DR.

SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

LUCKNOW

ADMINISTRATIVE LAW

ASSIGNMENT ON: CORPORATES AND ITS LIABILITY

(UNDER THE SUPERVISION OF PROF. GULAB RAY)

SUBMITTED TO: SUBMITTED BY:

PROF. GULAB RAY PRAWARTIKA SINGH

FACULTY OF LAW B.COM.LL.B (HONS.)

. 6TH SEMESTER
 Acknowledgement:

I PRAWARTIKA SINGH would like to express my deep gratitude to Prof. Gulab ray sir, for
giving me valuable input on the topic, which had made me competent enough to prepare my
project. I would also thank Prof. Shefali Yadav, Dean, department of Law , Dr. Shakuntala
Misra National Rehabilitation University, Lucknow for giving me the opportunity to make this
project.
INTRODUCTION-
A corporation is a separate legal entity established through some legislation or registration
process. They have rights and liabilities separate from that of their shareholders. Some of these
corporations have assets and facilities in other countries apart from their home country as well
and such corporations are known as multinational corporations (MNCs). Multinational
corporations have come to play a huge role in most aspects of human life today. Their powers
have grown at an astonishing rate over the last couple of centuries, so much so that they are often
compared to entire nations. Therefore, imposing some sort of means of accountability and
control over these multinationals and corporations is of paramount importance and should be
extremely high on the list of priorities for every nation.

In laymans terms, the doctrine of corporate criminal liability is essentially the doctrine
of respondeat superior which has been imported into criminal law from tort law. This doctrine
states that a corporation can be made criminally liable and convicted for the unlawful acts of any
of its agents, provided those agents were acting within the scope of their actual or apparent
authority. Apparent authority is that authority which an agent can be inferred to have by an
average reasonable person, whereas actual authority is authority that a corporation knowingly
entrusts to its agent or employee. To simplify matters, if a rational relationship can be established
between an employees criminal conduct and his corporate duties, the corporation will be held
criminally liable for the employees conduct.

CORPORATE CRIMINAL LIABILITY THROUGH THE AGES-

Throughout the ages, the evolution of the doctrine of corporate criminal liability faced many
major issues, the main ones being:

The failure to identify or prove criminal intent of a juristic, fictional being. As corporations are
intangible legal entities, finding the mens rea necessary for the commission of a criminal act
proved to be quite the obstacle.

Sanctions were the second problem. A corporation cannot be imprisoned or put to death and
hence the threat of imprisonment which plays a major role in criminal law could not be applied
here. This lead to speculation that criminal law was not appropriate for the enforcement of this
doctrine.

Courts required the accused in a criminal case to be physically brought before them for
proceedings to take place. This was obviously not possible in the case of corporations.
Prior to the twentieth century, it was believed that a corporation lacked the mens rea required for
the commission of a criminal act and hence to attain a criminal conviction. The idea that A
corporation has no soul to damn, and no body to kick was widely prevalent at that time.

At present, the directors, employees and officers are all liable for criminal acts committed by
them which they have actual authority to perform or appear to have authority to perform as
observed by an average reasonable man. Further, directors and officers may also be subject to
criminal liability under the accomplice theory which states that they either encouraged or
instructed a subordinate to commit a criminal act or failed to exercise due care and supervision of
their subordinates which in turn led to the commission of the crime. This theory states that a
person is criminally liable by virtue of his responsible relation to the misconduct regardless of
whether or not he possesses any knowledge regarding the criminal activity.

Today, for the doctrine of corporate criminal liability to be applicable, the criminal act of the
employee must:

Be committed with the intention of benefiting the corporation in some manner, or

Be committed with the intention of increasing his own personal gain, and this conduct ultimately
ends up benefiting the corporation as well.

REQUIREMENTS FOR ESTABLISHING CORPORATE CRIMINAL

LIABILITY-
There are a few necessary requisites whose existence must be established before criminal
liability can be imposed on a corporation of any other kind of legal entity:

Act within the scope of employment: For corporate criminal liability to arise, there are several
requirements that must be met. First and foremost, the employee committing the offence must be
acting within the scope of his employment, i.e. he must be performing duties authorized by his
parent company. But not all agents of a corporation are considered worthy of representing a
corporation for the purpose of establishing liability. There are two conflicting systems which
approach this issue differently, namely the common law and the Model Penal Code (MPC).
Common law states that a corporation is liable for its agents activities irrespective of the
employees status or position in the corporations bureaucracy. In the case of Dollar Steamship
Co. V. United States,[i]the common law system upheld the criminal liability of a steamship
company for polluting the waters even though the employee dumping refuse overboard was a
mere kitchen worker. MPC on the other hand states that the illegal act must be authorized,
requested, commanded, performed or recklessly tolerated by the board of directors or by a high
managerial agent acting in behalf of the corporation within the scope of his office or
employment. [MPC 2.07 (1) (c)]. Thus the MPC allows corporations to evade liability as long
as the higher ups in their hierarchy exhibit due diligence in the monitoring and stamping out of
wrongdoing.
Benefit to the Corporation: The second requirement is that the agents behaviour must, in some
way, benefit the corporation. The corporation need not actually directly receive the benefits nor
must the benefit be enjoyed completely by the company, but the illegal act must not be contrary
to corporate interests. This has been elaborated on because it is extremely rare that an employee
commits an illegal act selflessly, with no intention to make any personal gain.

Special problems arise when it comes to establishing mental culpability of a corporation. There
are two main methods by which this is done:

The Collective Blindness Doctrine

Courts have found corporations liable even when it wasnt a single individual who was at fault.
The Courts considered the sum knowledge of all the employees to come to this conclusion. This
is known as the Collective Blindness Doctrine. The rationale behind this is to prevent
corporations from compartmentalizing their work and duties in such a way that it becomes
elementary for them to evade liability by pleading ignorance in the event of any criminal
prosecution.

The Willful Blindness Doctrine

Corporations are made criminally liable if they knowingly turn a blind eye to ongoing criminal
activities. If a corporate agent becomes suspicious of some ongoing illegal acts but to avoid
culpability, he takes no action to mitigate the damage or investigate further or bring the offender
to book, the corporation becomes liable.

How Corporations can be made Liable

Courts today have devised a number of methods and ideologies to impute the employees actions
and knowledge to the parent corporation to stamp out illegalities from the economic sphere of
life:

The Collective Blindness Doctrine

Courts have found corporations liable even when it wasnt a single individual who was at fault.
The Courts considered the sum knowledge of all the employees to come to this conclusion. This
is known as the Collective Blindness Doctrine. The rationale behind this is to prevent
corporations from compartmentalizing their work and duties in such a way that it becomes
elementary for them to evade liability by pleading ignorance in the event of any criminal
prosecution.

Willful Blindness Doctrine

Corporations are made criminally liable if they knowingly turn a blind eye to ongoing criminal
activities. If a corporate agent becomes suspicious of some ongoing illegal acts but to avoid
culpability, he takes no action to mitigate the damage or investigate further or bring the offender
to book, the corporation becomes liable.

Conspiracies

A conspiracy has been traditionally defined as two or more people who agree to commit an
offence, with one or more people taking affirmative action to further the aim of the conspiracy.
Corporations can be made liable for a criminal conspiracy amongst its employees or involving
one employee and others not on the payroll of the corporation.

Mergers, Dissolutions and Liability

Corporations can be made criminally liable for the previous criminal acts and violations of
another corporation with which it has merged or has consolidated. Corporations, after a merger,
will also have to defend themselves against charges of conspiracy against the predecessor
corporation. Similarly, it is not always necessary that corporations will evade prosecution if
dissolution occurs before filing of charges. Depending on the law of the land, sometimes even
defunct corporations are forced to defend themselves against criminal prosecution.

Misprision of Felony

A corporation may also be held liable for misprision of felony, that is the offence of concealing
and failing to report a felony. This consists of four elements:

That the principal committed a felony

That the defendant knew about said felony

That the defendant failed to notify the concerned authorities at the earliest, and

That the defendant took proactive steps for the concealment of the felonious act.

Merely failing to notify the authorities is not enough to qualify as misprision of felony and
neither is merely having the intent to conceal the felony if such intention is not carried out.

CORPORATE CRIMINAL LIABILITY: IS IT REALLY NECESSARY?

Time and again, the question has arisen about the need for corporate criminal liability. It is often
asked whether we need to address the issue of corporate criminals or criminal corporations.
There is no general correct answer to this question. Each case has to be carefully examined and
then a decision has to be taken regarding the corporations liability.

Critics argue that this doctrine is completely unnecessary on two grounds. Firstly they challenge
the deterrent effect of fines and other sanctions against corporations on the grounds that it is not
the corporations that commit crimes, it is the individuals who do and the second being that the
retributive effect is borne by innocent shareholders (by decreasing the value of their shares) and
consumers (by driving up the prices of commodities and services).

The critics first objection is very simplistic in the fact that it doesnt account for the
labyrinthinian structure of corporations in todays world which makes it nigh impossible to
pinpoint individual responsibility for any specific decision. Also, the existence of corporate
criminal liability provides the top officers with a great incentive to supervise middle and lower
level management very closely. The existence of individual liability would encourage a dont
ask, dont tell kind of attitude from the top brass, thereby keeping themselves clear of all
liability whilst reaping the profits from illegal acts.

The second objection is that the cost of corporate criminal fines and sanctions is borne by
shareholders and consumers, and this too seems baseless. Shareholders are well aware of the
risks involved in investing in any venture and are seemingly happy when illegal acts bring them
profits so it is only fair to expect them to bear a part of the brunt when those illegalities are
discovered and duly sanctioned. As for the brunt borne by the consumers, it seems highly
illogical that a sanctioned corporation would try and pass on the fine to them by raising prices of
goods and services because that would only lead to consumers looking for alternate sources
which would in turn lead to loss of profit and reduced viability of the company, and in some
cases leading to irreparable harm thatd push the company down the slippery slope towards
bankruptcy.

CORPORATE CRIMINAL LIABILITY AROUND THE WORLD-

Corporate criminal liability in the United States of America
Initially, corporations were not held criminally liable for corporate activities as acorporation was
considered to be a fictitious legal entity incapable of forming the requisite mens rea necessary
for the commission of a crime. The Supreme Court ultimately rejected this notion in 1909 in New
York Central & Hudson River Railroad v. U.S[ii]. A railroad company employee paid rebates to
shippers in violation of federal law. The court upheld the corporations criminal conviction,
finding no reason that corporations could not be held responsible for and charged with the
knowledge and purposes of their agents, acting within the authority conferred upon them. The
Supreme Court concluded that criminal liability could be imputed to the corporation based on the
benefit it received as a result of the criminal acts of its agents. This case essentially imported the
doctrine of respondeat superior from tort law into criminal law. There are a plethora of federal
statutes applicable to corporations under which criminal liability may be imposed. Although
federal statutes may apply, this does not mean that the federal statutes overrule state laws that
overlap, i.e. a corporation can be prosecuted under both federal and state laws.

Punishments under U.S. Law

A corporation may be punished by fine or seizure of its property which can be levied by an
execution order issued by the court. The fact that the penalty provided for the violation of a
statute is a fine or imprisonment, or both in the discretion of the court, does not render it
inapplicable to a corporation, and the same rule applies where the statute creating the offence
provides for imprisonment if the fine imposed not paid. Sometimes, a statute providing that the
penalty for a particular crime is imprisonment may be read in conjunction with a general statute
allowing the imposition of a fine, and the fine may be imposed on the corporation in lieu of
imprisonment.

Corporate Criminal Liability in the United Kingdom

Prosecution of a company isnt seen as a substitute for the prosecution of criminally culpable
individuals such as directors, officers, employees, or shareholders. Prosecuting such individuals
provides a strong deterrent against future corporate wrongdoing. Equally, when prosecuting
individuals, due consideration is given to the possible liability of the company where the
criminal conduct is for corporate gain.

In the case of Tesco Supermarkets Limited v. Nattrass[iii], Tesco relied on the defence of the
act or omission of another person who in this case was a store employee, to show that they had
taken all reasonable precautions and due diligence necessary to not be criminally liable. Lord
Reid held that, in order for liability to attach to the actions of a person, it must be the case that
The person who acts is not speaking or acting for the company. He is acting as the company and
his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is
the guilt of the company.

In considering the seriousness of any offence, the courts consider whether the corporate entitys
culpability in committing the offence and any harm which the offence caused, was intended to
cause or might, foreseeably, have been caused. Guidelines issued on the assessment of
seriousness of any given offence identify four levels of culpability for sentencing purposes
starting with intention to cause harm to negligence in committing the offence. The guidelines
also refer to aggravating factors which are familiar territory: as whether the offence was planned,
whether the offence resulted in high profit and whether there was a failure to respond to
warnings or concerns expressed by others about the offenders behaviour. The corporate entitys
level of co-operation with the prosecuting and regulatory authorities is also a factor in assessing
the course of action taken by a regulator and the level of penalty appropriate where there has
been corporate criminal offense. Penalties which corporate entities can face include fines,
confiscation, compensation orders and debarment from public procurement.

Corporate criminal liability in the rest of Europe

Western European countries initially resisted the imposition of criminal liabilities on
corporations and other such legal entities until the 1970s. This opposition was expressed in the
principle societasdelinquere non potest, which means, a legal entity cannot be blameworthy .
the modern trend of imposing on corporations criminal liability for acts done by their agents
began in earnest in the 1970s.

The Netherlands

In 1976, the Netherlands became one of the first Western European countries to adopt legislation
enacting comprehensive corporate criminal liability. The legislation made corporations liable for
all offenses. The 1976 legislation also dispensed with the requirement that liability be predicated
on the actions of natural persons acting on the corporations behalf, which was a requirement of
the previous existing law. Liability may be predicated on deficient decision-making structures
within the corporation or on the aggregate knowledge of multiple individuals.

Denmark

In 1926, with the passage of the Butter Act, Denmark introduced corporate criminal liability for
some offenses. By the end of the century, Denmark had greatly expanded the list of enterprise
offenses.

Switzerland

It was only in late 2003, that Switzerland imposed criminal liability on corporations, after having
previously rejected such liability time and again for doctrinal reasons. Swiss criminal liability is
based on the concept of subsidiary liability, i.e. a corporation can be held liable for offenses
committed on its behalf only if fault cannot be attributed to a specific individual because of a
lack of organization within the enterprise. The offense must be in furtherance of a business
activity consistent with the purpose of the enterprise, a requirement which undoubtedly will
need to be defined by the courts. Criminal fines can range up to 5 million Swiss francs.

France

The basis for corporate criminal liability in French law is codified in Article 121-2 of the new
French penal code, which states: Juridical persons, with the exception of the State, are
criminally liable for the offenses committed on their account by their organs or representatives . .
. in the cases provided for by statute or regulations. Article 121-2 further provides the criminal
liability of legal persons does not exclude that of the natural persons who are perpetrators or
accomplices to the same act.

There are three basic requirements for liability to be imposed on a legal entity. First, the French
legislature must have enacted a substantive criminal offense which the corporation contravened.
Second, actual criminal responsibility for the offense must lie in the conduct of a corporations
representatives or its organs. Third, the acts on which criminal liability is predicated must have
been committed for the benefit of the corporation.
An important feature of the new French law is that it provides an expansive list of statutory
criminal penalties. In most cases, these will be monetary penalties five times the rate for natural
persons committing the same offense, with greater monetary penalties for recidivist conduct.

Corporate Criminal Liability in India

The issue of whether a company or a juristic person can be prosecuted for an offence for which
the mandatory punishment prescribed is both imprisonment and fine has come up in several
cases in India such as the cases of TheAssistant Commissioner, Assessment-II, Bangalore & Ors.
v. Velliappa Textiles[iv] and State of Maharashtra v. Syndicate Transport[v]wherein a ruling
was given stating that the court cannot impose only a fine where the mandatory punishment laid
down by the appropriate statute is both imprisonment and fine. The majority view is that the
court should not deviate from the minimum prescribed punitive sanctions. If the court did
prosecute for such offences and found the defendants guilty, it ran a massive risk of stultifying
itself by not being able to impose an effective order by way of sentence.

The doctrine of corporate criminal liability in India was made crystal clear in the recent
groundbreaking judgement in 2005 of the Apex Court in the case of Standard Chartered Bank
and Ors. etc. v. Directorate of Enforcement and Ors. Etc.[vi]that overruled all the previous
views. This case was related to the now defunct Foreign Exchange Regulation Act (1973),
otherwise known as FERA. The majority held that there is no immunity to the companies from
prosecution merely because the prosecution is in respect of offences for which the punishment
prescribed is mandatory imprisonment. As the company cannot be sentenced to imprisonment,
the Court cannot impose that punishment, but when imprisonment and fine is the prescribed
punishment the Court can impose the punishment of fine which could be enforced against the
company. Such a discretion is to be read into the Section viz., S. 56 of Foreign Exchange
Regulation Act (1973) (FERA) and Ss. 276-C and 278-B of Income-tax Act (1961) so far as the
juristic person is concerned. Of course, the Court cannot exercise the same discretion as regards
a natural person. As regards company, the Court can always impose a sentence of fine and the
sentence of imprisonment can be ignored as it is impossible to be carried out in respect of a
company. It cannot be said that, there is ablanket immunity for any company from any
prosecution for serious offences merely because the prosecution would ultimately entail a
sentence of mandatory imprisonment.The bench by a majority of 3:2 held that a corporation can
be punished and is criminally liable for offences for which the mandatory punishment is both
imprisonment and fine. In case the company is found guilty, the sentence of imprisonment
cannot be imposed on the company and then the sentence of fine is to be imposed and the court
has got the judicial discretion to do so. This course is open only in the case where the company is
found guilty but if a natural person is so found guilty, both sentence of imprisonment and fine are
to be imposed on such person. This particular judgment in has further crystallized the Courts
interpretative power with regards to a penal statute, by departing from the traditional view and
endorsing that for the punishment of the crime the court should go beyond the strict word, and
not let offences go unpunished due to application of too technical an interpretation that is
restrictive, strict and constricting to the very intent of the statute.

If a corporate entity or juristic person is found to have breached the law, the Courts, though
bound to impose the sentence prescribed under law, now have the discretion to impose the
sentence of fine as a corporate entity cannot be subjected to imprisonment. However, if a natural
person is found to have committed a crime, the sentence of imprisonment is still applicable.
There is no blanket immunity for corporations just because prosecution would ultimately lead to
the sentence of mandatory imprisonment.

The judgment of the Supreme Court in Iridium India Telecom Ltd. v. Motorola Inc.[vii] on 20
October 2010 merely reiterated the principles laid down previously in the Standard Chartered
Bank case. This was a case in which Iridium India Limited filed a criminal complaint against
Motorola Inc. alleging offences under section 420 (cheating) read with section 120B
(conspiracy) of the Indian Penal Code (IPC). The complaint alleged that Motorola Inc. had
floated a private placement memorandum (PPM) to obtain funds/investments to finance the
Iridium project. The project was represented as being the worlds first commercial system
designed to provide global digital hand held telephone data and it was intended to be a
wireless communication system through a constellation of 66 satellites in low orbit to provide
digital service to mobile phones and other subscriber equipment locally.On the basis of the
information contained in and representations made through the PPM, several financial
institutions invested in the project. The project turned out to be unviable and resulted in massive
losses to the investors which was alleged by Iridium India Limited to have been caused as a
result of Motorola Inc.s false representations in the PPM.

M.J. Antony, while commenting on the case, said the following[viii]:

The question of punishing a corporation came up recently in the Supreme Court in a criminal
case filed by Iridium India Telecom Ltd against Motorola Incorporated. The allegations were
cheating and criminal conspiracy. The magistrate in Pune started proceedings against Motorola.
It moved the Bombay High Court against the prosecution. The high court quashed the
proceedings giving several reasons, one of them being that a corporation was incapable of
committing the offence of cheating as it has no mind. According to the high court, although a
company can be a victim of deception, it cannot be the perpetrator of deception. Only a natural
person is capable of having a guilty mind to commit an offence.

However, the Supreme Court set aside the high courts finding and asserted that a corporate
body can be prosecuted for cheating and conspiracy under the Indian Penal Code. The offences
for which companies can be criminally prosecuted are not limited only to the specific provisions
made in the Income Tax Act, the Essential Commodities Act, and the Prevention of Food
Adulteration Act. Several other statutes also make a company liable for prosecution, conviction
and sentence.
The court allowed the prosecution to go on, stating that companies and corporate houses can no
longer claim immunity from criminal prosecution on the ground that they are incapable of
possessing the necessary mens rea for the commission of criminal offences. The legal position in
England and the United States has now crystallised to leave no manner of doubt that a
corporation would be liable for crimes of intent. This is the position all over the world where
rule of law supreme

CONCLUSION-

Corporate criminal liability is steadily gaining importance in the spheres of social concern such
as consumer protection, environment law and occupational health and safety norms. Till the
recent past, corporate governance wasnt given much thought, but with the emergence of this
particular doctrine that focuses on organizational blameworthiness and accountability of
superiors, this mindset is changing rather rapidly. Issues regarding the operation of corporations
are now being closely linked to their governance so as to avoid potentially triggering criminal
liability.

As Lord Reid so rightly said,

A living person has a mind which can have knowledge or intention or be negligent and he has
hands to carry out his intentions. A corporation has none of these; it must act through a living
person, though not always one or the same person. Then the person who acts is not speaking or
acting for the company. He is acting as the company and his mind which directs his act is the
mind of the company. There is no question of the company being vicariously liable. He is not
acting as a servant, representative, agent or delegate. He is an embodiment of the company or,
one could say, he hears and speaks through the persons of the company, within his appropriate
sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt
of the company. It must be a question of law whether, once the facts have been ascertained, a
person in doing particular things is to be regarded as the company or merely as the companys
servant or agent. In that case the liability of the company can only be a statutory or vicarious
liability.[ix]

Over time, Courts have ruled that corporations too can have mens rea, which is a vital
component for the commission of a crime. This ruling was delivered in India in the case
of Iridium India Telecom Ltd. v. Motorola Incorporated &Ors.[x]by the Supreme Court, thereby
establishing that it was possible for a corporation to be party to a conspiracy. Indian social
legislations like the Essential Food Commodities Act 1955, the Prevention of Food Adulteration
Act 1954, the Negotiable Instruments Act 1881, the Environment (Protection) Act 1986 state that
at the time of the commission of the offence, the company, along with every person in its
employment, shall be deemed to be liable for that offence and if pronounced guilty, they could
be punished with not only a fine, but also with imprisonment.
Thus it has now become possible to hold a corporation criminally liable for acts committed
through their agents and employees, and attributemens rea to them. In this day and age of
economic advancement where corporations have a say in almost every aspect of life, such a
principle has assumed paramount importance in corporate governance.

REFERENCE LIST-
Primary sources:

Dharm Veer Singh, Corporate Criminal Liability: A Jurisprudential and Comparative

Approach, available at http://www.legalserviceindia.com/articles/cor_dr.htm, last visited on
30/03/2013.

UmakanthVarottil, Corporate Criminal Liability: The Iridium/Motorola Case, available

at http://indiacorplaw.blogspot.in/2010/11/corporate-criminal-liability.html, last visited on
30/03/2013.

PrateekAndharia, Corporate Criminal Liability: Finding Settled Shores?-A Comment On

Iridium India Telecomv. Motorola Inc, available
at http://www.commonlii.org/in/journals/NALSARStuLawRw/2011/5.pdf, last visited on
30/03/2013.

Corporate Prosecutions, The Crown Prosecution Service, available

at http://www.cps.gov.uk/legal/a_to_c/corporate_prosecutions/, last visited on 30/03/2013.

Clifford Chance, Corporate Liability In Europe, available

at http://www.cliffordchance.com/content/dam/cliffordchance/PDFs/Corporate_Liability_in_Eur
ope.pdf, last visited on 30/03/2013.

All Indian cases taken from http://www.indiankanoon.org/

Secondary sources:

David Brody and James Acker, Criminal Law, 2nd ed. Jones & Bartlett Publishers.

KD Gaur, Criminal Law: Cases and Materials, 6th LexisNexis ButterworthsWadhwa

Publishers.

K I Vibhute, P S A Pillais Criminal Law, 11th LexisNexis ButterworthsWadhwa Publishers.