I. Introduction
1.The Lok Sabha, on March 17, 2020[1], introduced the Companies (Amendment) Bill, 2020 (the Bill) to decriminalise various provisions of the Companies Act, 2013 (the 2013 Act). In the first part of this two-part series, we will provide an analysis of the doctrine of corporate criminal liability and its evolution in India. In the second part, we will deal with details of the Bill and its significance in commencing a new chapter in the development of corporate criminal liability in India.
II.Evolution of corporate criminal liability particularly in the United States of America and the United Kingdom
2.The concept of corporate criminal liability developed in the Anglo-American tradition of common law through a process of accretion that lacked any conscious effort or a direction. Initially, the corporations were considered incapable of committing crimes, but with globalisation and liberalisation came a shift in the societal stance wherein corporations were seen as being involved in committing (almost all) white collar crimes[2].
3. In the early 1700s, the development of corporate criminal liability faced four main obstacles[3]:
a. Attributing acts to a juristic person[4];
b.Belief that companies could not possess the moral culpability necessary to commit intentional crimes[5];
c. Ultra vires doctrine, under which courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters[6]; and
d.Understanding of the extant criminal procedure, wherein procedure without the accused physically coming before the court was unknown[7].
4. Criminal liability stands on the basic rule of ‘actus non facit reum nisi mens sit rea’ i.e. an act is wrongful only when it is done with a wrongful state of mind. However, a corporation neither has a mind which can possess knowledge or intention, nor does it have hands to carry out its intentions. To address this issue, it is essential to understand that the original application of both civil and criminal liability to corporate entities were derived primarily from the ancient common law tort doctrine which says masters had “vicarious” liability for the wrongful actions of their servants[8]. As a result, the courts were soon willing to hold corporations criminally liable for almost all wrongs except rape, murder, bigamy, and other crimes of malicious intent[9].
5. The common criminal law also took the position that, in general, there could be no vicarious criminal responsibility i.e. a person could not be deemed to be guilty of a criminal offence committed by another[10]. Over a period of time, application of this rule became subject to exception on the basis of specific provisions in the statutes extending liability to others.
6. In the United Kingdom, the House of Lords while hearing the case of Tesco Supermarkets Ltd v. Nattrass[11] held that an employee was not a part of the ‘directing mind’ of the corporation and, therefore, his conduct was not attributable to the act of corporation. However, in Meridian Global Funds Management Asia Ltd v. Securities Commission[12] the Privy Council ruled that a company can be held liable for the crimes of its senior personnel, committed without the knowledge of the company. The identification theory imposes vicarious liability of an organisation for the acts committed by agents of the organisation and was identified in the above two judgments.
7. Both the American standards i.e. vicarious liability and Respondent Superior for holding organisations criminally liable employ the ‘identification’ approach pioneered in England. Respondent Superior is the broader of the two standards. Derived from agency principles in tort law, it provides that a corporation may be held criminally liable for the acts of any of its agents [who] (1) commits a crime, (2) within the scope of employment, (3) with the intent to benefit the corporation[13]. This standard is quite broad, permitting organisational liability for the act of any agent, even the lowest level employee[14].
III. Development of corporate criminal liability in India
A. Judicial Interpretation
8. The special vicarious liability doctrine adopted in India emanates from the common law principle which enables the courts to hold the directing minds responsible for the actions and affairs of the company[15]. In Sunil Bharti Mittal v. Central Bureau of Investigation[16], the Supreme Court, while adopting the position from Tesco Supermarkets Limited, held that a company cannot be criminally liable for the actions of its employees. Therefore, there is no special vicarious liability in criminal law without a specific statutory exception. However, this position was overturned in Standard Chartered Bank v. Directorate of Enforcement[17], where the Supreme Court at the outset rejected the idea that the company is immune from criminal prosecution where custodial sentence is mandatory and observed that the company is liable to be prosecuted and punished for criminal offences.
9. Thereafter, in the landmark case of Iridium India Telecom Limited v. Motorola Inc.[18], the Supreme Court observed that corporate houses can no longer claim immunity from criminal prosecution on the ground that they are not capable of possessing mens rea. Therefore, the actions of the directors of the accused company were directly linked to the actions of the company itself, thereby holding the corporation criminally liable both under common law and statutory law. It is an admitted position in India that despite being a juristic person, a company is liable for its actions and inactions that result in commission of an offence punishable under law.
B. Corporate criminal liability under the Companies Act
10. In India, the corporate criminal liability is imposed on the corporations through various legislations such as the Income Tax Act, 1961, the Securities and Exchange Board of India Act, 1992, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the Negotiable Instruments Act, 1881 and the Prevention of Corruption Act, 2013 to hold the company and the key managerial personnel (KMP) responsible for the illegal acts of the corporations. Considering that the Companies Act, 1956 (the 1956 Act) and the 2013 Act are legislations solely for the governance of the corporations, the study of the corporate criminal liability as provided for in these legislations become relevant.
11. Corporate criminal liability under the 1956 Act was based on the principle of strict vicarious liability, as discussed in the section above. However, the threshold of corporate criminal liability was increased under the 2013 Act by introducing stricter provisions to hold officers and directors vicariously liable on account of their designation, scope of employment and responsibility irrespective of any requirement to prove their involvement in commissioning of the crime.
12. The 2013 Act streamlines the manner in which corporate criminal liability is to be imposed on corporations. It specifies that the KMP would be considered as defaulting “officers”. The officers under the Companies Act, 2013 have been categorised as following:
(i) KMP including managing director, whole time directors, chief executive directors, chief financial officers and company secretaries;
(ii) personnel reporting to the KMP that are responsible for maintaining, filing or distribution accounts and records and participating in actively taking certain actions or inactions;
(iii) personnel responsible for ‘maintaining accounts and records’;
(iv) directors possessing the knowledge of any default committed by the other officers on behalf of the company through participation in board meetings or being in receipt of any board proceedings; and
(v) personnel not involved in the day-to-day affairs of the company but involved in the transfer of shares such as share transfer agents, registrars and the merchant bankers to the issue or transfer of shares.
13.The existing standards under the 2013 Act are inconsistent with the principles of criminal law as it holds the officers and personnel criminally liable merely on account of their designation and there specific actions or inactions that indicate that they possessed knowledge of the crime while they may not be actively involved in the commission of the crime. It is relevant to note the imposition of stricter punishments for offences committed by corporations was introduced in the 2013 Act with the objective of ensuring ‘deterrence’ on the companies. However, the imposition of stricter liability has made the corporations very vulnerable, thus greatly hampering the ease of doing business.
IV. Conclusion
14. While corporations have been a blessing to the economy, it is crucial that for progress and development of the society, the laws governing such corporations strike at the root cause of the crimes committed. While doing so, the legislations should also incentivise corporations to carry out their business with ease, and by freeing the directing mindsof the fear of being criminally liable merely on account of their designation. It is imperative for the legislation, while combating crimes, to strike a balance between functioning of the society and the overall benefit of the economy.
15. Therefore, there is a pressing need to dilute the corporate criminal liability, imposed specifically under the 2013 Act. The unrealistic standards prescribed under the said legislation needs to be watered down to a certain extent for the purpose of enhancing the ease of doing business. With this objective, the legislators introduced the Bill to decriminalise various provisions of the 2013 Act.
* Partner, Cyril Amarchand Mangaldas
** Partner, Cyril Amarchand Mangaldas
*** Senior Associate, Cyril Amarchand Mangaldas
†Associate, Cyril Amarchand Mangaldas
‡Associate, Cyril Amarchand Mangaldas
[1] Companies (Amendment) Bill, 2020 [Bill No. 88 of 2020]
[2] Thomas J. Bernard, The Historical Development of Corporate Criminal Liability, 22 Criminology 3 (1984).
[3] John C. Coffee, Jr., Corporate Criminal Responsibility, in 1 Encyclopaedia of Crime and Justice 253, 253 (Sanford H. Kadish ed., 1983)
[4] Coffee, supra note 3, at 253
[5] Ibid
[6] L.H. Leigh, The Criminal Liability of Corporations in English Law 1-12 (1969) (discussing the development of English corporate criminal liability).
[7] Ibid
[8] Ibid
[9] Richard S. Gruner, Corporate Crime and Sentencing § 1.9.2, at 52-55 (1994)
[10] Matthew Goode, Corporate Criminal Liability, Australian Govt. Publications, available at http://www.aic.gov.au/medialibrary/publications/proceedings/26/goode.pdf
[11] [1972] AC 153
[12] [1995] 2 AC 500
[13] United States v. A&P Trucking Co., 358 U.S. 121, 124-27 (1958)
[14] Corporate Criminal Responsibility-American Standards of Corporate Criminal Liability; available at
[15] Tesco Supermarkets Ltd v. Nattrass, [1972] AC 153
[16] (2015) 4 SCC 609
[17] Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530
[18] (2011) 1 SCC 74