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Criminal Liability of a Company

  By : , Bangalore, India       9.12.2015         Phone:+919916486107          Mail Now

Corporate Criminal Liability

A Company can only act through humans, and a human being who commits an offence on account of, or for the company will be responsible for that offence himself, the importance of the incorporation make the company liable for certain circumstances as well as the human beings- Glanville Williams

The term “Corporate” parse is derived from a Latin term “Corpus” that means the “body or an entity” which has all the rights to sue, to be sued, to represent, to enter into contracts, to perform activities for and on behalf of within the purview of the onus and the authority to carry on all the activities as “a separate legal entity”. A body may be created, dissolved or restructured. Hence considering these factors, the corporate can be treated as an entity that is driven by their board of directors, employers etc. that makes it a body, and considering these parameters it can be definitely be established that a body corporate can be held liable for its malaise activities, provided such act is accompanied with two components of crime described under the legal maxim  “Actus Non Facit Reum, Nisi Mens Sit Rea” means, to make one liable it must be shown that "act or omission has been done which was forbidden by law and has been done with guilty mind" i.e. Actus reus and Mens Rea. 

Human tendency is driven by curiosity followed by an action; curiosity leads to an Idea, an idea leads to planning that culminates in an action. A crime is always coupled with a malafide idea, curiosity and finally resulting in a malicious act. Under the IPC there are certain crimes if rationalized can be categorized as an act driven by an idea, followed by planning and resulting in commitment of malicious act. Whereas these crimes are often done either directly or indirectly for e.g. Murder, conspiracy, abatement, kidnapping, robbery, rape, defamation etc. are certainly an act that is borne in the mind as a malafide idea and further resulting in a malafide act termed as a crime. 

It is pertinent to note that Corporate have been engaged in practicing a corporate veil in order to avoid any liability and the detailed interpretation can prominently evidence that due to the principal of the corporate veil ascertainment of the criminal liability for a corporate has been quite a debatable and a tricky one as there was a lack on interpretation on this perspective by the judicial authorities of India. Treading through these qualms recently, the Indian Judicial authorities have taken a firm stand that the Corporate are liable to be put under the ambit of criminal liability based on the onus of the Mens rea. 

There are certain elements to ascertain the criminal liabilities on the corporate, 

(i) The requirement that an employee must be acting within the scope of his or her employment is met if the employee has actual or apparent authority to engage in the act in question;

(ii) The second element of corporate criminal liability according to the theory of vicarious liability is that the act benefits the company. The benefit need not be real, yet potential.

(iii) Identification Theory: The main underlying principle of the identification theory is the detection of the guilty mind, the recognition of the individual who will be identified as the company itself, who will be the company’s very ego, vital organ, or mind.

(iv) The corporation aggregates the composite knowledge of different officers in order to determine liability. The Company aggregates all the acts and mental elements of the important and relevant persons within the company to establish whether in toto they would amount to a crime if they had all been committed by the person.

In the case of Standard Chartered Bank and Ors v. Directorate of Enforcement, the facts of the case as follows, in this instant case Standard Chartered Bank was being prosecuted for violation of certain provisions of the Foreign Exchange Regulation Act of 1973 ("FERA") (now repealed and replaced as FEMA 1999). Ultimately, the Indian Supreme Court held that the corporation could be prosecuted and punished, with fines. 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 of decisions earlier were correct.

Before the enactment of the Companies Act 2013, it is a 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. 

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 Indian Supreme Court in Standard Chartered Bank had stated as follows:

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. 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.

Upon the precedent set under the Standard charter case, the Supreme court came up with few other landmark judgments wherein the precedent was followed as it is in the case of the Iridium India Telecom Ltd v. Motorola Incorporation and others the apex court further held that “There is no immunity to companies from prosecution merely because the prosecution is in respect of offences for which punishment prescribed is mandatory imprisonment”. In support to that the apex court reasoned that a corporation is virtually in the same position as any individual and may be convicted under common law as well as statutory offences including those requiring mens rea to be proved thereon. The criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs and relied on the ratio in Standard Chartered Bank Case “The criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs". In such circumstances, it would be necessary to ascertain that the degree and control of the person. 


Earlier the concept of a separate legal personality of a corporate was exploited by the individuals to evade their personal liability. But now it is well established that the Corporate cannot escape the liability for the offences just relying on the basis that they have no body or soul and cannot possess a mental state. The recent enactment of the Companies Act 2013 holds a wider and well defined clause that makes company liable under their specific provision in case of defaults, misrepresentations, fraud, tax evasions, issuance of shares on discount, purchase of its own securities, tampering with the minutes of meetings, default in laying the financials in the general meeting, issuance of debentures, default in complying with the provisional requirements, non- payments of debts, disclosure of self- interest by the directors etc so on and so forth has been duly capped with an increase in the caps of payment of fine as well as the company as an entity is liable to be punished with the imprisonment its directors whether joint or independent.

TAGS: Law,   Legal article,   Corporate Criminal Liability,   Companies Act 2013,   Criminal Liability of a Company,  

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