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February 04, 2015

CORPORATE CRIMINAL LIABILITY: PRINCIPLES OF ATTRIBUTION AND VICARIOUS LIABILITY CLARIFIED

 A three judge bench of the Supreme Court holds that the principle of alter ego  can only be
applied to impute the intent of the person who controls the affairs of the company to that of the
company;

 Principle of alter ego cannot be applied in the reverse direction to make the directors of the
company liable for an offence committed by the company;

 Vicarious liability of the directors on account of an offence by the company cannot be imputed
automatically in the absence of a statutory mandate.

INTRODUCTION

The Supreme Court recently in Sunil Bharti Mittal v. Central Bureau of Investigation (“CBI”) and
Others1 has held that the principle of alter ego  can only be applied to make the company liable for an
act committed by a person or group of persons who control the affairs of the company as they represent
the alter ego of the company; however it cannot be applied in reverse direction to make the directors of
the company liable for an offence committed by the company. The Supreme Court has clarified that the
application of the principle of vicarious liability to make the directors of the company liable for an
offence committed by the company can only be done if the statute provides for it. While doing so, the
Court has set aside the order of the Special Court wherein the Special Court had issued summons to the
directors of the companies by stating that they represent the alter ego of the companies.

BACKGROUND AND FACTUAL MATRIX

As per the directions of the Supreme Court in Centre for Public Interest Litigation and Ors v. Union of
India and Ors2 dated December 16, 2010, CBI conducted investigation into various irregularities in grant
of licenses and allocation of spectrum in the 2G band and filed a charge-sheet before the Special Judge.
CBI named Mr. Shyamal Ghosh and three companies namely M/s Bharti Cellular Limited, M/s Hutchison
Max Telecom (P) Limited and M/s Sterling Cellular Limited as the accused persons in respect of offences
under Section 13 (2) read with Section 13 (1) (d) of the Prevention of Corruption Act, 1988 and allied
offences.

The Special Judge vide an order dated March 19, 2013 directed that the summons be issued to the three
companies. At the same time, the Special Judge also directed that the summons be issued to (i) Mr. Sunil
Bharti Mittal (Chairman cum Managing Director of Bharti Cellular Limited), (ii) Mr. Asim Ghosh
(Managing Director of Hutchison Max Telecom (P) Limited) and (iii) Mr. Ravi Ruia (Director – Chairman of
Sterling Cellular Ltd.). The Special Judge held that in light of the capacity in which these directors acted,
they can be considered as the persons controlling the affairs of the company and the directing mind and
will of the respective companies. The learned Special Judge observed that these persons can be
considered to be the alter ego of their respective companies and the acts of the companies are to be
attributed and imputed to them. This order for issuance of summons passed by the learned Special
Judge was challenged in the Supreme Court.

ISSUES

1. Whether the principle of attribution/alter ego can be applied to make the directors of the
company liable for an offence committed by the company?

2. When can a director/person in charge of the affairs of the company be prosecuted for an
offence committed by the company?

JUDGMENT AND JUDICIAL REASONING

The three judge bench of the Supreme Court speaking though AK Sikri J struck down the summons
issued by of the Special Court and held that the Special Court had erroneously applied the doctrine
of alter ego to implicate the directors of the companies for offences committed by the companies.

The Supreme Court relied on its decision in Iridium India Telecom v. Motorola Incorporated and Others
(“Iridium”)3 wherein the court had dealt with the question of whether a company could be prosecuted
for an offence which requires mens rea  i.e. guilty mind. In the Iridium  case, it was held that the
companies and corporate houses can no longer claim immunity from criminal prosecution on the ground
that they are incapable of possessing the mens rea for the commission of criminal offences. The criminal
intent of the alter ego of the company/body corporate i.e. the persons or group of persons in control of
the affairs of the company or who guide the business of the company, would be imputed to the
corporation.4 However, the Court noted here that the principal is applied to impute criminal intention to
the company on account of criminal intention of its alter ego and not the other way round. The Court
thus held that the principle of attribution cannot be applied in the reverse scenario to make the
directors liable for offences committed by the company.

The Court thereafter observes 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:

1. If there is sufficient evidence of his active role coupled with criminal intent;

2. Where the statute specifically imposes liability.

On the first aspect, the court held that the Special Judge has not satisfied himself that sufficient
incriminating material was present on record to proceed against the directors. The Court however left it
open for the Special Judge to examine the material on record to ascertain if sufficient incriminating
material exists to proceed against the directors.

With reference to the second aspect, the court notes that it is a cardinal principle of criminal
jurisprudence 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.

ANALYSIS

The Court relied upon the decision of the House of Lords in Tesco Supermarkets Limited v.
Nattrass5  (“Tesco”), wherein it was held that the person whose mens rea is to be attributed must be the
directing mind and will of the company. Interestingly, the Privy Council in a subsequent judgment
in Meridian Global Funds Management Asia Limited v. Securities Commission 6  (“Meridian”)  has
expanded the rule laid down in Tesco by holding that, “the company builds upon the primary rules of
attribution by using general rules of which are equally available to all natural persons, namely, the
principles of agency”  thereby making the rules of attribution a more flexible one to be decided on a case
to case basis.

The decision of Tesco has been referred by the earlier division bench decisions of the Supreme Court
in J.K Industries Limited and Others v. Chief Inspector of Factories and Boilers and Others 7 and P.C
Agarwala v. Payment of Wages Inspector, M.P and Others 8 wherein it has been held that in the context
of vicarious liability under strict liability statutes, a person in charge would be deemed to be responsible
for the acts of the company. Thus, the decision of the three judge bench of the Supreme Court has
clearly brought some clarity on the principles of attribution and vicarious liability in the context of
corporate criminal liability vis-à-vis strict liability under a statute.

Also, it will be interesting to see whether the government can sustain the complaint only against the
three companies, in the absence of the offence being made out against a person or body of persons in
control of its affairs, more particularly when such offence requires mens rea.
VICARIOUS LIABILITY OF DIRECTORS IN CRIMINAL OFFENCES – WHEN APPLICABLE

Volume No: 16Issue No: 8

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Liability of directors for criminal offences by companies are dealt differently when compared to civil
offences. Any default of compliance of provisions under the Companies Act, 2013 will result in an
“officer in default” (which includes managing directors, KMPs and directors, as the case may be) to be
held responsible for such offence. Hence any non-compliance of a procedural statutory requirement to
report or to file a document, information or a fact is dealt as a strict liability. There is no question of
ascertainment of mens rea (guilty mind) or consideration of any other rhyme or reason to escape from
prosecution or stringent action. No further explanation or reason or excuse will even be considered by
the Court dealing with prosecution. Offences under the said Act for non-compliance of various
provisions are primarily civil offences except a few specific provisions which are criminal in nature like
Section 76A relating to default in respect of acceptance and repayment of deposits, Section 447 relating
to fraud.

However, the position of law is completely different in matters relating to criminal offences. While a
company is an artificial person, it is the Board of Directors and top management which are responsible
for its day to day operations. Thus, the top management including the Board of Directors become
the alter ego of the company. This means that by way of the principle of attribution, mens rea or the
criminal intent or the guilty mind and the actus reus or the criminal acts of the alterego  i.e. the persons
or group of persons in control of the affairs of the company and at the helm of its affairs, can be
attributed to the company and the company can be prosecuted. This means attributing the will of the
individuals who govern the company can be fastened on to the company to attract criminal liability of
the corporate body.

In Sunil Bharti Mittal v. Central Bureau of Investigation [(2015) 4 SCC 609], the Hon’ble Supreme Court
was faced with an opposite situation, where it had to examine as to : Whether the liability of the
company can be attributed to the person(s) at the helm of the affairs of the company by invoking the
principle of attribution?

The Supreme Court answered a resounding ‘No’. The Court reiterated that the criminal intent of the
person(s) controlling company can be imputed to company based on the principle of alter ego, however,
the reverse application of this principle is not permissible. When the company is the accused, its
directors cannot be implicated automatically and can be roped-in only in two situations: –

1. If there is sufficient incriminating evidence against them as to their specific role, coupled with
criminal intent on their part; or

2. The statute provides for specific vicarious liability of directors of the acts of the company by way
of a legal fiction.

Section 141 of the Negotiable Instruments Act, 1881 is an illustration which clearly states as regards
offence under Section 138 (Dishonor of Cheques for insufficiency etc., of funds in the account)  every
person who, at the time the offence was committed, was in charge of, and was responsible to the
company for the conduct of the business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, this
deeming fiction is subject to the exception that the person liable under Section 138 can escape
prosecution if he proves that the offence was committed without his knowledge, or that he had
exercised all due diligence to prevent the commission of such offence. Similar provisions of deeming
fiction to fasten liability on directors can be seen in penal provisions relating to pollution control laws.

The Supreme Court again in Maksud Saiyed v. State of Gujarat [2007 40 CompCas 590 (SC)] held that
the Indian Penal Code does not contain any provision which attached vicarious liability on the part of
managing director or directors of a company when the accused for a criminal offence is a company. The
Court further held that vicarious liability of the managing director and other directors would arise only if
there is a provision in that behalf in the statute providing punishment.

Recently the Supreme Court in Shiv Kumar Jatia v. State of NCT of Delhi (Criminal Appeal No.1263 of
2019 decided on 23rd August, 2019) settled a very important question of law as to whether the directors
can be held vicariously liable for the offences on behalf of the company. Simply put the question that
the Supreme Court was posed for answer is “whether the reverse of principle of attribution in respect of
offences by companies is possible i.e., whether the managing director can be held responsible
vicariously for a criminal offence attributable to a company?”

The facts of the case was that a guest at Hotel Hyatt Regency went to the 6th Floor of the hotel (terrace)
for smoking and suffered a fall. He was grievously injured and was admitted to a hospital. The company
that held the franchise for the hotel, its managing director and general manager among others were
booked under Sections 336 (endangering life or personal safety of others), 338 (causing grievous hurt by
endangering life or personal safety of others) under the Indian Penal Code, 1860 (IPC). The managing
director and general manager sought to quash proceedings against them.

The Supreme Court referred to its judgment in the Sunil Bharti Mittal Case and held that  in the absence
of a vicarious liability provision in the statute, an individual who acts on behalf of the company can be
made an accused, along with the company, only if there is sufficient evidence of his active role coupled
with criminal intent. The Supreme Court further held that though there are allegations of negligence on
part of hotel and its managing director and officers and staff who were in charge of day to day affairs of
the hotel, so far as managing director was concerned, no allegation was made directly attributing the
negligence with the criminal intent.

While the allegations were principally made against the company, its managing director and other staff
members who were in charge of day to day affairs of the company, so far as the managing director, the
allegations were that he was attending all the meetings of the company and various decisions were
being taken under his signatures and hence he ought to be held liable. This, the Court held was clearly a
vague allegation and does not establish any link between the managing director and the act/omission
alleged. Hence, the Court quashed the proceedings so far as the managing director was concerned.

The Court however, did not quash the proceedings against the general manager of the hotel. He pleaded
that he too was out of country on the date of incident but the Court held that general manager stands
on a different footing than that of, Managing Director. It would be a matter of trial to assess whether
any in-charge arrangements were made for his responsibilities properly etc to ascertain his culpability.
The aforesaid decision settles two important principles as regards prosecution of directors of a company
in a criminal offence as under:

1. Unless a director has been proven to have perpetrated the offence with criminal intention or
guilty mind and has actively played a role in the offence, he or she cannot be held liable.

2. Vicarious liability will not fasten on to a director unless the statute itself provides for such
fastening of liability.