CORPORATE CRIMINAL LIABILITY IN INDIA: AN INFORMATION TECHNOLOGY PERSPECTIVE

BY

GEETA NARULA*

 The aim of this article is to analyse the criminal liability of companies in India. The same may arise under various statutes that usually incorporate a standard clause containing same words and similar consequences for its breach. The present article aims at clarifying the legal position regarding the liability of the companies for the violation of provisions of Information technology Act, 2000. A special mention of the requirement of “due diligence” has been made, so that the confusion surrounding it can be cleared and explained.

 I. Introduction

 Corporations are as much part of our society as are any other social institution. Corporations represent a distinct and powerful force at regional, national and global levels and they wield enormous economic powers. Besides governments and governmental agencies, it is the corporations that are the more and more effective agents of action in our society. But, corporations, as we understand today, have not been same in the past. The multitude of roles the corporations play in the present day human life have been necessitated by the demands of the society, as it kept on ‘developing’. The development of the society, at various points of time, has had a direct influence on the structure and functions of the corporation. This had led to an ever increasing demand for the law to recognise the change and suit its applications, accordingly[1]. Over the last few decades nature and form of a corporate sector has grown complex. In last two decades of 20^th century, we saw globalization and privatization of every type of business entities all over the world and this globalization further paved the way for “Global Village”, which considerably made the changes in the form of business organisation. Today, a corporation is an artificial entity that the law treats as having its own legal personality, separate from and independent of the persons who make up the corporation[2]. This means, for example, that a corporation can own and sell property, sue or be sued, or commit a criminal offence because; a corporation is made up of and run by people, acting as agents of the corporation. A corporation has an existence separate from the shareholders constituting it and they cannot be held liable for the wrongs committed by the corporation. The corporations are run by natural persons and these peoples’ actions can be criminal in nature and can sometimes even result in great economical as well as human loss to the society. Hence, for a better understanding of the concept of corporate criminal liability, it is necessary to trace the origin and meaning of corporation first.

II. Origin of corporations

 In simple language, corporation means a group of individuals coming together to carry on a business. Corporation is a creation of law, a business entity recognised by law. Though, English law establishes the origin of modern corporation in the fourteenth century or so, yet some authors [3] are of the view that the origin of corporation could be sought in the twelfth century or perhaps in the Roman law where, juristic person was said to have been recognized. Sir Henry Maine suggested that a sort of corporate (as opposed to the individual) responsibility was at the very heart of the primitive legal system. Society was not what it is assumed to be at present, a collection of individuals. In fact, and in view of the men who comprised it, it was an aggregation of families. The law recognized this system of small independent corporations[4]. Corporations are of two kinds:

(a) Corporation Aggregate, and

(b) Corporation Sole.

 Corporation Aggregate is an incorporated body having membership of several persons. It is formed by number of persons known as share holder who pool their resources to create a fund known as capital to start with and it works for common interest of all the share holder and prime being profit making[5]. It was the industrial revolution of the seventeenth century and improvement in the transportation system thereby, which brought about the previously unanticipated changes not only in the size and structure of the corporations but also in the role and functions corporations play in the society. Over the past century, the concept of a corporation has shifted from the notion of an enterprise headed by one entrepreneur, who both owns and runs the going concern, to that of an organisation where stock ownership becomes separated from the control of the corporation’s affairs, the latter being managed by a professional, hired and self-perpetuating bureaucracy. Further, the individual shareholder’s role has changed from part-owner to investor, and its importance has diminished in large corporations where the most significant shareholders are collective entities. The attachment of the shareholder to the corporation is becoming secondary and indirect, reflecting the fact that corporations serve a variety of interests besides those of shareholders, including those of their employees, customers and the community at large. And hence, it has been observed that “the corporation can no longer be identified with a single homogeneous group of individuals. Its decisions and activities are the resultant of and are responsive to a complicated set of interests and conflicting claims”[6]. This is the more significant change for the purposes of the criminal law and for imputing corporate criminal liability on the corporations.

 In today’s economic and social structure, a corporation possesses functional structures, it is permanent, large, formal, complex and goal-oriented, and has decision-making structures. Although not all corporations share the characteristic of being large-scale operations involving many individual participants, it should be noted that small corporations do not generally raise the same problems for prosecutors as large ones. Moreover, the social importance of an organization’s policies and decisions increase with the magnitude of its resources, reflecting the greater potential of large organizations to cause substantial harm. It has also been observed that the large corporations tend to breed the conditions for disaster. The larger the corporation, the greater the diffusion of responsibility, and the greater the possibility for disaster, and for disaster of greater reach.

 III. Corporate criminal liability India

 Corporate criminal liability has been an important issue on a legal agenda for a long time. Corporations play a significant role not only in creating and managing business but also in common lives of most people. That is why most modern criminal law systems foresee the possibility to hold the corporation criminally liable for the perpetration of a criminal offence. The doctrine of corporate criminal liability turned from it's infancy to almost a prevailing rule[7]. But, because a corporation is not a natural person and cannot be subject to one of the most important sentencing options, namely, imprisonment, it requires special consideration in an inquiry into sentencing law. Punishing a corporation undermines the theoretical foundations of criminal law, which presupposes that crimes involve an act and a culpable mental state. Corporate criminal liability or corporate crime is very difficult to define because this phrase in present day scenario covers wide range of offences. However for understanding purpose it can be defined as illegal act of omission or commission, punishable by criminal sanction committed by individual or group of individual in course of their occupation[8]. It can be even defined as socially injurious acts committed in course of occupations by peoples who are managing the affairs of the company to further its business interest[9]. Corporate criminality also represents a kind of instrumentalities through which the trust of the people continues to be betrayed by persons in positions of responsibility, authority and power in the business sector. Corporate crime has been defined as “the conduct of a corporation or of employees acting on behalf of a corporation, which is proscribed and punishable by law”[10]. In this sense, “Corporate criminal Liability” refers to the imposition of criminal liability on either the corporation or its employees and agents. The latter is also referred to as white-collar crime.

 The development of the law relating to corporate criminal liability in India is not only similar to that in English law, but also greatly influenced by the English Law. At one point of time, ‘corporations’ were viewed as a convenient shield to evade liability. However, under our present penal structure, for an offence by the corporation, both the corporation and its officer can be made liable. The law on corporate criminal liability is however, not confined to the general criminal law in the penal code but it is, in fact, scattered over a plethora of statutes with specific provisions for the same. The need for proper law relating to corporate criminal liability in a legal system, specially in the developing countries like India was observed by the Supreme Court in the following terms:

“In India, the need for industrial development has led to the establishment of a number of plants and factories by the domestic companies and under-takings as well as by Transnational Corporations. Many of these industries are engaged in hazardous or inherently dangerous activities which pose potential threat to life, health and safety of persons working in the factory, or residing in the surrounding areas. Though working of such factories and plants is regulated by a 614 number of laws of our country, there is no special legislation providing for compensation and damages to outsiders who may suffer on account of any industrial accident.”[11] The major law relating to Corporations in India is codified in The Company Act, 1956 and the definition of “Corporation" as given in the Act under Section 2 (7) includes a company. Hence under Indian law the liability of the corporation is essentially liability of the company only. Further, under Indian law as well as under the English law, a Company is a creation of the law. It is not a human being but is an artificial person. On incorporation, the company acquires a separate legal entity distinct from and independent of its members. When a company is incorporated, all dealings are with the company and all persons behind the company are disregarded, however important they may be. Thus, a veil is drawn between the company and its members. Normally, the principle of corporate personality of a company is respected in most of the cases. The separate personality of the company is, however, a statutory privilege; it must be used for legal and legitimate business purposes only. Where a fraudulent, dishonest or improper use is made of the legal entity, the concerned individual will not be allowed to take shelter behind the corporate personality. The court will break through the corporate shell and apply the principle of “Lifting of the corporate veil”. The court will look behind the corporate entity and take action as though no entity separate from the members existed. In other words, the benefit of separate legal entity will not be available and the court will presume the absence of such separate existence[12]. The Companies Act, 1956 contains certain provisions[13], which empower the courts to lift the veil to reach the persons who are in fact responsible for the culpable or wrongful act. The corporate veil can be lifted in the following cases:

(1) Where the doctrine conflicts with the Public policy,

(2) Where corporate veil has been used for fraud or improper conduct,

(3) Where the corporate facade is only an agency instrumentality,

(4) For determining the real character of the company,

(5) Where the veil has been used for evasion of taxes,

(6) In quasi-criminal cases,

(7) For investigating the ownership of the company,

(8) For investigating the affairs of the company[14],

(9) Where the company is used as a medium to avoid various welfare and labour legislations,

(10) In case of economic offences,

(11) Where the company is used for some illegal and improper purpose, etc.

             The following provisions of the Companies Act, 1956 provide that the Members or the Directors/officer(s) of a company will be personally liable if:

(1) A company carries on business for more than six months after the number of its members has been reduced below seven in the case of a public company and two in the case of a private company. Every person who was a member of the company during the time when it carried on business after those six months and who was aware of this fact, shall be severally liable for all debts contracted after six months[15],

(2) The application money of those applicants to whom no shares has been allotted is not repaid within 130 days of the date of issue of the prospectus, then the Directors shall be jointly and severally liable to repay that money with the prescribed interest[16],

(3) an officer of the company or any other person acts on its behalf and enters into a contract or signs a negotiable instrument without fully writing the name of the company, then such officer or person shall be personally liable[17],

(4) The court refuses to treat the subsidiary company as a separate entity and instead treat it as only a branch of the holding company[18],

(5) In the course of winding up of the company, it appears that the business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, al those who were aware of such fraud shall be personally liable without any limitation of liability[19].

Thus, the protection of separate legal entity cannot be claimed in these cases and the limited liability of the shareholder becomes unlimited if he is engaged in these activities. The concept of “limited liability” restricts the liability of a shareholder to the nominal value of the shares held by him. If he has paid the entire amount which is payable towards his shares, he cannot be held liable for the debts of the company, even if he holds almost the entire share capital of the company. This rule, however, does not apply if the court lifts the corporate veil and finds the shareholder responsible for the wrongful act[20]. Not less recently, in the landmark judgment of Kapila Hingorani v State of Bihar[21], the Apex Court analysed the rights and liabilities of a company vis-à-vis the Fundamental rights and Human Rights of the individuals. The Court observed:

“A company incorporated under the Companies Act is a juristic person and has a distinct and separate entity vis-à-vis its shareholders. The corporate veil, however, can in certain situations be pierced or lifted. Whenever a corporate entity is abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable thereof. The veil can indisputably be lifted when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest”. It has also been observed that a corporation deemed to be “State” within the meaning of Article 12 of the Constitution and acting as agency of the government, would be subject to the same limitations in the field of Constitutional or administrative law as the government itself, though in the eyes of law they would be distinct and independent legal entities[22].

 IV. Liability under the IT Act, 2000

 The companies are expected to act within the framework of statutory laws. Thus, accountability and reasonableness requirements are safeguarded by affixing liability of the companies under almost all the statues that are enacted from time to time. It is ensured by incorporating a provision in the respective statue making the company liable for the wrong for which general public has also been made liable. For instance, under the environmental laws, taxation laws, etc the companies are also made liable for the respective wrong committed under these statutes. An interesting aspect of these provisions is that the language used in these statutes is virtually similar in all of them. This is a normal and well- acceptable practice, which is uniformly followed by the “legislature”. The degree of reasonableness and accountability is same in all these statues and hence while interpreting the provisions of a particular statute, support and aid can be taken of the judicial precedents given under other statutes.

For instance, Section 85(1) of the Information Technology Act, 2000 (IT Act, 2000) provides that where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a Company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business of the company as well as the company, shall be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. The proviso to section 85 (1) provides that such person will not be liable for punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention. Section 85(2) provides that where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

The explanation to section 85 provides that the expressions “company” means any body corporate and includes a firm or other association of individuals and the expression "director", in relation to a firm, means a partner in the firm. The language of the section is not alien to our legal system and it is surprising that a lot of hue and cry has been raised recently regarding the “due diligence” requirement. It is strange that people are demanding to take aid of the American System, whereas the matter has authoritatively and conclusively decided by the Supreme Court in various cases that arose under different statutes. The accountability, reasonableness and due diligence requirement are incorporated in all the statutes so that the Fundamental and other rights of the people are safeguarded in their widest and truest perspectives. The law expects every person to act fairly, reasonably and diligently. That is why deviations from these standards are made punishable by the law. One cannot in the zeal of earning profit or in the sense of indifference take the law casually. There are certain well-recognised cardinal principles of criminal laws, which need to be discussed before proceeding further. These are:

(1) The ignorance of law is no excuse,

(2) The “presumption of innocence” continues until the guilt of the accused is proved,

(3) The guilt of the accused must be proved “beyond reasonable doubt”,

(4) No person is guilty of an offence unless it is accompanied by both an act/ omission and the guilty intention for the same,

(5) The law may presume the guilty intention if the commission of the act is proved. This is known as “strict liability offences”, and

(6) The law may fix the liability of certain individuals on a “notional basis”.

This usually happens where a company is involved in the commission of an offence or wrong. The imputation of criminal liability to certain “natural persons” is logical because a company, being an artificial person, cannot operate automatically. Thus, to conduct the affairs of the company certain natural persons are required, who alone can be saddled with the liability of the wrongs committed by the company. It requires common sense to understand that a company, being a non-living entity, cannot commit any wrong and in the ultimate analysis some natural person is responsible for the wrong. That is why the liability can be fixed upon a living person only. As a corollary, only that person can be held liable for the wrong who was responsible for the conduct of the business at the time when the wrong was committed. This practice has the support of logic and common sense because the supreme authority, on whose orders and directions the company is bound to act, can safely be presumed to have the “express” as well as the “constructive knowledge” of the wrong committed by the company. He cannot escape his liability by merely “pleading’ either ignorance of the law or ignorance of the “factum of the wrong”.

If the supreme authority was in charge of the day-to-day affairs of the company at the relevant time and the commission of the wrongful act was within his powers, competence, authority and reach, then the law can safely presume that its commission had a backing of that authority. This is, however, a rebuttable presumption that can be rebutted at the trial stage. Till then the law will consider the authority as the responsible person. This approach also seems to be just and fair because if the supreme authority cannot prevent the commission of the wrong then none can prevent such wrong. It would be wrong to presume that a subordinate staff can take decisions in the active presence and participation of the supreme authority. In fact, when the matter pertains to involvement of government departments/institutions, then the “head of the department/institution” is held liable for the wrong. Thus, there cannot be any “preferential treatment” in favour of private person as the same may violate the provisions of Article 14, 19 and 21 of the Constitution of India.

Similarly, when the wrongful act was committed with the consent or connivance of, or is attributable to any neglect on the part of, the supreme authority, who was responsible for the day to day functioning of the company, such authority shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. Te companies, generally appoint and declare, a particular individual as the “Principal officer” or “Officer in default”, who alone is responsible for the compliance of certain rules, regulations and laws. If any contravention occurs, then such officer in default is responsible for the same. Such officer in default can escape his liability if he proves that the contravention happened without his knowledge or that he had taken all reasonable precautions for the prevention of the same. There may be a situation where the officer in default may be forced to take actions, which are in contravention of the law, by the supreme authority. In that situation, the primary liability of the contravention will be that of the supreme authority, though the officer in default will also be liable. The court may, while awarding the punishment, consider this fact and may grant a lesser punishment. But in no case he is exonerated from the liability. Thus, the officer in default must take the mandates of law very seriously. The officer in default must restrain from being a part of such contravention and must take a safer recourse. In such a situation he can claim that he took all reasonable precautions to prevent the commission of the contravention. Another example where the defence of “preventive precaution” is where despite the best tangible efforts on the part of the officer in default, the commission of the contravention could not be prevented. In that situation the company is exonerated from the liability as it has exercised all ‘Due Diligence” for the prevention of the commission of the contravention[23].

 V. Conclusion

Much has been written on the appropriateness of attributing criminal liability to corporations, and the debate is still far from over. It has come as an accepted notion now that the corporations are not mere fictions. They exist, occupy a predominant position within the organization of our society, and are as capable as human beings of causing harm. It is only just and consistent with the principle of equality before the law to treat them like natural persons and hold them liable for the offences they commit. Such organizations, which have a major impact on our social life, must be required to respect the fundamental values of our society upheld by the criminal law. In the case of corporate criminal liability, the approach has changed over the years from there being no concept of a liability for criminal acts for corporations to liability based on the identification of some persons as the alter ego of the company.

 Today, corporate criminal liability is a subject of concern for a wide range of groups campaigning on issues including human rights, environment, development and labour. Corporate crimes committed on all continents across a range of industrial activities in various sectors (e.g. chemicals, forestry, oil, mining, genetic engineering, nuclear, military, fishing, etc.) clearly point towards the need for greater control, monitoring and accountability of corporate activity in a globalised economy.

Corporate criminal liability is complementary to individual liability. The present liability regime that makes both corporate and individual prosecutions available to regulatory authorities has undeniable advantages over one that does not. Where crime arises from intra-organisational defects, the dismissal or discipline of a few individuals is clearly an inadequate response. Further, where individual liability is difficult to determine, prosecution of the corporation is an attractive alternative. There are many other situations where the prosecution of the corporation may be the only way to allocate responsibility for white-collar crime. Where both a corporation and its officers can be prosecuted, the prosecution of one over the other, or both, is a matter that is largely left to the discretion of the prosecuting authority. The prosecution’s choice should be aimed at achieving the effective regulation of corporate activities, as well as the general objectives of sentencing.

 The law have conferred and assigned a special status to the companies, which is not available to other forms of associations. It expects the companies to contribute for the growth and development of the nation. The companies are expected to perform their “Social responsibilities” so that people can enjoy a qualitative life. The role of the companies is so important that we can see provisions touching and regulating their functioning in almost all the spheres of life. This is particularly so in a country like India which is a “Welfare State” by nature. The State formulates various laws and regulations keeping in mind its welfare state role. Thus, a balance has been maintained between social responsibilities of the company on the one hand and conferment of absolute autonomy and freedom from interference upon the company on the other. In the present scenario companies play a very important role in the growth and development of the nation. Thus, they should be encouraged and motivated to contribute more. This can be achieved by providing them additional benefits, concessions and privileges. Their functioning and operations should not be made complicated by forcing them to comply with unnecessary and technical formalities. In fact, the various technical and procedural formalities governing them should be made more liberal and simplified so that the “corporate governance” can become a real and effective governing force[24].

[Ed: Views expressed herein are the vies of the author only]