If I were to pen an epitaph for 2010, I would put it down as the year of shame and scandal. And whether it’s the closure of the Arushi case or the various scams that surfaced, while the spotlight is on the government, ministers, lobbyists or media persons, in the ultimate analysis, the offence ori-ginates from a corporation, which raises a concern on how effective our Indian laws and systems are in dealing with new genre crimes, which cover a wide spectrum ranging from frauds, environmental pollutions, market manipulations, insider trading, just to name a few. India offers, not just an emerging market, but also fast growing industrial and investment sectors. What needs to be strengthened is India’s reputation as a trusted hub for which effective laws and judicial frameworks providing quick disposal are essential.
The archaic Indian Penal Code (IPC) in which the key offences involving fraud, such as criminal breach of trust, cheating, forgery, falsification of accounts are to be found, is in the need of a rehaul, if not replacement, as it does not specifically deal with the issue of corporate liability. Certain crimes are dealt with under various special laws, or have either been inserted in an existing law, such as check bouncing in the Negotiable Investments Act, 1881.
The Companies Act 1956 (Act) under Section 5 designates various office bearers such as Directors and Company Secretary to be “officers in default” to pinpoint the liability on specific individuals. The definition of “Corporation" under Section 2 (7) of the Act includes a company, which implies that only the company as a legal entity can be punished, except wherever provided in the Section 5 definition. The fallout of this is, since the company is an artificial entity, no mens rea can be attributed to it, except in the rare cases where the corporate veil can be lifted. The dilemma is two-fold; one, how can a company be truly penalised for its misdeeds, except by making directors and empowered officers liable. If that is the correct premise it would lead, by implication, to a situation, where others are immune. In fact, the Indian legislative and judicial approach has been to hold Board members liable for most offences. This implies that the heads to roll have to be the powerful and visible ones, a concept based on vicarious liability. To satisfy the above test, the employee must be acting within the scope and course of his employment and there has to be an assumption that the employee must be acting for the benefit of the corporation, whether the company actually receives the benefit or whether the activity is one which is expressly prohibited. Take the facts of the Shivraj Puri case, where a SEBI document was forged and a false bank account opened as a Custodian account under a lapsed scheme, to dupe investors including large business groups. While Puri can be prosecuted for cheating and related offences under Sections 415, 418 and 420 of the IPC, the larger question pertains to the bank’s safeguard procedures and enforcement or omission thereof. If that is established against Citibank, then other and more empowered persons will be held culpable.
On the other hand, the containment of witchhunting directors, regard-less of culpability, is imperative. The Courts have recognised this propensity, and the Supreme Court, notably in its recent judgment in the National Small Industries Corporation, significantly narrowed down the liability of directors, in holding that not all directors were liable under Section 141 of the Negotiable Instruments Act, and only those persons in-charge of and responsible for the con-duct of the business of the company at the time of commission of an offence would be liable The other issue is that of sentencing. This is a sensitive issue and has to be addressed on a case to case basis. In Velliappa Textiles’ case, a majority bench of the Supreme Court held that a company cannot be prosecuted for offences which require the imposition of a mandatory term of imprisonment coupled with fine. It was further held that the provision could not be bifurcated to impose only a fine. The Supreme Court in Standard Chartered Bank and Ors v Directorate of Enforcement and Ors1 put the controversy to rest by a split judgement of 3:2, at least temporarily. More recently, the Supreme Court in the Motorola vs Iridium case has asserted that a corporate body can be prosecuted for cheating and conspiracy under the Indian Penal Code.
Ultimately, the purpose of penalisation has to be a deterrent, and in appropriate cases, other than fines, measures such as temporary closure of the corporation or exemplary compensation to victims can be some of the answers. But there are still issues to be addressed. Should the approach be the same for gross negligence in environmental matters and pure whitecollar crimes? That however is a story for another day.
Kumkum Sen is a partner at Bharucha & Partners, Delhi Office. Email: kumkumsen@bharucha.in