Corporate Criminal Liability: Tracings Its Origin And Development

    Owing to globalization, the world is one big village and corporations are an integral part of it. They have developed at a strong pace as one of the most important organizations in the modern economy[1]. The corporations can be credited with providing everything to us from houses, food, and clothes to healthcare, employment, and insurance. It won’t be wrong to call corporations one of the most powerful residents of this global village we live in. The law recognizes corporations as legal persons with separate legal identities that are independent of their members. A corporation is thus a legal fiction. In such a case, how can it be held liable for wrongdoings or what is its liability ?

    Introduction

    It was easier for courts to allocate civil liability to the erring corporations. The difficulties have historically been with the identification of criminal liability. A corporation is a separate legal entity but, it is merely a fiction. The law recognizes it as a person but it cannot be punished like one. To name a few obstacles, it cannot be imprisoned and it cannot mark its presence in a court of law when accused of a crime, both of which are integral to criminal law proceedings. But, its crimes can also not go unpunished especially when they have more severe impacts on society. It is important to hold corporations accountable for their wrongdoings. This notion gave rise to the still-developing concept of Corporate Criminal Liability.

    This article aims to discuss the meaning of Corporate Criminal Liability, its theories as well as trace its origin and development in common law with a specific reference to the Indian scenario.

    Meaning

    Corporate Criminal Liability is a highly debatable concept that has grown at a radical pace over the last two decades. This pace, however, is different for different countries as their legal systems are still contemplating the application of criminal liability to corporates.

    At present, corporations are subject to a variety of laws to keep them in check and protect society at large from their wrongdoings. A corporate is a separate legal entity and can thus be tried, convicted, as well as sentenced for the commission of a crime. In simple terms, Corporate Criminal Liability is defined as the liability imposed upon a corporation for its criminal acts.

    Concept of Criminal Liability

    Crime is defined as an unlawful act or an act that is forbidden by law. A person is said to be criminally liable when he acts in violation of the criminal law. The concept of criminal liability has evolved from the Latin Maxim, actus non facit reum, nisi mens sit rea that literally means that “an act in itself does not make one guilty unless the mind is also guilty”. This maxim hence gives rise to two elements for a crime, actus reus, and mens rea. Actus reus is the physical aspect of a crime wherein an act has been done in violation of the law. Mens rea, on the other hand, is the mental element that refers to criminal intent. Together, these two elements constitute a crime. Generally, both these elements must be proved beyond a reasonable doubt. However, an exception lies in the principle of strict liability where one may be held liable for a criminal act without proving the intent or the guilty mind. This principle comes in handy in ascertaining the criminal liability of corporations especially in cases of serious harm to society or the environment.

    Corporates and Criminal Liability

    A corporation is an organization created by a group of shareholders for-profits or nonprofits. It has a distinct and separate legal identity from its owners. The law recognizes it as a legal person thereby allowing it to enjoy rights and responsibilities generally possessed by an individual. Any crime committed by a corporation is known as corporate crime. Australian criminologist John Braithwaite defines corporate crime as the conduct of a Corporation, or of employees acting on behalf of a corporation, which is proscribed and punishable by law[2].

    The most common corporate crimes are a result of a violation of environmental laws. Other examples may include bribery, counterfeiting, embezzlement, bank fraud, and blackmail[3] among others. These crimes have a drastic effect not just on the economy but also on society and the environment. In some cases, they have led to the loss of life and property on a massive scale.

    The assignment of criminal liability in the case of corporates is different from that of a person. Despite being recognized as a separate legal entity, a corporation is merely a piece of legal fiction. It exists on the physical plane as a brick and mortar building that is incapable of having its own thoughts or ideas. The actions that it takes or the acts that it undertakes and the thinking that goes behind these acts are done for it by its directors or employees[4]. This means that the guilt cannot be possibly allocated to the corporation itself but to those who acted on its behalf. There has been a lot of debate on this position which is elaborated in the latter part of this article.

    But, as of today, the position is well settled that a corporate can possess mens rea and thus, can be held liable for the commission of crimes with mens rea as a requisite.

    Theories Of Corporate Criminal Liability

    It was stated by Lord Chancellor Edward Thurlow during the late 18th century that corporations have neither bodies to be punished, nor souls to be condemned; they, therefore, do as they like[5]. Allocating criminal liability to corporates was a complex task and still proves to be so. However, many theories have been developed over the years for the interpretation of the concept of corporate criminal liability. These theories are described as under:

    Theory of Vicarious Liability

    This is the first-ever theory propounded to allocate criminal liability to corporations. It originated from Britain and found its way out to other legal systems. The British courts adopted and applied the theory of vicarious liability to the allocation of corporate criminal liability. It was later developed as the theory of respondeat superior in the American jurisprudence. It also happens to be the most common and widely followed theory. It allocated the criminal liability to corporates for the acts done by its employees within the course of employment and with the intent of benefitting the corporation.

    Theory of Identification

    While the US developed the theory of respondeat superior, another theory called the identification theory came into existence in the UK. This theory is also known as the theory of alter ego. It was first introduced in the landmark decision of Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd[6] wherein the test of alter ego was adopted. It aimed to identify the real directing mind of the corporation.

    The theory of identification directly holds the corporation liable for the commission of criminal acts and not vicariously. The mind of the senior employees who have control over the acts of the corporation like the director or manager is said to be the mind of the corporation. Thus, this theory allows for the allocation of criminal liability to a corporation for offenses involving mens rea.

    Theory of Attribution

    The theory of attribution is an extension of the theory of identification. The aim here is to identify the person who is the directing mind and will of the corporation and whose actions can be called as corporate’s actions. Such a person is attributed to being a guilty mind.

    Aggregate Theory

    This theory was first proposed in 1987 by the first circuit court of the US in the case of United States v. Bank of New England[7] wherein it was established that the knowledge of a corporation is the aggregate knowledge of its agents/employees. This theory is a culmination of the theory of vicarious liability and the theory of identification. It prevents corporations from hiding behind various departments to protect themselves against criminal liability. It has helped the courts especially in cases of fraud and tax evasion.

    https://legalreadings.com/the-vitality-of-sections-311-and-313-crpc/

    Development Of Corporate Criminal Liability Under Common Law

    The origin of the concept of criminal liability of corporate bodies is identified by the judiciary’s relentless struggle to overcome the crisis of assigning the criminal blame to the fictional entities[8]. Jurisprudence on corporate criminal liability has developed a lot over the years. Earlier, corporations could not be held criminally liable. The rationale behind it was the absence of mens rea in a non-natural person. But now the position has changed significantly and a corporate can be held liable for most of their crimes.

    Before the 16th century, corporates in England were entities that managed church property. It was thus the view of the church that was followed when it came to the early interpretation of corporate criminal liability. The corporation was a fictional entity, distinct from its members, and hence could not commit wrongs or sins[9]. The 16th and 17th centuries saw an expansion of the term corporates which now included hospitals, universities[10], etc. The increasing number of corporates generated a lot of debate regarding corporate criminal liability. According to W. S. Holdsworth, the law needed to regulate these groups of men who, when they act in combination, have far more power for good or evil than any single man[11]. Lord Holt too in 1701 stated that a corporation is not indictable, but the particular members of it are[12]. Blackstone was of the same view. He said that corporations cannot commit treason or felony, or other crime, in its corporate capacity, though its members may, in their distinct individual capacities[13]. Neither is it capable of suffering a traitor’s, or felon’s punishment, for it is not liable to corporal penalties[14].

    Thus, the early 1700s proved to be an obstacle-laden path for corporate criminal liability. Both the courts and legal thinkers faced difficulties in attributing an act or guilty intent to corporations, a legal fiction. It was also the literal interpretation of criminal proceedings that hindered the development of corporate criminal liability. It must also be noted that this was the time before industrialization began in England.

    The later part of the 1700s saw a shift in the understanding of corporate criminal liability by courts. It was first seen in the courts of England and the US. But the criminal liability was limited to the crimes of nonfeasance of quasi-public corporations like municipalities. It was in the 1800s that the courts expanded their interpretation of corporate criminal liability and included commercial corporations in the net. Soon the courts extended the criminal liability to other offenses as well. In the Queen v. Great North of England Railway Co[15], Lord Denman ruled that corporations could be held criminally liable for misfeasance[16]. This development reached the American courts as well and they began giving similar decisions. This chain of events pushed the courts to expand the meaning of corporate criminal liability to also include crimes that do not require mens rea.

    The 1900s again saw a gradual shift in the concept of corporate criminal liability. Courts had now borrowed the principle of vicarious liability from the law of Torts. This meant that corporations were being held criminally liable for the acts of their agent that were committed during the course of employment.

    The position of the courts in the US developed differently. The liability was limited to non-moral crimes as the existing belief was that corporations don’t have a body or soul and thus, cannot commit a moral offense. The corporate criminal liability did not extend to crimes that included mens rea. But, this position changed after the ruling of New York Central & Hudson River Railroad Co v. United States[17]. It was held that the corporations can be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them[18]. The court also called Blackstone’s rule an “old and exploded doctrine”.

    This ruling paved the way for courts to extend criminal liability to corporations irrespective of the specific intent of Congress regarding the same. As the theory of vicarious liability developed through English law, American jurisprudence developed the principle of respondeat superior that was followed in the decisions that came after New York Co[19]. Corporations were held liable for the acts of their employees. The acts must have been done by the employee/agent during the course of employment with the intent to benefit the corporation.

    This position is still maintained and widely followed in common law countries. Now, corporations can be held liable for almost all crimes except rape, murder, and bigamy among others that require mal intent.

    Corporate Criminal Liability In India

    The advent of the concept of corporate criminal liability was much slower in India. Since it is a common law country, the initial emphasis remained on the requirement of mens rea. The concept of corporate criminal liability can be easily traced not only from various case laws but also statutes. Section 11[20] of the Indian Penal Code, 1860 defines a person to include any company or association or body of persons. It also includes body corporates, incorporated or not. This enables the courts to prosecute corporations under the provisions of IPC. The Companies Act, 2013 also recognizes corporate criminal liability. For instance, section 53[21] provides for punishment in case of contravention of the provisions laid down by this section. It states that the officer in default may be punished with imprisonment or fine or both. Other statutes including the Negotiable Instruments Act[22], Essential Commodities Act[23], and the Environment Protection Act[24] among others also recognize the corporate criminal liability.

    Tracing Development Through Case Laws

    In A. K. Khosla and Others v. T S Venkatesan and Others[25], the Calcutta High Court emphasized the then current position of corporate criminal liability in India. It was the consistent view of the courts that a company is a legal person and it cannot be prosecuted for offenses that involve mens rea or those that involve compulsory imprisonment. A similar position can be seen in Kalpnath Rai v. State (Through CBI)[26]. In this case, the Hon’ble Supreme Court of India held that a company is not a natural person and is not liable to be prosecuted under section 3(4) of the Terrorists and Disruptive Activities Prevention Act. The rationale behind this ruling was the absence of mens rea on the part of the company.

    In Zee Telefilms Limited v. M/S Sahara India Commercial[27], it was held that a company was incapable of committing an offense of which mens rea was an essential ingredient. The Bombay High Court in Motorola Incorporated v. Union Of India[28] held:

    Although a person who is a victim of deception can be a company, the perpetrator of deception cannot be a corporate body like a company or association. It can only be a natural person who is capable of having mens rea to commit the offense [29].”

    A new challenge was brought forth in Velliappa Textiles[30] wherein the apex court emphasized the importance of legislative changes concerning corporate criminal liability. The court held that a fine cannot be imposed in lieu of mandatory imprisonment in the absence of provisions stating the same. This legal difficulty was highlighted in the 41st as well as the 47th Report of the Law Commission wherein several recommendations were made. Following these reports, suitable amendments were introduced in the tax laws. 

    It was then in the landmark judgment of Standard Chartered Bank v. Directorate of Enforcement[31] that the difficulty arising in the Velliappa[32] case was resolved and the latter was overruled. The court by a majority decision of 3:2 held that in offenses involving mandatory imprisonment and fine, the courts have the discretion to impose the sentence of fine as corporations cannot be imprisoned.

    Conclusion

    Corporates are an integral part of a developing society and have a strong influence on our lives. With the growth of corporations, also grows the menace caused by their wrongdoings. The law recognizes a corporate as a legal person with a separate legal identity and as per the present position of law, it can be held accountable for both civil and criminal liabilities. It took centuries for the law ascertaining the criminal liability of corporations to develop. The difficulties and obstacles faced by common law countries were not faced by civil law nations. The growth of corporate criminal liability has been slow on a global scale and even slower in India. There are still many lacunas that need to be addressed to ensure a proper application of corporate criminal liability. Meanwhile, India has a long way to go to not only be on par with the international developments but to also be at the same level and speed of the growth of corporations within the country.

    References

    [1] Nadav Shemer, “Corporations are important in modern economy” The Jerusalem Post, December 18, 2012, available at: https://www.jpost.com/business/business-features/corporations-are-important-in-modern-economy#:~:text=%E2%80%9COne%20cannot%20simply%20rely%20on,position%20in%20the%20international%20economy (last visited on October 20, 2020).

    [2] John Braithwaite, Corporate Crime in Pharmaceutical Industry 6 (Routledge and Keagan Paul, London, 1984).

    [3] D. Silviya Dixina, S. Indrapriya, “A Study On Corporate Crime In India” 2 International Journal of Law Management & Humanities (2018).

    [4] Abhinandan Bassi, Corporate Criminal Liability: An Analytical Study With Special Reference To Penal Laws In India (2016) (Unpublished Ph.D. thesis, Rajiv Gandhi National University of Law) available at: http://hdl.handle.net/10603/200004 (last visited on October 20, 2020).

    [5] John Poynder, Literary extracts from English and other works; collected during half a century: together with some original matter 268 (John Hatchard & Son, London,1844).

    [6] Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd(1915) A.C. 705.

    [7] United States v. Bank of New England(1987) 821 F.2d 844.

    [8] M. Arshiya Thansum, M. Kannappan, “A Critical Study on Corporate Criminal Liability with Reference to Indian Case Laws” 119 International Journal of Pure And Applied Mathematics (2018).

    [9] William Blackstone, Commentaries on the laws of England, Book The First (Clarendon Press, Ireland, 1765).

    [10] W. S. Holdsworth, “English Corporation Law in the 16th and 17th Centuries” 31 Yale Law Journal (1922).  

    [11] Ibid at 383.

    [12] Anonymous case (No. 935), 88 Eng. Rep. 1518 (K.B. 1701).

    [13] Supra 9 at 464.

    [14] Ibid.

    [15] The Queen v. Great North of England Railway Co Eng. Rep. 1294 (Q. B. 1846).

    [16] Ibid.

    [17] New York Central & Hudson River Railroad Co v. United States 212 US 481 (1909).

    [18] Ibid.

    [19] Ibid.

    [20] The Indian Penal Code, 1860 (Act 45 of 1860), s. 11.

    [21] The Companies Act, 2013 (Act 18 of 2013), s. 53.

    [22] The Negotiable Instruments Act, 1881 (Act 26 of 1881).

    [23] The Essential Commodities Act, 1955 (Act 10 of 1955).

    [24] The Environment (Protection) Act, 1986 (Act 29 of 1986).

    [25] A. K. Khosla v. T S Venkatesan (1992) 1 CALLT 77 HC.

    [26] Kalpnath Rai v. State (Through CBI) (1997) 8 SCC 732.

    [27] Zee Telefilms Limited v. M/S Sahara India Commercial (2001) 1 CALLT 262 HC.

    [28] Motorola Incorporated v. Union Of India 2004 CriLJ 1576.

    [29] Ibid.

    [30] The Assistant Commissioner v. M/S. Velliappa Textiles Ltd AIR 2004 SC 86.

    [31] Standard Chartered Bank v. Directorate of Enforcement AIR 2005 SC 2622.

    [32] Supra 30.


    BY SHALU BHATI | CAMPUS LAW CENTRE , DELHI UNIVERSITY

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