made and codified. The court rejected the plea that a corporation could not be criminally held liable for the acts of its officers because if was beyond the scope of their employment, unless otherwise specified.
However, the burden of attributing mens rea to a non-human entity still remained a big hurdle in imposing criminal liability on corporations. One such decision came in the year 1915 in a civil liability casevii decided by the House of Lords. The issue was whether the fault of a director, who was actively involved in the operations of the company, was in law, the fault of the corporation. The Hon’ble court held that it was so, as the corporation had no mind or body of its own and the active and directing will of the corporation will be found in the person who for some purposes is the agent of the corporation and whose command is the very will and ego of the corporation.
Subsequently, this principle was applied in Canada in a criminal matter. The court held in the matter of R v. Fane Robinson Ltd.viii, the corporation and its two directors, who were acting as active managers, as guilty of crimes of conspiracy to defraud and obtaining money on false pretence.
There are three common theories in practice for deciding cases pertaining to Corporate Criminal Liability. These theories help the judges in deciding whom to hold liable- the director, the corporation or both. The theories are:
1. Agency Theory
2. Identification Theory
3. Aggregation Theory
This theory is based on the principle-agent relation. It emerged in tort law and was carried on to criminal law. It holds that the corporation is liable for the acts of its director(s) and other officers. Thus it is widely held that since corporations do not have intention or physical ability, then someone acting for the corporation, must be presume to have them. This theory is widely used both in India and the United States of America. In America a three part test is established to determine whether a corporation is vicariously liable for the acts of its officers:
1. The employee must be acting within the course and scope of his or her employment.
2. The employee must be acting, even if in part, for the benefit of the corporation.
3. The intent and the act must be imputed to the corporationix.
The question of whether an employee acted in the course and scope of his or her employment is determined differently by each source of law and factual framework. Also the benefit endowed upon the corporation need not be real. The mere intention to benefit the corporation is enough to pass the second part of the test.
This doctrine of identification is the traditional method used in most common law countries. This theory was developed as an attempt to overcome the problem of imposing primary, as opposed to vicarious, Corporate Criminal Liability for offences that insisted on proof of criminal fault. The identification theory relies on an individual to attribute liability to a corporation. While the agency theory imitates tort principles, the identification theory adjusts the principles to the reality of corporate misconduct. According to this theory, the solution for the problem of attributing fault to a corporation for offences that require intention was to merge the individual within the corporation with the corporation itself.
The array of personnel whose acts can be imputed to the company varies from jurisdiction to jurisdiction. In most cases, the senior most management and policy makers i.e. the directors, CEOs, trustees etc. are considered as the nerve centre of a corporation, thereby making them the directing mind and therefore making their wrongful acts liable to be attributed to the corporation. However, exceptions have been made where the operations of a corporation are so huge that decentralisation of authority has occurred, thereby making the wrongs of even the low-level managers and policy makers as liable on the corporation.
Modern corporations have multiple power centres that share in controlling the organization and setting its policy. The complexity of this new setting has created some challenges for the imposition of criminal liability to corporations under the traditional approach. The aggregation or collective knowledge doctrine was developed as a response to this puzzling scenario. According to this theory, the corporation aggregates the collective knowledge of different officers in order to determine liability. All acts and mental element of all those involved is collected and to establish whether in totality, they would amount to a crime if it were to be committed by a single personx.
This theory seems to combine the doctrine of vicarious liability with that of ‘presumed or deemed knowledge’. The idea of aggregate knowledge is basic to the notion of corporate fault. It represents a departure from the paradigm that intention must come from a single individual. Common law theories have made the necessary bridge between individualistic and organizational approaches. They bring back to life principles of criminal law that have prevailed before the prevalence of the principle that only individuals commit crimes.
In all of these theories, corporate fault is still traced back to an individual or a group of individuals, yet they allow the attribution of criminal liability to corporations.
The relationship between directors and a corporation was established about 140 years back in the matter of Ferguson v. Wilsonxi. The Chancery Division held that a company though a separate entity cannot act on its own. It can act only through its directors and as such the relation of a director with the company is that of principal and agent. Therefore general principles of law of agency would govern the relationship between the company and the directors.
In the year 1878, the Chancery Division in the matter of Forest of Dean Coal Mining Company’s casexii, defined the relationship between a company and its directors as trustees and thus establishing a fiduciary relation between them. These judicial pronouncements were universally accepted and applied all over and the position of directors in relation to the company was that they were not only agents but also trustees. This relationship would mean that the directors should always act in the interest of the principal i.e. the company and in discharge of their fiduciary responsibilities, they cannot benefit at the cost of the companyxiii.
Director’s liability arises because of their position as agents or officers or trustees of a company or for having fiduciary relation with the Company or its shareholders. Some of these liabilities are in contract, some are in tort, some are under the criminal law and others are statutory. The courts have, in deciding the liability of Directors, taken into consideration a director’s position as a whole.
The question of imposing criminal liability to a corporation for criminal offences committed by its directors and officers while conducting corporate affairs has gained a lot of importance in the jurisprudence of criminal law. The courts are likely to impose criminal liability on a corporation if the criminal act is requested, authorized, or performed by the director(s) or officer(s) or another person having responsibility for formulating company policy or high level administrator having supervisory responsibility over the subject matter of the offence and acting within the scope of his employment.
The liability of directors is of two types. One is pertaining to statutory law and the other pertains to the fiduciary relationship between the director(s) and the company. Various acts including the Companies Act lays down the various requirements on the part of the company and most of these provisions provide for penal action against the directors. Thus over a period of time the view that a director’s duties to a company is that of a man of ordinary prudence has changed and now it is more than that of a man of ordinary prudencexiv. However, the role and responsibility of a director depends upon the nature of his directorship.
Corporate Criminal Liability in India
Criminal Law jurisprudence in India has seen one exception in form of doctrine of strict liability in which one may be made liable in absence of any guilty state of mind. This happens in cases of mass destructions through pollution, gross negligence of the company resulting in widespread damages like in the Bhopal Gas tragedy, etcxv.
Furthermore, the doctrine of penalty by the way of imprisonment and fine in cases of criminal lawxvii, where the corporate could not be imprisoned or fined (when both were applicable), was overruled in the recent judgment in the matter of Standard Chartered Bank v. Directorate of Enforcementxvii. The Hon’ble court held 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. However, such discretion is to be read into the section so far as a juristic person is concerned and does not apply to a natural person. Furthermore, while commenting on the rule of interpretation of the statutes, the court observed that it was sheer violence to commonsense that the legislature intended to punish the corporate bodies for minor and silly offences and extended immunity of prosecution to major and grave economic crimes.
Thus, there is no impediment in the criminal law jurisprudence whatsoever to impose criminal sanction on a corporation since it can have a mind of its own and also an environment wherein crime is nurtured. Yet this developed jurisprudence does not find a place in the Indian statues as they still make only the officials responsible for the act criminally liable and not the corporate itself. For example:
1. Sections- 5, 45, 63, 68, 70(5), 203, etc. of the Companies Act, 1956 wherein only the officials of the company are held liable and not the company itself.
2. Various sections of the IPC that direct compulsory imprisonment does not take a corporate into account since such a sanction cannot work against the corporation.
These sections need to be amended soon to include corporate criminal liability and not merely restricting criminal liability to the personnel, for imposing punishment of pecuniary nature.
But law has also developed to an extent with regard to certain other statutes and their respective penal provisions wherein a fine has been imposed on the corporations when they are found to be guilty. For example:
1. 141 of the Negotiable Instruments Act, 1862.
2. Section 7, Essential Commodities Act.
3. Section 276-B of the Income Tax Act.
Thus, the law on Corporate Criminal Liability is not confined to general Criminal Law but is scattered over a plethora of statutes with specific provisions relating to it. There is no doubt that the courts have been efficient in evolving the concept of criminal liability of corporate. It is now for the legislature to evolve new forms of punishments and incorporate them in the Criminal Justice system of the land. Even though the Companies Act, 1956; the IT Act, 2000 etc. have gone to great extent to cover Corporate Criminal Liability, the need for proper law relating to Corporate Criminal Liability in the Indian legal system was observed by the Supreme Court in the following terms:
“In India, the need for industrial development has led to the establishment of a number of plants and factories by the domestic companies and under-takings as well as by Transnational Corporations. Many of these industries are engaged in hazardous or inherently dangerous activities which pose potential threat to life, health and safety of persons working in the factory, or residing in the surrounding areas. Though working of such factories and plants is regulated by a 614 number of laws of our country, there is no special legislation providing for compensation and damages to outsiders who may suffer on account of any industrial accident.xviii”
It is high time that our legislators enforce some kind of law, in order to clearly define, enforce and punish criminal liabilities of the corporate, in order to protect the fundamental right and other constitutional rights of the general public and also of the personnel (of the corporate) and the corporate itself.
Corporate Criminal Liability in Foreign Countries
At present, different nations have diverse notions regarding the applicability and extension of the Doctrine of Corporate Criminal Liability. Following is the present status of Corporate Criminal Liability in Australia, Europe, Northern America and Asia.
After applying the concept of Vicarious Liability until 1995, the Australian legislature changed their Criminal Code to base Corporate Criminal Liability on a test of the “corporate culturexix”. It is more direct and realistic than the more mechanical and abstract identification doctrine. The corporate culture approach provides four ways in which fault may be proven. Among these is a “Corporate culture which directed, encouraged, tolerated or led to a noncompliance with the relevant provision;” or that the corporation failed to created and maintain such a corporate culturexx.
In addition, it is sufficient to establish that the board of directors or a high managerial agent intentionally, knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offencexxi. With regard to this, a defence of due diligence existsxxii for a wrongful act.
France did not recognize Corporate Criminal Liability until the French Revolution. In 1982, it was provided that corporations are not free from finesxxiii. It was only in the new Penal Code of 1992 that specific mention of Corporate Criminal Liability was made under Section 121-2.
However, there are tight restrictions on the application of this provision. France’s model is based on the directing mind concept, and Section 121-2 is restricted by the requirement that each crime needs to mention specifically that a corporation can be punished. Moreover, corporations can only be held liable when one of the legal representatives or organs of the corporation has acted. The violation of supervisorial duties is also sufficient to warrant proceedings on the basis of Corporate Criminal Liability.
Without taking recourse to criminal law, Germany has developed an elaborate structure of administrative sanctionsxxiv, which include provisions on Corporate Criminal Liability. The key provision for sanctioning the corporation is in Section 30, which calls for the imposition of fines on corporate entities. There has been a great deal of debate in legal circles about the incorporation of corporate criminal liability in Germany.
Reasons for “true” Corporate Criminal Liability include:
1. The inadequacy of existing sanctions and of the deterrent effect of an administrative fine.
2. The problem is the “organized absence of responsibilityxxv”.
Reasons against the inclusion of the concept of Corporate Criminal Liability are:
1. The lack of capacity to act and the lack of criminal capacity are mentioned.
2. Corporate entities are not capable of being culpable.
3. The inability to undergo punishment
Nevertheless, the German legislature instituted a working group in 1998, to review and improve the situation by strengthening the role of criminal law with regard to corporate entities.
In the UK, despite a judgment in 1842, Corporate Criminal Liability was not firmly established until the 20th century. Corporate entities could only be held liable for crimes which did not require mens rea. However, three common law crimes, which did not require mens rea were public nuisance, criminal libel and contempt of court. Also regulatory offenses created by statutes, and which were held to be absolute liability offenses, did not require mens rea. The final obstacle of establishing criminal liability of the corporation for mens rea offenses was over come in 1915. The House of Lords laid down a general principle for attributing fault to a corporation– the directing mind principle, i.e. the acts and state of mind of certain senior officers are deemed to be the acts and state of mind of the corporation.
United States of America
At the beginning of the century, some American courts started to expand the concept of corporate criminal liability to include mens rea offensesxxvi. This confirmation came after the Congress had passed the Elkins Act, which stated that- acts and omissions of an officer acting within the scope of his employment were considered to be those of the corporation. Although the case before the Supreme Court was concerned with a statutory offense, the lower courts rapidly expanded its scope of offenses at common law. In 1983, the 4th Circuit Court stated that “a corporation may be held criminally responsible for antitrust violations committed by its employees if they were acting within the scope of their authority, or apparent authority, and for the benefit of the corporation, even if … such acts were against corporate policy.xxvii”
The situation in Canada is characterized by the fact that the directing mind concept can be instituted at a lower level within the corporationxxviii. The existence of a corporate mens rea was established. Despite these move, in a recent civil case of The Rhone v. The Peter A.B. Widenerxxix, it was suggested that implicitly of concept directing minds will only be found at higher levels of authority.
There are currently more than 700 criminal provisions in the Japanese law which can punish entities other than individuals. In addition, the Japanese Supreme Court decided that corporate entities must establish and implement policies and systems that prevent their subordinates or employees from committing crimes in the course of doing business. If such policies are not implemented or not updated accordingly, the corporate entities can be held criminally liable on grounds of negligence on the part of the directing minds.
China’s Criminal Code did not contain a provision on Corporate Criminal Liability until 1997. Prior to the introduction of “unit crime” into the Criminal Code in Article 30 & 37; the Customs Law of the People’s Republic of China was the first law to stipulate that “enterprises, institutions, state organs or public organizations” could commit a crime. More than 50 kinds of unit crimes have been put into place in over 20 criminal, civil, economic and administrative regulations. These have lead to some criticism, mainly because:
1. Vagueness of the responsibility of individuals in the context of unit crime
2. The large number of designations that exist in the context of unit crime and
3. Inconsistencies with regard to the punishment of unit crimes, since some laws provide for a dual-punishment system, while others rely on a single-punishment system.
Apart from the penal codes, administrative regulations or civil statutes, of the above countries. Corporate Criminal Liability is also mentioned in a number of international documents. These documents have to be ratified by member countries and applies to their respective laws.
It has come as an accepted notion now that the corporations are not mere fictions. “Corporate bodies reap all the advantages flowing from the acts of the directors and they act to the detriment of the public in the name of the corporate bodies.” The criminal law jurisprudence relating to imposition of criminal liability on corporations is settled on the point that the corporations can commit crimes and hence be made criminally liable. The field of corporate criminal liability is a multi-faceted issue. It is only just and consistent with the principle of equality before the law to treat them like natural persons and hold them liable for the offences they commit. Thus the question is whether corporate liability should be criminal in nature, or whether the unique circumstances of punishing a corporate entity merits different approaches. Apart from fines, punishments such as winding up of the company, temporary closure of the corporation, heavy compensation to the victims, attachment and confiscation of its properties and assets etc. should be used to have a deterrent effect on the corporate.
Today, Corporate Criminal Liability is a subject of concern for a wide range of groups campaigning on issues including human rights, environment, development and labour. The law has conferred and assigned a special status to the companies. The companies are expected to perform their “Social Responsibilities” so that people can enjoy their civil rights and a qualitative life.
This article was first published on icsi.edu.
i P Fauconnet, ‘La Responsibilité: etude de sociologie’, as described by J.A. Quaid, ‘The Assesment of Corporate Criminal Liability on basis of Corporate Identity: An Analysis’, (1998) 43 McGill LJ 67.
ii P.A. French, ‘Collective and Corporate Responsibility’ as described by J.A. Quaid, ‘The Assesment of Corporate Criminal Liability on basis of Corporate Identity: An Analysis’, (1998) 43 McGill LJ 67.
iii B. Fisse, ‘Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault and Sanctions’, 56 S. Cal. L. Rev. 1141; C. Wells, Corporations and Criminal Responsibility, (OUP 2001).
iv Baron Thurlow, Lord Chancellor of England in the 18th Century.
v Union Colliery Co. v The Queen (1900) 31 SCR 81.
vi R v Great West Laundry Co. (1900) 3 CCC 514 (Man Q.B).
vii Lennard’s Carrying Co. Ltd .v Asiatic Petroleum Co.(1915) A.C. 705 (HL), 713.
viii (1941) 76 C.C.C. 196, 203 (Alta C.A).
ix United States v One Parcel of Land 965 F.2d 311 (7th Cir. 1992), 316.
x United States v Bank of New England (1987) 821 F.2d 844 (1st Cir.).
xi (1866) LR 2 Ch App 77.
xii (1878) 10 Ch.D. 450, 453.
xiii Official Liquidator v P.A. Tendulkar, AIR 1973 SC 1104.
xiv <http://www.ficci.com/media-room/speeches-presentations/2003/aug/aug28-ceo-subramania.html > accessed 24 May 2011.
xv Assn. of victims of Uphaar Tragedy v Union of India (2003) 104 DLT 234, Rylands v Fletcher (1868) LR 3 HL 330.
xvi Assistant Commissioner, Assessment-II Bangalore & Ors v Velliappa Textiles Ltd & Anr. (2003) 11 SCC 405 ; State of Maharashtra v Syndicate Transport Company Pvt. Ltd. AIR (1964) Bom 195. A change in this rule was also suggested by the 41st Report of the Law Commission for the amendment of section 62 of the Indian Penal Code.
xvii (2005) 66 CLA 225 (SC)
xviii Charan Lal Sahu v Union of India AIR 1990 SC 1480
xix Criminal Code Act 1995, s 12.3(6), Corporate Culture-an attitude, policy, rule, course of conduct or practice existing within the body corporate, generally or in part, of the body corporate in which the relevant activities take place.
xx Criminal Code Act 1995, s 12.3(2).
xxi Criminal Code Act 1995, s 12.3(2).
xxii Criminal Code Act 1995, s 12.3(3), Due Diligence – i.e. let the body corporate can prove that it exercised due diligence to prevent the conduct, or the authorization or permission.”
xxiii Guy Stessens, “Corporate Criminal Liability: A Comparative Perspective.”, International and Comparative Law Quarterly, v. 43, July 1994, pp. 496-497Criminal Code Act, 1995, Section 12.3(6) (Australia), Corporate Culture- “an attitude, policy, rule, course of conduct or practice existing within the body corporate, generally or in the part, of the body corporate in which the relevant activities take place.
xxiv Known as Ordnungswidrigkeitengesetz.
xxv Gerhard Feiberg, ‘National Development in Germany: An Overview’ (International Colloquium on Criminal Responsibility of Legal and Collective Entities, Berlin, Germany, 4-6 May 1998).
xxvi New York Central and Hudson River Railroad Co. v United States 212 U.S. 481 (1909).
xxvii United States v Basic Construction Co. 711 F.2d 570 (4th Cir. C.A. 1983), 573.
xxviii Canadian Dredge and Dock Co.v the Queen (1985) 19 C.C.C (3d) 1, 23, 45 C.R (3d) 289, 313.
xxix (1993) 1 S.C.R 497