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Doctrine of attribution in corporate criminal liability

By Dinesh Babu Eedi

The question of making a company liable for for criminal offences committed by its directors, managers, officers and other employees  while conducting business  has gained  importance in criminal law  jurisprudence  while  being  subject to debate. The traditional view was that a corporation could not be guilty of a crime, because criminal guilt required intent( mens rea), which a corporation does not possess. In addition, a corporation cannot be imprisoned.       

The basic rule of criminal liability revolves around the basic Latin maxim Actus non facit reum, nisi mens sit rea. It means that to make one liable it must be demonstrated that (a)  a forbidden  act or omission has been done (b) with a deliberate intent. Hence, in order to attribute criminal liability to a company, it must be proved that there was a physical act i.e. actus reus and that there was an intention to commit the act i.e. mens rea.      

Further, to counter the practical difficulty of sentencing companies to imprisonment created by the legal fiction of law, the courts have developed what is termed as the ’Doctrine of Attribution’. As per this doctrine, in the event of an act or omission leading to violation of criminal law, the mens rea i.e. intention of committing the act is attributed to those who are the ‘directing mind and will’ of the corporations. Although this doctrine was developed in the United Kingdom and has been in use in India since many years, the Supreme Court’s recent Judgment in Iridium Indian Telecom Limited v. Motorola Inc., [(2011) 1 SCC 74] (“Iridium”) has finally resolved   the debate whether corporations can be held liable for offences inextricably possessing mens rea as one of the essential components.      

Origin of the Doctrine of Attribution         

The principle of vicarious liability was  generally applied to hold corporations liable for the acts of its agents. Companies were called on to make good the loss occasioned by its agents when they acted in the course of their employment. However, this  principlewas not  extended to pass on the liability of criminal wrong to corporations. As such, corporations could act with impunity in all such cases.      

To plug this loophole,  courts in England pierced the corporate veil and held that  corporations are  liable for  criminal and civil wrongdoings if the offences were committed through the corporation’s ‘directing mind and will’. This attribution of liability to the corporations later came to be known as the ‘Doctrine of Attribution’.    

In Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co Ltd. (‘Lennard’)[i], trying an offence under the Merchant Shipping Act, the House of Lords applied the doctrine of attribution to identify Mr. Lennard, who was the owner of the ship and also responsible for the management of the ship, as the ‘directing mind and will’ of the company. Subsequently, in H.L Bolton Co. Ltd., v. T.J Graham and Sons (‘Bolton’) [ see end note 1], the Court of Appeals likened companies to a human body and their brain to the directors of the company, and confirmed the application of the doctrine of attribution to criminal cases.      

Indian approach towards doctrine of attribution before Iridium      

The debate on the liability of corporations for offences with mens rea as an essential component began much before the decision of the Supreme Court in Iridium. Indian High Courts were not  inclined to declare corporations as liable and  rejected appeals for punishing  companies  for criminal offences.        

In 1964, in State of Maharashtra v. Syndicate Transport Co. (P) Ltd. [AIR 1964 Bom 195], the Bombay High Court developed a very forward-looking approach in this regard and in deciding a case in which a company was charged with cheating, criminal breach of trust and dishonest misappropriation, the Court held:        

“The question whether a corporate body should or should not be liable for criminal action resulting from the acts of some individual must depend on the nature of the offence disclosed by the allegations in the complaint or in the charge-sheet, the relative position of the officer or agent vis-a-vis the corporate body and the other relevant facts and circumstances which could show that the corporate body, as such, meant or intended to commit that act.”        

In 1975, the Bombay High Court, in Esso Standard Inc v. Udharam Bhagwandas Japanwalla, [1975 45 CompCas 16 Bom] (‘Esso Standard’) further noted:       

 “The law attributes to the company intention of the officers of the company under certain circumstances. The company's intention could be ascertained only when the company in a general body or at the meeting of the board or in accordance with the memorandum or articles of association has expressed that intention in the form in which it should be expressed.”        
However, the Calcutta High Court in a series of cases did not apply the attribution principles adopted by the Bombay High Court. In Sunil Chandra Bannerjee v. Krishna Chandra Nath, [AIR 1949 Cal 689] the Calcutta High Court acquitted  a bank, on the basis  that a company cannot be said to possess mens rea to cheat. In Kusum Products v. S.K Sinha, [1980 126 ITR 804 Cal.] it held that a company being a juristic person could not be punished.        

The Supreme Court in 1997 in MV Javali v. Mahajan Borewell  [(1997) 143 CTR (SC) 320] further held that mandatory sentence of imprisonment and fine is to be imposed where it can be imposed, but where it cannot be imposed namely, on a company, fine will be the only punishment. This ‘One Size Fits All’ approach was dismissed, in the Asst. Commissioner v. Velliappa Textiles [(2003) 11 SCC 405] where the Supreme Court held that since company is an artificial person, it cannot be physically punished to a term of imprisonment. But the court also held that where the statute provides for imprisonment or fine, it is not a problem, but where the statute provides for imprisonment and fine, the court is not given the discretion to impose fine in lieu of imprisonment.          

The Supreme Court in the case of Standard Chartered Bank [AIR 2005 SC 2622] without making any reference to doctrine of attribution held that a company can be prosecuted for offences which are punishable with mandatory imprisonment. However, the Court left open the question of whether a company could be punished for crimes requiring mens rea. Hence, till the pronouncement of Apex Court ruling in the Iridium case, there were conflicting judgments of various High Courts on attribution of criminal intent to a company.          

Deadlock resolved by Iridium        

The Supreme Court in the Iridium case discussed the doctrine of attribution, not to adjudge the liability of the directors, but to determine the liability of the corporation. The Apex Court held  that  criminal liability of corporations would arise when the offence is committed in relation to the business by a person or body of persons in control of its affairs and when the degree of control is such that a body or body of persons can be said to be its ‘directing mind and will’. The Court also held that such mens rea would be attributable to the corporation on the principle of ‘alter ego’ and upheld its earlier decision in the Standard Chartered case discussed supra. Thereby, the Apex Court has finally resolved the position regarding criminal liability of corporations.          

Conclusion         

In the Iridium case, the Supreme Court discussed the doctrine of attribution to determine the liability of Motorola Inc. This doctrine is  applicable not only for the acts committed by the directors of the company, but also for the acts committed by the company through its promoters, who are controlling the affairs of the company. The acid test is to determine the ‘mind and will’ of the controlling person vis-à-vis the controlled company and is valid even when two or more layers above the controlled company exist.        

It will be very interesting to see how the doctrine is applied in cases such as the liability of a company for misstatement or non-disclosure in an information memorandum issued in connection with an offering of securities. Although the decision is an important step in promoting the use of criminal sanction to regulate corporate behavior, it is important to note that the Supreme Court did not throw light on the methods by which mens rea of a company can be proved. Moreover, the risk factors and disclaimers contained in the Private Placement Memorandum in Iridium were disregarded by the Apex Court even though these provisions seek to pass on risks of uncertainty to the investors.          

In conclusion, although the decision clarifies the position on criminal liability of a company and the possibility of criminal intent, the prosecution of officers of the company or promoters for the criminal acts of a company would depend on the facts and circumstances of each case and is not likely to be applied very widely.          

[ The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad ]
          
End Notes:

  1. [1915] A.C. 705 HL. Also see Rudd v. Elder Dempster & Co. Ltd., [1933] 1 KB 566.
  2. [1957] 1 Q.B. 159 CA
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