India: Corporate Criminal Liability – #DirectorToo

Last Updated: 18 July 2019
Article by Bharat Vasani and Amey Pathak

Criminal liability encompasses two elements: actus reus (guilty act) and mens rea (guilty mind). There is no dispute that a company is liable to be prosecuted for criminal offences. However, the company being an artificial person cannot have the requisite mens rea, hence the question whether a company could be prosecuted for an offence for which the mandatory sentence is imprisonment.

The law has evolved from the position that a company cannot be prosecuted for offences that require imposition of a mandatory imprisonment1, to the position that the mens rea of the 'alter ego' of the company (i.e. the person or group of people that guide the business of the company) will be imputed to the company as laid down by the Supreme Court in Iridium case 2.

Today, the settled position of law is that if a company commits a criminal offence, the liability rests with the directors in two ways:

  • When the offence committed by the company involves mens rea, it would normally come down to the intent and action of the individual acting on behalf of the company. Thus, an individual who has perpetrated an offence on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent.
  • Where the statutory regime itself attracts the doctrine of vicarious liability by specifically providing for such liability.

There are various legislations including foreign exchange regulations, tax, labour and environment laws that attract the doctrine of vicarious liability by specifically providing for liabilities of a person in-charge and/or directors in the case of an offence being committed by a company. Further, directors are liable under certain penal statutes such as inter alia the Insolvency and Bankruptcy Code, 2016 and the Prevention of Money Laundering Act, 2002. Interestingly, the Prevention of Corruption Act, 1988 (POCA) does not provide for the vicarious liability of directors in the same manner as provided in other legislation referred to above.

This issue came up for consideration in 2015 in the Sunil Mittal / 2G Spectrum case3, wherein the Supreme Court of India quashed the criminal charge against Sunil Bharati Mittal (Chairman-cum-Managing Director of Bharti Cellular Limited), since there was no vicarious liability of director provision in POCA. The Supreme Court was faced with the issue as to when a director / person in charge of the affairs of the company can be prosecuted for an offence committed by the company. The three-bench court relying upon the law laid down in Iridium stated that the 'principle of attribution' is applied to impute criminal intention to the company on account of the criminal intention of its 'alter ego' and cannot be applied in a reverse scenario to make the directors liable for offences committed by the company.

In light of the rising incidents of scrutiny and enforcement by Government and its agencies, the presumption (moral and not legal) is that since a person is the directing / controlling mind and will of the company, his status in the company will determine his culpability in a crime committed by a company. However, this is totally extraneous to the law discussed above.

For determining the culpability of any person, a trial court is bound to apply its mind and also to 'form (to its satisfaction) and record' its opinion4 that there is sufficient ground for proceeding / initiating criminal proceedings against any person based on the material available on record. Though the judicial precedent is unambiguous about this legal position, it is rarely observed in practice. There are instances where a person has been summoned by the trial court as an accused despite the fact that he was not even called for interrogation or was not even named in the FIR or the charge-sheet5 and in some cases where a probing agency had recorded in the charge-sheet itself that it did not find any material to implicate him6.

In current times, there are instances where the directors are arraigned as accused in a criminal prosecution, in high profile scams where there is public money involved, without any evidence on record of the involvement of such directors. This leads to such directors being forced to knock the doors of the courts to seek a redressal and thereby resulting in a burden on the criminal justice system. This is especially ironical given the fact that a trial court is empowered7 to summon any person as an accused at any stage of the trial, only if evidence surfaces against him as was also highlighted by the Supreme Court in the 2G scam case.

Though the legal position under the POCA has undergone change recently with the 2018 amendment, which provides for (a) prosecution of a commercial organisation, 'if any person associated with such organisation gives or promises to give any undue advantage to a public servant...'8; and (b) if a commercial organisation is held guilty of giving a bribe, and it is proved that it was with the consent or connivance of a director, then such director will also be punishable9. It further provides a defence to a commercial organisation to prove that it had in place adequate procedures to prevent persons associated with it from undertaking such conduct. The effort seems to be to make a distinction between non-compliance attributable solely to a personal deviance/neglect of a person and a systemic failure of an organisation. This new amendment is yet to be tested.

With regard to the criminal liability of a non-executive directors (NED) and independent directors (ID) specifically, the Companies Act has introduced the 'knowledge' test (including through the Board's processes) for IDs and a NED10 (not being a promoter or a KMP) similar to a standard vicarious liability of directors' provision. However, this immunity granted to NEDs and IDs is limited only for the offences under the Companies Act and not under any other legislation. A few recent episodes of the Supreme Court passing certain drastic interim orders to attach bank accounts of IDs of certain real estate companies appear to be cases of judicial reaction to bad facts in those cases.

In our view, the law laid down by the Supreme Court in 2015 in Sunil Mittal case on the criminal liability of directors is still the final word on the subject. Therefore, each case must be adjudged from the viewpoint of the criminal liability of directors under the current legal regime, away from the hysteria created by various actors demanding a 'face' to be held accountable in infamous public scams.

Footnotes

1 Asstt. Commr. V. Velliappa Textiles Ltd. (2003) 11 SCC 405

2Iridium India Telecom v. Motorola Incorporated and Others (2011) 1 SCC 74. Also see Standard Chartered Bank v. Directorate of Enforcement (2005) 4 SCC 530, Lee Kun Hee, President. Samsung Corpn., South Korea vs. State of U.P. (2012) 2 SCC 132 and Aneeta Hada vs. Godfather Travels and Tours (P) Ltd. (2012) 5 SCC 661

3 (2015) 4 SCC 609

4 Section 204 Criminal Procedure Code, 1973

5 Mr. Ravi Ruia, Director in Sterling Cellular Limited, 2G scam case

6 Mr. Sunil Mittal, CMD, Bharati Cellular Limited, 2G scam case.

7 Section 190 and 319 of Criminal Procedure Code, 1973

8 Section 9, Prevention of Corruption Act, 1988

9 Section 10, Prevention of Corruption Act, 1988

10 Section 149(12), Companies Act, 2013

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