CORPORATE CRIMINAL LIABILITY IN INDIA ; NEED FOR REFORMS

ABSTRACT

Corporate criminal liability has become an important consideration in India in the evolving economic and legal context. Corporations yield tremendous financial and social power, and traditional notions of criminal law, based on the nature of natural persons, are falling short of capturing corporate offending behaviour. Events like the Satyam scandal illuminated a failure of governance, enforcement and of accountability regimes. Doctrinal tools, such as attribution and piercing the corporate veil, have been ineffective with more convoluted corporate forms. Enforcement is in chaos and section 441 of the Companies Act laid out a limited range of sanctions while failing to deter criminals from a corporate context. Corporate criminal liability in India needs urgent reconsideration, particularly a clean statutory scheme that clearly articulates organizational fault, investigates powers, extends punishments beyond sanctions, and ultimately include more tools, like deferred prosecution agreements. Reform in these areas can act as cellular deterrence against corporate wrongdoing, find and hold individuals responsible for misconduct, and league for better options of governance, ultimately having a positive social impact.

KEYWORDS:

Corporate Criminal Liability , Corporate Wrongdoing , Companies Act,2013 , Satyam Scandal, Piercing of the corporate veil

INTRODUCTION

The emergence of corporations in the modern economy has been both beneficial and problematic. Corporations can create jobs, wealth, and innovation, but they can also create some of the worst harms industrial disasters, environmental destruction, financial frauds, and consumer exploitation. The 1984 Bhopal Gas Tragedy, which killed and injured thousands, is a perfect example of the terrible costs of corporate negligence. Recently, financial frauds perpetrated by corporations like Satyam Computer Services and IL&FS have shown how fraudulent organization conduct can undermine markets and erode faith in investors.[1]

Traditionally, Indian criminal law largely established by the Indian Penal Code, 1860 was primarily focused on punishing natural persons.[2] The very notion of actus reus and mens rea were complicated in cases against corporations, because they are legal fictions. However, once corporations created eigenvalue as legal persons, it became necessary to ask the question: Is a corporation criminally liable, and if so, to what extent?

This article will address this very question. It will provide a timeline of legal advancement of corporate criminal liability in India, discuss judicial interpretation, note significant gaps, and examine the need for reform in the globalized context.

RESEARCH METHODOLOGY

This research utilizes both doctrinal and analytical methods. Primary sources of law consist of legislation and rules: statutory provisions like the Companies Act, 2013, the Indian Penal Code, 1860, and statutes or rules relevant to specific sectors. Cases from the Supreme Court and High Courts provide the primary basis of analysis and evaluate the formed principles in criminal culpability. Secondary sources reflect critical academic commentary, law commission reports, and comparative discussion to document the UK and US comparable frameworks. The evaluative and reform approach is the core of the current research which aims to critique a law and/or suggest a response to the current law.

LEGAL FRAMEWORK

In India, corporate criminal responsibility is based on the legal recognition of corporations as “persons”. Section 11 of the Indian Penal Code, 1860 (IPC), defines “person” to encompass “any company or association or body of persons, whether incorporated or not.”[3] Thus, corporations can be prosecuted administratively as criminal “persons”, or artificial persons. When the IPC came into force, corporate structure was not as sophisticated, so it is not surprising that corporate criminal responsibility was not foreseen in the same manner as it is currently. Ultimately, as the general section began to prove inadequate, specific statutes were enacted about corporate wrongdoing.

The Companies Act of 2013 has set provisions for criminal liability which is specifically attributed to corporations[4]. For example, Section 447 addresses punishment for fraud, Section 448 relates to punishment for false statements, and Section 449 establishes punishment for false evidence. [5]The Act also creates liability for officers in default, thus connecting the idea of liability by the organization to that of an individual. The Environment Protection Act of 1986 applies liability for actions which harm the environment[6] or other laws and section 141 of the Negotiable Instruments Act of 1881 creates liability for the dishonour of a cheque against companies.[7]

In addition to statutory law, regulations indicate corporate liability as well. For instance, regulatory agencies, such as the Securities and Exchange Board of India (SEBI) and the Serious Fraud Investigation Office (SFIO) have statutory roles in the enforcement of laws[8] for cases of corporate misconduct. However, the law generally has little focus on blacklisting or compliance-type types of remedial actions, as compared to monetary penalties. Furthermore, often there are concurrent statutes in provisions which raise confusion and difficulties in enforcement. As a whole, the lack of coherence in the law indicates a serious need for an all-encompassing, codified and coherent legal standard on corporate criminal liability in India.

JUDICIAL INTERPRETATION

The judiciary has been essential in defining the ambit of corporate criminal liability in India, particularly in overcoming the challenges of addressing mens rea to artificial entities. The important case Standard Chartered Bank v. Directorate of Enforcement (2005), took place where the Supreme Court held that corporations could be prosecuted[9] and subjected to fines even for offences with a mandatory minimum period of imprisonment. This decision definitively rejected the argument against the corporates’ liability based on their artificial nature, and thus began the process of determining the corporate character of prosecutions under criminal law.

In Iridium India Telecom Ltd. v. Motorola Inc. (2011), additional clarification was provided when the Court accepted the idea that corporations could have mens rea[10] and imputed the mental culpability of directors, officers and other key managerial persons to the corporation under the alter ego doctrine. This was a monumental step in bringing Indian jurisprudence in line with international practice when it recognized that a corporation could not hide, through its artificial character, the decisions made on its behalf by those it empowered to make decisions.

However, there are boundaries on the judiciary’s part in obstructing excessive criminalization of an individual director. In Sunil Bharti Mittal v. CBI (2015), the Supreme Court ruled that liability could not rest with a director of a company as a consequence of the company’s liability for an offence, absent evidence of the director’s own participation [11]in committing the offence. The emphasis on the principle of separate legal personality was consistent with the recognition that an individual director was just that  an individual  and could not simply be liable without evidence of their own participation in the commission of the offence. This range of conclusions, taken together, provides a body of support to what has been a steady and undoubtedly gradual development in the Indian legal environment  a willingness to move from moments of hesitation and hesitance to the affirmation, and stronger affirmation of corporate criminal liability, while at the same time reducing the prospect of a presumption of personal liability of directors and officers.

CRITICAL ANALYSIS

As Indian law has slowly moved towards recognizing the concept of corporate criminal liability, there are still several doctrinal and practical challenges that negate its viability. The most fundamental issue is establishing mens rea for corporations. The alter ego doctrine attributing the intent of the directors or principal managerial personnel to the company may be fine in a small, closely-held corporation but presents problems in large, multi-layered corporations with diffuse decision-making. At this scale, it is not difficult for those companies to avoid liability by simply spreading responsibility among its various departments or subsidiaries, leading to the impossibility of accountability.

Another issue is the type of sanctions imposed on corporations. Courts in India, as well as legislation, have mostly limited punishment to financial penalties, which are often not a deterrent for very wealthy corporations. In the UK, for instance, sentencing guidelines will allow for sanctions of compliance orders, corporate probation, and a disgorgement of profits, while Indian law does not allow for any other corrective actions to attempt to change structures within corporations. This creates a situation where the punishment aspect of corporate liability in India is at risk of becoming simply a cost of doing business rather than as a meaningful deterrent.

Furthermore, the disjointed legal framework presents serious enforcement concerns. There is corporate liability across an array of statutes the Companies Act, environmental legislation, anti-corruption laws, and the penal code that are not codified into a single statute. The presence of overlapping provisions, inconsistencies, and ambiguities in legal interpretation leads to prolonged litigation. The challenges of regulatory capture and the capacity of enforcement agencies exacerbate this state of inaction. These all point to the conclusion that while recognising corporate criminal liability may have taken some steps acknowleded, effective enforcement is still lacking in India, and improvements are still needed to support that need for deterrence and fairness.

RECENT DEVELOPMENTS

In recent years, India has made a number of amendments and formations of policies that have effectively altered the nature of corporate criminal liability. For instance, the Companies (Amendment) Act, 2019 reviewed the criminality of many procedural and technical offences[12] under the Companies Act 2013 in order to reduce compliance burden and thereby enhance ease of doing business. While such amendments and formations indicate a pro-business stance taken by the government, they have begotten some level of skepticism as to how or whether such amendments and formations provide less of a deterrent to corporate offending. There have been raised concerns that, in a decriminalized scheme, firms will now see non-compliance with the law as a simple civil tort or wrongdoing, rather than serious wrongdoing, and/or the firm would avoid any engaged accountability for that wrongdoing.

Another important legislative change is the Prevention of Corruption (Amendment) Act, 2018, which established clear liability for companies in the case of bribery[13]. Companies are expected to have adequate compliance procedures to prevent corrupt practice and may have a potential defence if such processes are shown to exist. This brings India more in line with global norms, such as the UK Bribery Act, 2010,[14] which features a compliance-based liability. The Insolvency and Bankruptcy Code, 2016 has also indirectly influenced corporate accountability[15] which is a general trend towards greater scrutiny on management in cases of financial misconduct.

The proposed Bharatiya Nyaya Sanhita, 2023 (BNS), which aims to replace the Indian Penal Code, remains consistent with a corporate liability construct but does provide clarification surrounding the assignment of mens rea. Additionally, global regulatory pressures, particularly under the auspices of the OECD Anti-Bribery Convention[16] and other burgeoning international compliance arrangements, are steadily adjusting India’s views on corporate accountability. These developments indicate a clear propulsion for reform but the reforms are currently disparate and lack a cohesive statutory scheme. What India needs now is a single, comprehensive corporate criminal liability framework, that values deterrence, compliance, and economic growth.

WAY FORWARD (NEED FOR REFORM)

1. Codification of Corporate Criminal Liability under BNS

Currently, various provisions of corporate liability are located in the IPC, Companies Act, environmental laws, and sectoral laws. This fragmented distribution of corporate liability provisions creates confusion, duplication, and inconsistent enforcement practices. A chapter addressing corporate criminal liability in the Bharatiya Nyaya Sanhita, 2023 would provide a uniform, comprehensive, and codified regime applicable to corporations. Codifying the law would also offer clarity on questions regarding mens rea attribution, the extent of vicarious liability, and sentencing standards applicable to corporate crime to enhance predictability and clarity of the law[17].

2. Lifting the Corporate Veil for Accountability

One of the most difficult issues of introducing criminal liability for corporations is the abuse of the Separate legal personality doctrine[18]. The corporate veil protects shareholders and directors in the regular course of business decisions[19]; however, it is most often abused to protect people behind the corporate form from liability for fraud, corruption, and environmental abuses. Reforms should implement direct statutory language that would give courts the authority to lift the corporate veil in instances of criminal behaviour [20]instead of allowing individuals to hide behind the veil from liability. This would provide accountability for those who actually gain or control the wrongful conduct of which they are benefitting, while ensuring that corporations are not allowed to become safe havens for criminal activity.

3. Reinforcing Mens Rea Attribution

The current application of the alter ego principle, attributing the intent of directors or other high managerial roles to a corporation, is insufficient for complex corporations with diffuse decision-making. The updated framework should use a hybrid attribution method, permanently adopting identification of halal individuals with an organizational negligence standard[21]. This model would allow for liability to be established, not only if intent is demonstrated at the top level, but when systemic deficiencies in compliance and governance demonstrate organizational negligence.

4. Distinguishing Civil vs Criminal Liability

A significant flaw in the current regulatory scheme is the dual liability for civil liabilities and criminal offences under the Companies Act and other regulatory laws. This has resulted in confusion over liability and allowed for the abuse of criminal laws over minor regulatory contraventions. The legal reforms will need to strictly separate civil liabilities  as technical or procedural defaults from a criminal conduct fraud, corruption and willful environmental harm. This separation of civil and criminal liability will reduce over-criminalization and ensure that real corporate crime has the real seriousness it warrants.

5. Improving Enforcement and Specialized Mechanisms

Regardless of statutory provisions, corporate criminal liability in India is poorly enforced. Investigative bodies such as SEBI, SFIO, and CBI frequently experience resource constraints and regulatory capture[22]. Reforms should focus on building institutional capacity, providing technical training, and establishing a court, or bench, specialized to hear financial and corporate liability matters. Reforms in this way would lead to a quicker, uniform, and specialized system of adjudication of corporate criminal offences.

CONCLUSION

Corporate criminal liability in India has changed significantly over the last few decades, going from a position of wariness to a position of acceptance through law and judicial legitimacy. However, the barriers to corporate criminal liability difficulty establishing mens rea, failure to make meaningful enforcement actions, and inadequate penalties continue to inhibit the full function of what corporate criminal liability ought to be. Given the role that corporations increasingly play in the life of society, India needs a clear corporate liability framework that performs the dual functions of allowing corporations to develop economically and protects the interests of society.

This reform is not “a good idea”; it is a necessity. A forward-looking corporate liability regime that is preventative, effective, and compliance-focused still has a chance to fortify the rule of law in India and protect society against corporate wrongful behaviour. It is time for India to move from a series of unconnected corporate reform efforts to a law with a legislative framework that understands the economic reality of a corporate world increasingly driven by globalization.

REFERENCE(S):

Books / Commentaries / Journals Referred

1. P. Maheshwari, Corporate Criminal Liability in India: A Critical Appraisal, 12 NUJS L. Rev. 45 (2019).
2. R. Gandhi, Rethinking Mens Rea in Corporate Criminal Liability, 7 Indian J.L. & Pol’y 102 (2020).
3. S. Deshpande, Corporate Accountability and Criminal Law: An Indian Perspective, 3 NLSIR 88 (2021).
4. Gaur K.D., Textbook on Indian Penal Code (6th ed. 2016).
5. Ram Jethmalani & D.S. Chopra, The Companies Act: Critical Analysis (2015).

Online Articles / Sources Referred

1. Law Commission of India, Report No. 246, Amendments to the Negotiable Instruments Act (2014), available at: https://lawcommissionofindia.nic.in
2. Sentencing Council, Fraud, Bribery and Money Laundering Offences: Definitive Guideline (U.K. 2014), available at: https://www.sentencingcouncil.org.uk
3. OECD, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997), available at: https://www.oecd.org/corruption/oecdantibriberyconvention.htm
4. Ministry of Corporate Affairs, Companies (Amendment) Act, 2019 – Key Highlights, available at: https://www.mca.gov.in
5. PRS Legislative Research, The Bharatiya Nyaya Sanhita, 2023: Bill Summary, available at: https://prsindia.org

Cases Referred

1. Standard Chartered Bank v. Directorate of Enf’t, (2005) 4 S.C.C. 530 (India).
2. Iridium India Telecom Ltd. v. Motorola Inc., (2011) 1 S.C.C. 74 (India).
3. Sunil Bharti Mittal v. Cent. Bureau of Investigation, (2015) 4 S.C.C. 609 (India).
4. Union Carbide Corp. v. Union of India, (1990) 1 S.C.C. 674 (India).
5. Salomon v. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.) (U.K.).

Statutes Referred

1. Indian Penal Code, No. 45 of 1860 (India).
2. Companies Act, No. 18 of 2013 (India).
3. Environment (Protection) Act, No. 29 of 1986 (India).
4. Negotiable Instruments Act, No. 26 of 1881 (India).
5. Prevention of Corruption (Amendment) Act, No. 16 of 2018 (India).
6. Insolvency and Bankruptcy Code, No. 31 of 2016 (India).
7. Companies (Amendment) Act, No. 22 of 2019 (India).
8. Securities and Exchange Board of India Act, No. 15 of 1992 (India).
9. Bharatiya Nyaya Sanhita, No. 45 of 2023 (India) (pending).
10. Bribery Act 2010, c. 23 (U.K.).

[1] C.B.I. v. B. Ramalinga Raju, C.C. No. 1 of 2009 (Special CBI Court, Hyderabad).

[2] Indian Penal Code, No. 45 of 1860, India Code (1860).

[3] Id. § 11

[4] Companies Act, No. 18 of 2013, India Code (2013).

[5] Id. §§ 447–49.

[6] Environment (Protection) Act, No. 29 of 1986, India Code (1986).

[7] Negotiable Instruments Act, No. 26 of 1881, § 141, India Code (1881).

[8] Securities and Exchange Board of India Act, No. 15 of 1992, India Code (1992)

[9] Standard Chartered Bank v. Directorate of Enf’t, (2005) 4 S.C.C. 530 (India)

[10] Iridium India Telecom Ltd. v. Motorola Inc., (2011) 1 S.C.C. 74 (India)

[11] Sunil Bharti Mittal v. Cent. Bureau of Investigation, (2015) 4 S.C.C. 609 (India).

[12] Companies (Amendment) Act, No. 22 of 2019, India Code (2019).

[13] Prevention of Corruption (Amendment) Act, No. 16 of 2018, India Code (2018).

[14] Bribery Act 2010, c. 23 (U.K.).

[15] Insolvency and Bankruptcy Code, No. 31 of 2016, India Code (2016).

[16] Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Dec. 17, 1997, 37 I.L.M. 1.

[17] R. Gandhi, Rethinking Mens Rea in Corporate Criminal Liability, 7 Indian J.L. & Pol’y 102, 112–14 (2020)

[18] Salomon v. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.) (U.K.)

[19] K.D. Gaur, Textbook on Indian Penal Code 56–58 (6th ed. 2016)

[20] Union Carbide Corp. v. Union of India, (1990) 1 S.C.C. 674 (India).

[21] P. Maheshwari, Corporate Criminal Liability in India: A Critical Appraisal, 12 NUJS L. Rev. 45, 56–57 (2019).

[22] Securities and Exchange Board of India Act, No. 15 of 1992, § 11, India Code (1992); Companies Act, No. 18 of 2013, § 211, India Code (2013)