Corporate Criminal Liability in India
Indian Law, Courts, and the Constitution: A Brief Introduction1
India is a sovereign democratic republic containing a federal system with a parliamentary form of government in the Union and the States, an independent judiciary, guaranteed fundamental rights, and so-called Directive Principles of State Policy that contain objectives that, while not enforceable in law, are fundamental to the governance of the nation. The primary source of law in India is its constitution, which gives due recognition to statutes, case law, and customary law consistent with its dispensations. Statutes are enacted by the Parliament (the Union legislature) and the State legislatures. There is also a vast body of law known as “subordinate legislation” in the form of rules, regulations, and by-laws-made by the Central and State governments and local authorities like municipal corporations, municipalities, Gram Panchayats, and other local bodies.
One of the unique features of the Indian Constitution is that, notwithstanding the adoption of a federal system and the existence of Central and State acts in their respective spheres, it has generally provided for a single integrated system of courts to administer the laws of both the Union and the States. The Supreme Court of India is at the apex of the entire judicial system. Below it are the High Courts in each State, below which lies a vast hierarchy of subordinate courts.
Corporate Criminal Liability: Pre-Standard Chartered Bank Case Law
Until recently, Indian courts were of the opinion that corporations could not be criminally prosecuted for offenses requiring mens rea as they could not possess the requisite mens rea. Mens rea is an essential element for majority, if not all, of offenses that would entail imprisonment or other penalty for its violation. Adopting an overly generalized rationale, pre Standard Chartered decision, Indian courts held that corporations could not be prosecuted for offenses requiring a mandatory punishment of imprisonment, as they could not be imprisoned.
In A.K. Khosla v. T.S. Venkatesan,2 two corporations were charged with having committed fraud under the IPC. The Magistrate issued process against the corporations. In the Calcutta High Court, the counsel for the defendants argued, inter alia, that the corporations, as juristic persons, could not be prosecuted for offenses under the IPC for which mens rea is an essential ingredient. The court agreed. The court pointed out that there were two prerequisites for the prosecution of corporate bodies, the first being that of mens rea and the other being the ability to impose the mandatory sentence of imprisonment. Each of these prerequisites rendered the prosecution of the defendant corporations futile: a corporate body could not be said to have the necessary mens rea, nor can it be sentenced to imprisonment as it has no physical body.
In Kalpanath Rai v. State,3 a company, accused and arraigned under the Terrorists and Disruptive Activities Prevention (“TADA”) Act, was alleged to have harbored terrorists. In a bench trial, the trial court convicted the company of the offense punishable under section 3(4) of the TADA. On appeal, the Indian Supreme Court referred to the definition of the word “harbor” [“harbour”] as provided in Section 52A of the IPC and pointed out that there was nothing in TADA, either express or implied, to indicate that the mens rea element had been excluded from the offense under Section 3(4) of TADA. The Indian Supreme Court referred to its earlier decisions in State of Maharashtra v. Mayer Hans George4 and Nathulal v. State of M.P.5 and observed that there was a plethora of decisions by Indian courts which had settled the legal proposition that unless the statute clearly excludes mens rea in the commission of an offense, the same must be treated as an essential ingredient of the act in order for the act to be punishable with imprisonment and/or fine. Taking this reasoning a step further, the Indian Supreme Court held that an accused corporation could not possess the requisite mens rea, even if any terrorist had been allowed to occupy the rooms in its hotel. The Court observed:
We are aware that in many recent penal statutes, companies or corporations are deemed to be off enders on the strength of the acts committed by persons responsible for the management or affairs of such company or corporations e.g. Essential Commodities Act, Prevention of Food Adulteration Act, etc. . . . But there is no such provision in TADA which makes the Company liable for the acts of its officers. Hence, there is no scope whatsoever to prosecute a company for the offense under Section 3(4) of TADA.6
Similarly, in Zee Telefi lms Ltd. v. Sahara India Co. Corp. Ltd.,7 the court dismissed a complaint filed against Zee under Section 500 of the IPC. The complaint alleged that Zee had telecasted a program based on falsehood and thereby defamed Sahara India. The court held that mens rea was one of the essential elements of the offense of criminal defamation and that a company could not have the requisite mens rea. In another case, Motorola Inc. v. UOI,8 the Bombay (now “Mumbai”) High Court quashed a proceeding against a corporation for alleged cheating, as it came to the conclusion that it was impossible for a corporation to form the requisite mens rea, which was the essential ingredient of the offense. Thus, the corporation could not be prosecuted under section 420 of the IPC.
It is clear that, in the past, Indian courts were of the opinion that if mens rea is an element of an offense, a corporation cannot be prosecuted for such an offense as it cannot possess mens rea. But what if a corporation is accused of violating a statute that mandates imprisonment for its violation?
In Velliappa Textiles,9 a private company was prosecuted for violation of certain sections under the Income Tax Act (“ITA”). Sections 276-C and 277 of the ITA provided for a sentence of imprisonment and a fine in the event of a violation. The Indian Supreme Court held that the respondent company could not be prosecuted for offenses under certain sections of the ITA because each of these sections required the imposition of a mandatory term of imprisonment coupled with a fine. The sections in question left the court unable to impose only a fine. Indulging in a strict and literal analysis, the Court held that a corporation did not have a physical body to imprison and therefore could not be sentenced to imprisonment. Further, the Indian Supreme Court was of the view that the legislative mandate was to prohibit the courts from deviating from the minimum mandatory punishment prescribed by the Act. The Court also noted that when interpreting a penal statute, if more than one view is possible, the court is obliged to lean in favor of the construction that exempts an accused from penalty rather than the one that imposes the penalty.
Standard Chartered Bank and Ors v. Directorate of Enforcement
In Standard Chartered Bank and Ors v. Directorate of Enforcement,10 Standard Chartered Bank was being prosecuted for violation of certain provisions of the Foreign Exchange Regulation Act of 1973 (“FERA”). Ultimately, the Indian Supreme Court held that the corporation could be prosecuted and punished, with fines, regardless of the mandatory punishment of imprisonment required under the respective statute.
The Court initially pointed out that, under the view expressed in Velliappa Textiles, the Bank could be prosecuted and punished for an offense involving rupees one lakh11 or less as the court had an option to impose a sentence of imprisonment or fine. However, in the case of an offense involving an amount exceeding rupees one lakh, where the court is not given discretion to impose imprisonment or fine, that is, imprisonment is mandatory, the Bank could not be prosecuted.
The Court also referred to the recommendations made by the Law Commission, 12 which had noticed the legal conundrum arising out of the aforementioned situation. The Law Commission recommended the following provision to be inserted in the Penal Code:
(1) In every case in which the offense is punishable with imprisonment only or with imprisonment and fine, and the offender is a corporation, it shall be competent to the court to sentence such offender to fine only.
(2) In every case in which the offense is punishable with imprisonment and any other punishment not being fine, and the off ender is a corporation, it shall be competent to the court to sentence such offender to fine.
(3) In this section, “corporation” means an incorporated company or other body corporate, and includes a firm and other association of individuals.
Of course, Standard Chartered Bank argued that the Indian Parliament enacted laws knowing fully well that a corporation cannot be subjected to custodial sentence, and, therefore, the legislative intention was not to prosecute the companies or corporate bodies. According to the defendant, when the sentence prescribed cannot be imposed, the very prosecution itself is futile and meaningless, and, thus, the majority decision in Velliappa Textiles had correctly laid down the law.
The Indian Supreme Court in Standard Chartered Bank observed that the view of different High Courts in India was very inconsistent on this issue. For example, in State of Maharasthra v. Syndicate Transport,13 the Bombay High Court had held that the company could not be prosecuted for offenses which necessarily entailed corporal punishment or imprisonment; prosecuting a company for such offenses would only result in a trial with a verdict of guilty and no effective order by way of a sentence. On the other hand, in Oswal Vanaspati & Allied Industries v. State of Uttar Pradesh,14 the appellant-company had sought to quash a criminal complaint, arguing that the company could not be prosecuted for the particular criminal offense in question, as the sentence of imprisonment provided under that section was mandatory. The Full Bench of the Allahabad High Court had disagreed:
A company being a juristic person cannot obviously be sentenced to imprisonment as it cannot suffer imprisonment. . . . It is settled law that sentence or punishment must follow conviction; and if only corporal punishment is prescribed, a company which is a juristic person cannot be prosecuted as it cannot be punished. If, however, both sentence of imprisonment and fine is prescribed for natural persons and juristic persons jointly, then, though the sentence of imprisonment cannot be awarded to a company, the sentence of fine can be imposed on it. . . . Legal sentence is the sentence prescribed by law. A sentence which is in excess of the sentence prescribed is always illegal; but a sentence which is less than the sentence prescribed may not in all cases be illegal.15
The Indian Supreme Court in Standard Chartered Bank also referred to an old decision of the United States Supreme Court, United States v. Union Supply.16 In that case, a corporation was indicted for willfully violating a statute that required the wholesale dealers in oleomargarine to keep certain books and make certain returns. Any person who willfully violated this provision was liable to be punished with a fine of not less than fifty dollars and not exceeding five hundred dollars and imprisonment for not less than 30 days and not more than six months. It is interesting to note that for the offense under Section 5 of the statute at issue, the Court had discretionary power to punish by either fine or imprisonment, whereas under Section 6 of the statute (the section that was actually violated in Union Supply), both types of punishment were to be imposed in all cases. The corporation moved to quash the indictment, and the District Court quashed it on the grounds that Section 6 was not applicable to the corporations. The United States Supreme Court reversed the District Court’s judgment. Justice Holmes held:
It seems to us that a reasonable interpretation of the words used does not lead to such a result. If we compare Section 5, the application of one of the penalties rather than of both is made to depend, not on the character of the defendant, but on the discretion of the Judge; yet, there, corporations are mentioned in terms. And if we free our minds from the notion that criminal statutes must be construed by some artificial and conventional rule, the natural inference, when a statute prescribes two independent penalties, is that it means to inflict them so far as it can, and that, if one of them is impossible, it does not mean, on that account, to let the defendant escape.17
In the end, it was obvious to the Indian Supreme Court in Standard Chartered Bank that the legislative intent to prosecute corporate bodies for the offenses committed by them was clear and explicit. The statute in question never intended to exonerate corporations from being prosecuted. To follow Velliappa Textiles would be to presume that the legislature intended to punish the corporate bodies for minor and silly offenses while it extended immunity of prosecution for major and grave economic crimes. As a specific illustration, the court pointed out that in the case of cheating and dishonestly inducing delivery of property covered under Section 420 of the IPC, the punishment prescribed is imprisonment, which may extend to seven years and fine. However, for the offense under Section 417, that is, simple cheating, the punishment prescribed is imprisonment for a term which may extend to one year, a fine, or both. If Standard Chartered Bank’s argument were accepted, it would mean that for the offense under Section 417 of the IPC, which is a minor offense, a company could be prosecuted and punished with a fine, whereas for the offense under Section 420, which is an aggravated form of cheating, the company could not be prosecuted as there is a mandatory sentence of imprisonment. This interpretation clearly produced an illogical result.
The Indian Supreme Court in Standard Chartered Bank held:
We do not think that the intention of the Legislature is to give complete immunity from prosecution to the corporate bodies for these grave offenses. The offenses mentioned under Section 56(1) of the FERA Act, 1973 . . . for which the minimum sentence of six months’ imprisonment is prescribed, are serious offenses and if committed would have serious financial consequences affecting the economy of the country. All those offenses could be committed by company or corporate bodies. We do not think that the legislative intent is not to prosecute the companies for these serious offenses, if these offenses involve the amount or value of more than one lakh, and that they could be prosecuted only when the offenses involve an amount or value less than one lakh.
The Indian Supreme Court also pointed out that, as to criminal liability, the FERA statute does not make any distinction between a natural person and corporations. Further, the Indian Criminal Procedure Code, dealing with trial of offenses, contains no provision for the exemption of corporations from prosecution when it is difficult to sentence them according to a statute. The court held that the FERA statute was clear: corporations are vulnerable to criminal prosecution, and allowing corporations to escape liability based on the difficulty in sentencing would do violence to the statute. The Court did not develop its reasoning far enough so as to specifically hold that a corporation is capable of forming mens rea and acting pursuant to it. However, the Court held that corporations are liable for criminal offenses and can be prosecuted and punished, at least with fines. Many of the offenses, punishable by fines, however do have mens rea as a necessary element of the offense. By implication, it can be said that post Standard Chartered decision, corporations are capable of possessing the requisite mens rea. As in prosecution of other economic crimes, intention could very well be imputed to a corporation and may be gathered from the acts and/or omissions of a corporation.
The Indian Supreme Court has settled the disputed question of criminal liability of a corporation. The Standard Chartered Bank decision overrules prior decisions to the contrary and holds that corporations are liable for criminal offenses and can be prosecuted and punished, at least with fines.
|1||Adapted from the website of the Supreme Court of India, available at http://www.lorandoslaw.com/www.supremecourtofindia.nic.in.|
|2||(1992) Cr.L.J. 1448.|
|3||(1997) 8 S.C.C 732.|
|4||A.I.R. 1965 S.C. 722.|
|5||A.I.R. 1966 S.C. 43.|
|6||(1997) 8 S.C.C. 732, 739-40.|
|7||(2001) 3 Recent Criminal Reports 292.|
|8||(2004) Cri.L.J. 1576.|
|9||(2004) 1 Comp. L.J. 21.|
|10||A.I.R. 2005 S.C. 2622.|
|11||One Lakh = Rs. 100,000. Approximately $2320.|
|12||After independence, the Constitution of India with its Fundamental Rights and Directive Principles of State Policy gave a new direction to law reform geared to the needs of a democratic legal order in a plural society. Though the Constitution stipulated the continuation of pre- Constitution Laws (Article 372) till they are amended or repealed, there had been demands in Parliament and outside for establishing a Central Law Commission to recommend revision and updating of the inherited laws to serve the changing needs of the country. The Government of India reacted favorably and established the First Law Commission of Independent India in 1955 with the then Attorney-General of India, Mr. M. C. Setalvad, as its Chairman. For further details see http://www.lorandoslaw.com/www.lawcommissionofindia.nic.in.|
|13||(1963) Bom. L.R. 197.|
|14||(1993) 1 Comp.L.J. 172.|
|16||215 U.S. 50 (1909).|
|17||Id. at 55.|