We all know startups, except for sole proprietorship firms and partnership firms, are considered separate legal entities, distinct and independent from the members who represent it. So, how can courts punish these startups which commit crimes? Common law has various theories which determine the liability of the corporations and the most prominent one would be the doctrine of vicarious liability which states that corporations can be held liable for the torts committed by its employees. But can corporations be charged with the crimes they have committed? Or more importantly, should they be held liable, especially since a company itself is not capable of thinking or of creating any intention of its own. In this blog, we will figure out answers.
Under the Indian Penal Code (IPC), corporations can be prosecuted for the crimes they have committed. Section 11of the Act defines that the ‘person’ would include “any Company or Association or body of persons, whether incorporated or not". Incidentally, the IPC also protect companies. For instance, Section 499 (Explanation 2) makes defaming a company a criminal offense.
What does corporate crime involve?
According to R.C. Kramer, the corporate crime involves “criminal acts which are the result of deliberate decision making or culpable negligence by persons who occupy structural positions within the organization as corporate executives or managers. These decisions are organizational in that they are organizationally based - made in accordance with the operative goals (primarily corporate profit), standard operating procedures, and cultural norms of the organization - and are intended to benefit the corporation itself.”
What do theories say on Corporate criminal liability?
1. Doctrine of Attribution
A corporation can be convicted of a criminal offense involving mens rea by applying the Doctrine of Attribution. According to the doctrine, criminal intention of the “alter ego” of the company, i.e., the person/ group of person in charge of the business/affairs of the company can be attributed to the corporation as well to make it liable. In other words, corporates can be held responsible for offenses committed by the persons in control of its affairs, if such are perpetrated in relation to the business of the corporation.
However, the question then arises whether the reverse will also hold true, i.e., whether the officials of the company can be held responsible for acts of the company? This question was recently answered by the Supreme Court of India in Sunil Bharti Mittal vs. Central Bureau of Investigation. The Apex Court, in no uncertain terms, held that the principle of attribution cannot be applied in the reverse scenario to make the directors liable for offenses committed by the company. However, the Court thereafter observed that in the following circumstances a director/person in charge of the affairs of the company can also be prosecuted, along with the company as an accused:
- If there is sufficient evidence of his active role coupled with criminal intent;
- Where the statute specifically imposes liability.
2. Vicarious Liability
Originally developed in the context of tortious liability, the doctrine of vicarious liability holds a person liable to answer for the acts of another. For instance: In the case of companies, the company may be held liable for the acts of its employees, agents, or any person for whom it is responsible.
The concept of vicarious liability of corporate officials has evolved substantially in the recent times so much so that it has become a trend to implead the officials of the company along with the company to exert pressure on the company to settle. However, it is important to note that there is no vicarious liability unless the statute specifically provides for it. Therefore, when the company is the offender, vicarious liability of the directors cannot be imputed automatically in the absence of any statutory provision to that effect.
Essentials for the doctrine of vicarious liability, therefore, are as follows:
- There must be a crime committed by the agent of the company.
- He must commit it within the scope of his employment.
- The act must be carried out with intent to benefit the company.
3. Theory of identification
The theory of identification recognizes that the acts and state of mind of certain senior officials in a company are the directing minds of the corporation and thus deemed to be the acts and state of mind of the corporation. The corporation is considered to be directly liable, rather than vicariously liable under this theory. In other words, this theory contemplates an identity between the corporation and the persons who constitute its directing mind. The commission of an offense by such person constitutes an offense by the corporation as well. If a corporate employee is virtually the directing mind and will of the corporation, the employee’s action and intent are the action and intent of the company itself, provided the employee is acting within the scope of his/her authority, either express or implied. Under the doctrine of identification, the company is personally liable. It is not liable vicariously. It is deemed to have committed the offense by itself.
The concept of corporate criminal liability is still in its emerging stage in India. However, attempts have been made in the Companies Act, 2013 to control and reduce corporate crime, and at the same time improve corporate governance practices, making companies more responsible and answerable. With the advent of globalization, imposing criminal liability on corporations makes sense; because they are immensely powerful actors whose conduct often causes very significant harm both individuals and society as a whole. Clearly, a lot is still required to be done in this area but the steps taken so far should not be undermined. How effectively laws and regulations will be able to control corporate behavior, only time will tell.
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