Corporate Criminal Liability

Why it matters here. It removed the sentencing objection and left the mind objection open, which is precisely the gap Iridium filled. An answer that gives Standard Chartered credit for both holdings is inaccurate, and saying what it expressly reserved is worth marks.

Facts. Iridium India Telecom Ltd. v. Motorola Incorporated, (2011) 1 SCC 74, concerned a complaint of cheating founded on representations in a private placement memorandum issued for a satellite telecommunications venture. The High Court quashed the proceedings against the corporate accused on the footing that a corporation is incapable of the mens rea that cheating requires.

Held. The Supreme Court set that aside. Reviewing English and Indian authority, it held that a corporation is liable to be prosecuted and punished for criminal offences, and that the criminal intent of the alter ego of the company, the person or group of persons who guide its business, is imputed to the corporation; the High Court's conclusion that the company could not have the necessary mens rea was clearly erroneous.

Why it matters here. This is the Indian adoption of the identification or directing-mind doctrine and the authority for corporate liability in offences requiring intent. Paired with Standard Chartered it completes the picture: the company can intend, and the company can be sentenced.

Facts. Sunil Bharti Mittal v. Central Bureau of Investigation, AIR 2015 SC 923, arose when a special judge summoned the chairman of a telecom company as an accused, reasoning that as the company's alter ego his acts and the company's were the same, so that the company's alleged offence was his.

Held. The Court quashed the summoning. The alter ego principle runs from the individual to the company, not from the company back to the individual. A person in charge may be made an accused only where there is sufficient evidence of his own active role coupled with criminal intent, or where the statute itself imposes vicarious liability by express provision. It is a cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides for it.

Why it matters here. It is the control on the doctrine and the case most often needed in practice, because prosecuting agencies routinely array the whole board. It also explains why the Companies Act works through the defined expression "officer who is in default" rather than by attributing offences to directors at large.

How the Companies Act itself allocates blame

The Act does not leave officer liability to inference; it defines it. Section 2(60) provides that "officer who is in default", for any provision enacting that an officer in default shall be liable to penalty or punishment, means the whole-time director; the key managerial personnel; where there is no KMP, such director or directors as the Board specifies with their written consent, or all the directors if none is specified; any person under the immediate authority of the Board or a KMP charged with responsibility including maintenance, filing or distribution of accounts or records, who authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default; and, further down the clause, persons in accordance with whose advice or directions the Board is accustomed to act.

Three features of that definition repay attention because they are the statutory expression of Sunil Bharti Mittal. It is role-based, not status-based: being a director is not enough, and the Act asks what the person was charged with. It is knowledge-based in its wider limbs: authorising, actively participating, knowingly permitting, or knowingly failing to prevent. And it reaches shadow directors, those on whose advice the Board is accustomed to act, so that hiding behind nominees does not work.

A worked example

Anantara Foods Limited files financial statements that materially overstate inventory. The prosecution wants to charge the company under s.447 for fraud, and to array the managing director, the chief financial officer, a non-executive independent director and the promoter who holds sixty per cent and attends no meetings but instructs the managing director by telephone.

Take them in turn. The company: prosecutable. Standard Chartered removes any sentencing objection, and Iridium supplies the mens rea by attributing the state of mind of those who directed the falsification. The managing director: prosecutable if the evidence shows his own active role and intent; he is also a whole-time director and so an officer in default under s.2(60)(i) for the Act's own penal provisions. The CFO: key managerial personnel, squarely within s.2(60)(ii), and on the facts the person charged with the accounts. The independent director: not liable merely as a director; Sunil Bharti Mittal forbids reverse attribution, and the Act's own scheme in s.149(12), taught in [Independent Directors], limits his liability to acts of omission or commission which occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently. The promoter: not immune because he holds no office; if the Board is accustomed to act on his directions he is within the shadow-director limb of s.2(60), and if the evidence shows he directed the falsification, he is liable on ordinary principles for his own role.

Notice what decided each answer: evidence of role and knowledge, not seniority. That is the sentence to write in an examination.

Distinctions

What it does NOT mean

Not that every offence can be committed by a company. Offences whose only punishment is imprisonment and which by their nature require a human actor remain outside the reach; the Standard Chartered solution operates where a fine is among the prescribed punishments.

Not that directors are safe. They are liable for their own acts, as officers in default under the Act's own provisions, and wherever a statute expressly creates vicarious liability. What they are not is automatically liable for the company's offence.

Not the same as lifting the veil. Attribution gives the company a mind; piercing gives a human the company's acts. [Lifting the Veil: the Judicial Doctrine] runs the other way.

Quick revision

Standard Chartered, (2005) 4 SCC 530, Constitution Bench: no immunity where imprisonment is mandatory; impose the fine, ignore the imprisonment; Velliappa Textiles overruled; mens rea question expressly left open. Iridium, (2011) 1 SCC 74: mens rea of the alter ego is attributed to the company. Sunil Bharti Mittal, AIR 2015 SC 923: no reverse attribution; an officer needs his own active role and intent, or an express statutory vicarious liability. Section 2(60): officer in default is role-based and knowledge-based, and reaches shadow directors.

Test yourself

1. What exactly did Standard Chartered decide, and what did it expressly leave open? That a company may be prosecuted and punished though the prescribed sentence includes mandatory imprisonment, the court imposing the fine; it left open whether a corporation can be attributed with mens rea.

2. Which case answered the question left open, and how? Iridium, holding that the criminal intent of the alter ego, those who guide the company's business, is imputed to the company.

3. A prosecutor summons a chairman solely because he heads the offending company. Advise. The summoning is bad: Sunil Bharti Mittal holds the alter ego doctrine does not run in reverse, and vicarious criminal liability requires an express statutory provision or evidence of the individual's own active role with criminal intent.

4. Who is an "officer who is in default" if a company has appointed no key managerial personnel? Under s.2(60)(iii), such director or directors as the Board specifies with their written consent, and if none is specified, all the directors.

5. Does a promoter holding no office escape the Act's penal provisions? Not necessarily: s.2(60) extends to a person in accordance with whose advice or directions the Board is accustomed to act.