Unveiling The Legal And Regulatory Measures Of Corporate Crimes In India (By-Divyanshi Saxena & Gurusha Muniyal )

Unveiling The Legal And Regulatory Measures Of Corporate Crimes In India

Authored by-Divyanshi Saxena

BBA LLB Corporate Law Batch 1 (Penultimate year)

Gurusha Muniyal

BBA LLB Corporate Law Batch 1 (Penultimate year)

Introduction

Corporations break the law and then get away with it- a fundamental insight of Edwin Sutherland (first person who coined the term ‘white collar crime’ almost 80 years ago). Being creatures of the statutes, corporations must abide by the rules which dictate and limit their conduct; these are numerous and complex.[1] When these corporations’ issue false securities, that in turn leads to defrauding their investors or shareholders which are thousand in number. “By their very size, corporate income tax violations defraud the government of large sums of revenue.”[2]

The fact that the corporation has its own legal entity is undeniable, the case which establishes this is Salomon vs Salomon & Co. Ltd[3]. The criminal justice system in the present system is not a viable forum for the purpose of tackling corporate wrongdoing. As the criminal law was not developed with companies in mind, surprisingly.

The concept of actus reus and mens rea doesn’t make complete sense when they are applied to the corporations. Trying to apply these concepts to companies is a bit like trying to squeeze a square peg into a round hole[4].

The word ‘corporate crime’ is itself has a broad meaning, and the modern-day offenses include stock market manipulations, price fixing, insider trading, formation of illegal cartels,

anticompetitive market manipulations, manufacture of hazardous product, consumer fraud, racial and gender discrimination, the pollution of the environment, false and misleading advertisements, bribery, fiscal offenses, and corporate manslaughter.

People who run businesses have formed business associations that are very strong at the global level. They have a lot of power because they have a lot of money. They can have an impact on people's lives socially, politically, and economically. When it comes to businesses, a corporation with limited liability has the most advantages and is thought to be the best way to run a big business. The corporation has become a social group that can act without the help of people who can be easily identified. This has made it hard to figure out who is responsible for crimes.

Company Law Offenses

The framework of the Companies Act is provided to ensure transparency and consistency in corporate operations and accounting.

Officers in Default
Section 2(60) of the Indian Companies Act, 2013[5] defines the term ‘Officer in Default’ which means an officer who shall be held responsible for any default in the company. These include

Key Managerial Personnel
Directors
Whole Time Directors
Registrars
Merchant Bankers
Share Transfer Agents
There are exceptions to this rule if there aren't any Whole-Time Directors or Key Managerial Personnel (such as MD/CEO/CS(Whole-time)/CFO). Then, the board can pass a resolution and choose one of the Directors to be the officer in default.

To understand why it's important to have an Officer in Default:

To make sure that officers are acting in the best interests of the company and its stakeholders,
To do their jobs in good faith.

Keeping this in mind, it is suggested that an Officer in Default be appointed to have a single point of responsibility. This person will be responsible for any non-compliance or misconduct, and he/she will have to pay any penalties or punishments that the regulatory bodies give.

In order to define corporate criminal liability and to make a corporation liable for an offense, it is necessary to trace down the ‘officers in default’. This was observed in the case of S. Vishwanathan Vs United Phosphorus Ltd.[6] it was held that without prosecuting the company, the directors cannot be prosecuted alone.

Personation of Shareholders
Personation is defined as when a person is pretending to be someone else. So, personation of shareholder means when a person pretends to be a company’s shareholder when he is actually not. Personation is done with the intention of defrauding or deceiving in the name of the shareholder. Personation is nevertheless an immoral act in itself and can be considered a crime.

Section 57 of the Companies Act[7] mentions the provisions for personation of shareholders of a company. A person who poses as an owner of a security or interest in a company, or of a share warrant or coupon issued under this act, and gets or tries to get that security or interest, or that money that is due to that owner, will be punished with imprisonment for up to three years and a fine of up to Rs. 5 Lakhs.

Providing False Information or Misrepresentation
The key to corporate governance is the disclosure of information. The Companies Act of 2013, unlike its predecessor Act of 1956, has tried to highlight different provisions or situations where Section 447, which deals with fraud and its punishment, comes into play.

They are as follows:

a) Section 7- This states that when the company gets incorporated, there are certain documents that needs to be filed with the ROC. And if such documents are not filed, there are certain penal consequences-

Sub- Section (5): If a person gives false information or incorrect information or hides material information, the person can be punished under Section 447[8].
Sub-Section 6: The promoters, the first directors, and the fiduciaries, such as the chartered accountant, the company secretary in practice, the cost accountant, or the advocate, the managing director, or the secretary of the company, who make false statements in the prescribed format will also be subjected to Section 447.

Section 8: Deals with Charitable Companies. There are some penal consequences for getting into trouble-
In Sub-Section (11): If it can be proven that the company's affairs were done illegally or fraudulently, then the officer in default is liable under the provisions of Section 447[9]
Section 34- Deals with criminal liability for making false statements in a Prospectus. Under this rule, anyone who gave permission for a false statement to be put in a prospectus is responsible.
Section 38: This part talks about punishment for people who use their identities to buy securities, i.e personation for the acquisition of shares.
Section 46: It mostly deals with Certificates of Shares. There are some consequences to getting into trouble. The penal consequences are-
Sub- Section (5): Frauds with regard to the issuance of share certificates can result in a fine of not less than five times the face value of the shares involved in the fraudulent double issue, with a maximum penalty of ten times the face value of the shares or Rs. 10 crores, whichever is higher.
Section 56: This part talks about how shares can be transferred and transmitted. The penal consequence is –
Section 66: This part talks about reduction of share capital. Section 447 says that anyone who hides or lies about the name of a creditor who can object to a debt or claim being reduced will be punished by the law.
Section 75: Deals with damage involved in Fraud.  If the company accepts a deposit with the intention of defrauding the depositors or for any other fraudulent reason, each officer who

accepted the deposit will be personally liable for all or any of the losses or damages that may have been caused. This is in addition to what subsection (3) of that section says and what section 447 says about liability.

Section 140: It deals with the removal, resignation, and giving of special notice of the Auditor. Sub- Section (5): punishment for an auditor of a company if he or she has, directly or indirectly, acted in a dishonest way, or helped or worked with someone else who did the same. This could be the company, its directors, or its officers. The auditor will not be able to work as an auditor for any company for five years after the NCLT made an order against them.
Section 206 talks about the power of the ROC to get information, inspect books, and make inquiries.
Section 212: This part talks about how the SFIO can look into the affairs of the company. Despite what the Code of Criminal Procedure, 1973 says, any offence covered by Section 447 of this Act will be punishable. No one accused of an offence under that section can be released on bail or on his own bond unless the Public Prosecutor has been given a chance to oppose the application for such release; and if the Public Prosecutor opposes the application, the court must be satisfied that there are good reasons for not letting the person go.
Section 213: It deals with investigation into affairs in other cases. Penal Consequences-Clause (b): If the investigation shows that the business of the company was being done with the goal of defrauding its creditors, members, or any other person, or that the company was formed for these reasons, or that any person involved in the formation of the company was willing to be guilty of fraud, then every officer in default or other person who was involved in the formation of the company will be punished under Section 447.
Section 229: This part talks about the punishment for giving a false statement or destroying documents. There are some consequences to getting into trouble.
These rules apply to anyone who falsifies or mutilates records, or tries to destroy documents during an inspection, investigation, or other process.

Section 251- It deals with people who try to get their names taken away by making false claims i.e fraudulent applications for removal of names.
Section 339- deals with punishment for false statements.
Section 448: It talks about punishment for making false statements.

Common Doctrines Of Corporate Crimes

Corporate crime has adapted a number of doctrines that try to justify the fundamental understanding of the concept. The doctrines try to explain the liability along with the reasoning behind such a delegation of liability. The most common and preferred doctrines are as follows:

Doctrine of Direct Liability

The doctrine explains how the person who committed a crime is held accountable. As for its nature, it's also very much like that of a legal person. A corporation is a group of people who act and act on behalf of a group of people who act and act within the scope of their authority.

But, on the other hand, the law says that a corporation is liable for crimes because it isn't complicated. Whether or not the corporation did something they didn't mean to or knew about, they will be held liable in the following circumstances of the case.

1. Vicarious liability: The body of the corporate organs has the power to act on behalf of the person it's being held liable for, then the legal person.

2. Intentionally committed offense- The corporation purposefully committed a nature offense. The company knew or on purpose used evidence of its nature to do something that was against nature.

3. Corporate culture: when the company didn't have a good corporate culture and didn't encourage it. This isn't because the company didn't follow the law.

How is it correlated?

There are several doctrines for the prevention of crimes in the corporate sector. Yet, there are a lot of instances, such as Yes Bank, DHFL, and many more. Here the question remains: despite the many laws, regulations, doctrines, and commissions, the number of corporate crimes every year keeps increasing. The doctrines either state punishment/fines or accountability for the crime. The question is followed by what measures could be taken in advance to prevent these crimes from happening.

Doctrine of Respondeat Superior

In the debate wherein the validity and operation of Mens Rea and Corporate Criminal Liability are discussed, it is very much argued that mens rea being an element of wilfulness, will render the immune of the offenders from liability in matters of reckless negligent conduct (such as the Bhopal

Gas Tragedy)[10] Currently, conduct such as environmental offenses, fraud, and other common Corporate Crimes is prosecuted that even lacks a mens rea requirement.[11]

All the discussion with regards to corporate criminal liability under the requirement of Mens Rea brings up another essential question: Whether a company should be held liable for the crimes that are committed by the employees of a corporation? This question can be understood after understanding the concept of Respondeat Superior, which is utilized in cases of corporate crimes.

Respondeat Superior is a principle that states that an employer (in our case, a Company) can be held liable if its agent (employee of the company) commits a crime. This is commonly utilized in the Indian Legal system as vicarious liability.

The Supreme Court in 1909 announced certain standards regarding this principle that to our surprise are unchanged in the current paradigm.[12]  The principle of respondeat superior arises from tort law, which essentially establishes that the employers/company will be vicariously liable for the crimes that are committed by their employees during the scope of their employment even when there is no sign of corporate fault.[13]

In the landmark case of New York Central & Hudson River Railroad v. United States[14] the apex court of USA abandoned the rule that the companies could not held liable criminally. In this case, the issue was regarding the constitutionality of Congress to hold Companies liable for violating and breaching the Elkins Act. It was concluded by the court that, “the court cannot act oblivion to the fact that the great majority of business transactions in the current era is being via these companies especially interstate commerce is entirely in the hands of the company.”

The supporters of corporate criminal liability that there is a sheer amount of harm that can be caused by the companies[15] Moreover, there is expressive value, from the general public’s moral perspective, in punishing companies when its employee has committed the offense.[16]

[17] It's important to know that the criminal respondeat superior rule must always be used when the government can prove that:

There was the occurrence of a corporate crime irrespective of the fact that the employee wanted to give benefit to the corporation or not

there was an omission by the company to take reasonable steps with aim of preventing corporate crime,

(3) It would be objectively foreseeable to a reasonable person that the company would engage in such a crime

If the above conditions are fulfilled, it becomes valid to punish the company wherein the crime was committed by the employees of the company thereby solving a major loophole under liability in corporate crimes.

     On Whom Should The Corporate Criminal Liability Be Imposed?

The determination of corporate criminal liability is a big ambiguity under the purview of Corporate Crime. There are several questions that must be answered while analyzing the scope of Corporate Criminal Liability.

Whether it is legally and fundamentally appropriate for corporate criminal liability to exist in the legal system remains to be seen

What is the value of corporate criminal liability that must be given so that there is a coexistence of both civil liability and redressals against them?

Whether corporate criminal liability has added value over individual criminal responsibility.[18]

It is argued by the detractors that punishing an entity criminally evidently violates the three primary purposes of criminal punishment: deterrence, retribution, and rehabilitation.

This can be explained better with the following studies:

As per John Hasnas, vicarious liability is characterized as, the punishment of innocents. In our paradigm, the stakeholders, shareholders, and other employees are incompatible with the retributive principle of punishing not more than what is deserved.[19]

It is also suggested by certain empirical literature that corporate criminal liability cannot result in imprisonment but only damages or fines. This may over-deter the misconduct of administrative and civil sanctions.[20]

The existence of corporate criminal liability of a corporate crime can be defended under specific circumstances. It can be defended on the grounds that corporate crime has imposed number of harms on its victims wherein such harm is adapted as is in nature of the corporate structure.[21] It must be admitted that in criminal law there is redress for the increased cultural and psychological harm that is related to the company’s institutional connections and enduring nature. The act of redressing this type of harm is an essential function in matters of criminal punishment that cannot be received in civil matters. There can be additional benefits from redressing such type of harm, however, such benefits cannot justify the act of imposing punishment even when there is no harm.[22]

There is a dividing line that exists between criminal and civil laws, which are unclear or ambiguous in matters of determining the liabilities of the corporation. This is primarily because the company law is an amalgam of both civil and criminal action while dealing with individuals in the corporation. The directors of the company who illegally use their position in most of the cases are brought with civil action and thereby are brought on the company with the aim of recovery of any compensation for the damages which in a number of cases, the companies try to blur the difference by seeking the provision of the matter being dealt under the provisions of civil law so that the company can use it as an excuse and get away from coming under the stigma of criminality. The moment the term crime will be associated to the Company, it will face backlash and lose its net worth and profits, considering no one wants to work with a criminal.

This is a huge problem because a number of companies use the provisions of civil as a tool to protect themselves from criminal liability. In the case where the companies fail to take due diligence that leads to mass destruction as well as damage to the lives of innocent people, which was seen by the entire world in Bhopal gas tragedy case where the corporations were ready to pay the compensation and wash their hands off since such compensation would not have mattered considering their economy is the best way of getting away from any criminal liability of a Corporate Crime.

In a situation where a Corporate crime is committed, whether a company can be convicted criminally is one of the major issues which are faced by the Indian courts as it becomes a struggle in order to formulate the jurisprudence so that there can be determination or substantiation of the guilt of the corporations since in major of the cases, the companies could not be criminally prosecuted since there was a requirement of mens rea, which not be proved in the court due to the fact that Company is not a natural person.[23]

However, this was solved to an extent by the honorable Supreme court of India, wherein in the case of Standard Chartered Bank v Directorate of Enforcement[24] the apex court held that

corporate bodies can be prosecuted in matters of criminal offenses, which in the past were not imposed in such similar cases because of lack of mens rea.

Legal And Regulatory Measures To Control Corporate Crime

Incorporation in the matters of social desires as well as international commitments, the Indian laws are designed in such a way that they regulate human behavior. The laws are aimed at maintaining peace and order in society, protecting the lives of the people, protecting property, and contractual rights. The laws offer a series of punitive actions such as imprisonment and/or fine when the accused is found guilty of violating such rights that serves a necessary purpose. The detailed and refined definition and the act of enforcing the laws help  society in order to prevent as well as control the unlawful acts that occur in them.

It is essential to explore the fact that the Indian legal system is serving in order to prevent as well as control the issue of Corporate Crime. As per section 11 of the Indian penal code, the provision defines a legal person as a person that also includes an Association or body of persons or a Company, whether the entity is incorporated or not.[25]

As per a reasonable and prudent person’s point of view, it is easily understood that a natural person can be convicted of an offence, which is because they have a mind[26]. This existence of a mind is also one of the determining factors when considering the commission of crime. Therefore, observing the definition of the Indian Penal Code of a ‘Person’ substantially includes corporations as well as companies which means that Indian law recognizes the capability of the company to commit crime, thereby legally substantiating the existence of corporate crime and corporate criminal liability.

However, on further exploration, it is found that in certain areas, the corporation cannot be held liable but the officials of the company can. The Companies Act 2013, is a document that is regulatory in nature and formulated by the Indian Parliament that essentially caters to the company’s dissolution, incorporation of companies, and  responsibilities of the company along with its directors.

Similar to these sections of the Companies Act, the provisions of the Indian penal code which talk about compulsory imprisonment or imprisonment and/or fine, the liability of an offense on the company can't be established since the Company even if it is a legal person, is a non-living entity that practically cannot be imprisoned.

In the landmark case of State of Maharashtra vs. Syndicate Transport,[27] it was observed by the court that a fine cannot be imposed on the offender where, as per the law, the mandatory punishment constituted of both the fine as well as the imprisonment. Merely imposing a fine and not imprisoning is a deviation from the bare minimum of what is prescribed in the law about punishment.

However, this problem was solved by the Supreme Court which was brought up by the radical judgments in the case of Standard Chartered Bank and Ors. etc. vs. directorate of enforcement and Ors.[28], (as discussed above) wherein it was observed by the court and subsequently enforced that imprisonment, as well as fine, is the obligatory prescribed punishment and that the corporation cannot legally escape just because of the fact that it practically cannot be imprisoned. As per this case, the company would be held liable to pay the fine which is enforced by the court (which is a punitive measure) against the company’s liability. This goes against certain sets of sections of the companies Act 2013, where the company was not the one to be held liable and accountable. However, the court would observe other related statutes wherein the corporate will be fined in case it is found guilty under the legal provisions like, Section 141 of the Negotiable Instruments Act, Section 276-B of the Income Tax Act and Section 7 of the essentials Commodities Act, etc.

How Effective Is The Enforcement Mechanism For Corporate Crimes In India?

The primary goal of enforcing a corporation's criminal liability, such as in cases of faulty prospectus, is to essentially establish deterrence so that future offenders do not commit the crime again, For example, once someone is deterrently punished for a faulty prospectus, others shall follow all the disclosure requirements under the fear of being convicted in case they do not.

The term "deterrence" is primarily characterized to trigger fear of the potential consequences that might occur and so that they would avoid illegal action or its omission. With the aim of discouraging such illegal and undesirable behavior, the criminal law has in the past been levying fines on companies and convictions on agents of the company.

In the era of the globalized world, companies need significant access to resources and in order to compete in a trend of global marketplace it is essentially required that they must embrace as well as demonstrate ethical conduct so that they could develop along with survive in the long run of their business.

In recent decades, there has been a sharp and steep increase in the ambitions and aims of an individual as well as companies which is increasingly creating severe impact on the lives of the individual and the society. The corporate crime such as corporate fraud and corruption has always remained a constant, unbending feature that poses a severe threat to the macro as well as micro-economy of the country.

The above-mentioned problem of that of corporate crime, most essential corporate scams like the Harshad Mehta Scam or Ketan Parekh Scam is very active in India. However, there are many cases of corporate crime that have gotten away. The laws do exist however, there is a dire need for a more significantly transparent, responsible, ethical, and effective corporate governance framework in India.

In the world of capitalism, it is very essential to have a regulator of stock exchanges in every country. The Securities and Exchange Board of India (commonly known as SEBI) is the primary regulator of the stock market of India. SEBI imposes heavy mandates regarding compliances and ingeniously is engaged in a growing number of enforcement activities in the commercial procedure. However, at certain instances SEBI has failed to evaluate and prevent corporate crimes. It has a duty in terms of policing the act of fraud against Company for example in the Satyam Scam[29]. This might be due to the fact that SEBI has excessive workload as well as budgetary constraints which obstructs it to do its job more stringently. There are certain consideration of taking additional steps for avoidance of such disasters. This brings to the question: What are the further steps that are required to be taken by the government of India in order to enforce more efficiency in matters of dealing with the corporate crimes or scams and fraud?

The policy implementation by the government of India is ineffective, inefficient, as well as slow-paced especially while considering the delays which are caused in the Indian legal system, which has become one of the primary issues in matters of corporate crimes in India. It is the responsibility of the state to ensure that there are certain sets of mechanisms as well as guidelines which should be adapted as well as simultaneously implemented efficiently, effectively, and precisely while dealing with the problems of corporate crimes which are mushrooming day by day. There is a need to have a certain set of mechanisms and methodology in order to deal with issues that are negatively affecting society.

The only social responsibility fulfilled by them is the corporate governance mandated corporate social responsibility (CSR) which is hardly taken with the intention of doing good to society rather than to complete a mere regulatory formality. The companies constantly ignore as well as violate the legal provisions. However. they still manage to get away from punishments since the corporates often enjoy a culture of impunity since there is a lack of effective mechanisms present in  Indian law, which is why it becomes an essential duty of the government to ensure that there

are counterpoise and checks and balances on the heads of corporations so that it is ensured that the laws which are already existing must put a termination to the long precedent culture of impunity which is always enjoyed the companies. The system and the laws need to be looked at often so that the system doesn't become outdated and can be fixed as soon as a flaw is found.

There is an earnest requirement for a certain set of guiding principles in commercial practice as well as human rights. These guiding principles[30] lay down certain directions and guidelines that must necessarily be adopted by the government. The common general guidelines were as follows:

It is the government’s obligation that it must respect, protect as well as fulfil human rights along with fundamental freedoms.
The primary role of a Company which is specialized revenue-generating and earning organ of society, is vehemently required to comply with laws that are applicable at that time along with respect of human rights;
The requirements of the rights and the obligations should be matched with appropriate as well as effective remedies when such rights are breached.

These above-mentioned guiding principles should apply to all over the country and especially to corporations, irrespective of the fact that they are transnational or not. This must be done irrespective of their size, location, ownership, sector, and structure. The above-stated guidelines are majorly not paid heed to by the legislators, and government while they are dealing with the substantial issue of corporate crimes.

Conclusion

A Corporate entity is a collection of a number of stakeholders, such as the investors, customers, employees, partners, government and society. A company must essentially be fair and transparent towards its stakeholders in matters of all of its commercial transactions and must not get blind for minting the money in the era of capitalism. The vulnerability of corporate crime arises from the requirement of companies to access global pools of capital and the urge to attract as well as retain investments from all over the world. The curbing of corporate crime cannot be taken place unless a company gracefully embraces and performs ethical conduct.

The best way to curb corporate crime is through the regulatory compliance of corporate governance. Corporate governance deals entirely with ethical conduct in business. Ethics refers to the set of values and principles that allow a person to choose between right and wrong, and hence between different courses of conduct. Corporate governance is excellent for business because it instills investor confidence, which is critical for raising cash. However, a few unscrupulous business people and fly-by-night operators can largely undermine all of the trust that excellent companies build and the good work that they accomplish over time. Such exceptions necessitate the imposition of deterrent penalties.

Good governance is essential, based on effective representative democracy and a strong opposition that draws its strength from working people, is well-informed, and does not rely solely on hyperbole. This will significantly reduce the number of cases of corporate fraud. Corporate crime can thus be avoided by promoting excellent corporate governance, with appropriate transparent systems within the firm to detect unlawful executive behaviour.

The damaging loopholes in law that promote the corporate crime are being analysed so that judicial strategy will have a greater impact on society and avoidance of people using it in illegal way. In conclusion, we understand that corporate crime refers to crimes done by a corporation or an individual working on its behalf and benefit of the company that are prosecuted and punished under the law. Corporate crimes should be sentenced in the legal provision in a more effective manner, and there is a requirement of revision of these laws. Such corporate crime has a negative impact on the capital markets and we could observe the same via the number of frauds in India.