CSR and the Companies Act 2013

Has it really achieved the objectives or are we still far from achieving a strict compliance with the CSR policies

Sandeep Menon Nandakumar, Assistant Professor (Sr.), VIT Law School, Chennai

It is an undisputed fact that multinational corporations wield more power and wealth than many of the nations across the world ((For example, the annual sales of the Royal Dutch/Shell Group Oil Company are twice New Zealand’s gross domestic product; See Dr. Clarence J. Dias, ‘Corporate Human Rights Accountability and the Human Right to Development: The Relevance and Role of Corporate Social Responsibility’ 4 NUJS L. Rev. 495 (2011).)). Due to the very same reason, they are capable of doing more harm than any other private economic institutions as their activities surpass national boundaries thereby going beyond the control of national jurisdictions in many cases. Multinational corporations do a great deal of service to the society by paying huge taxes, providing employment, contributing to charitable causes and so on. However, at the same time they are also prone to corruption, accused of providing poor and inadequate workplace conditions, causing human rights abuses, consumer disputes and violating environmental values. It is not quite sure whether it is the latter part that the Corporate Social Responsibility (CSR) tries to control but it is surely a mechanism, which balances the latter with that of the former. Corporate social responsibility is based on the premise that most of the companies derive resources from the society and they are expected to return it back. CSR has been defined thus:

“Corporate Social Responsibility is a term used to express that an organization is taking responsibility for the impact of its activities upon its employees, customers, community and the environment. It is usually used in the context of voluntary improvement commitments and performance reporting. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honouring of a triple bottom line- People, Planet and Profit. CSR involves a commitment to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as well as the local community at large ((Dr. Clarence J. Dias, ‘Corporate Human Rights Accountability and the Human Right to Development: The Relevance and Role of Corporate Social Responsibility’ 4 NUJS L. Rev. 505 (2011).)).

This paper primarily endeavours to find whether above-mentioned concept of CSR is reflected in the Companies Act 2013. The first part of the paper focuses on the requirement of the mandatory CSR policies at the national level. In this part, the extent of responsibility of the states for the activities of corporations is also analysed and some changes have been suggested in this regard. The second part of this paper is on the provisions relating to CSR in the new Companies Act 2013 including its VII Schedule. It also examines whether the UN Global Compact principles are given due recognition in the provisions relating to CSR in the Companies Act. Final part deals with an analysis of Chhattisgarh Corporate Social Responsibility Policy, 2013. Its pros and cons and how it differs from the CSR objectives mentioned in the 2013 Act. This article ends with raising some concerns about the concept of CSR enshrined in the 2013 Act, and that if given proper attention can add new momentum towards the goal of achieving the objectives of CSR.

Inadequacy of State Responsibility: Requirement of mandatory CSR policies at the national level

As one author puts it, “a corporation can recognizably become involved in violations of human rights law either directly as a private actor; as an actor coloured by a connection with a state, state entity, or other public actor; or as a participant in a joint venture or complicitous relation with another human rights violator ((Jordan J. Paust, ‘Human Rights Responsibilities of Private Corporations’ 35 Vanderbilt Journal of Transnational Law 801 (2002).)).” In both international as well as national law, the states are responsible only for the acts of their organs and are generally not made responsible in case of private corporate wrongs. In order to make the state responsible, the legal system looks into whether the acts of the corporations were ‘on behalf of the state’ or ‘under the control of’ the state. However, in most of the cases the situation is different. The corporations are complicit in violating human rights along with the state or vice versa and it should have been a point to include the factor of complicity along with acts ‘on behalf of the state’ or ‘under the control of’ the state.

The Draft Articles on Responsibility of States for Internationally Wrongful Acts, 2001 ((Report of the International Law Commission on the work of its fifty-third session in 2001))attributes the conduct of any organ of the state to the act of state but an organ of the state has been defined to include any person or entity which has that status in accordance with the internal law of the State ((Article 4 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (2001).)). The 2001 Draft Articles has expanded the ambit of the term organs of the state under articles 5 and 8. According to Article 5, the acts of any organ, which is empowered by the law of that State to exercise elements of the governmental authority, shall be considered an act of the State under international law. The commentary to the Draft Articles state that “since corporate entities, although owned by and in that sense subject to the control of the State, are considered to be separate, prima facie their conduct in carrying out their activities is not attributable to the State unless they are exercising elements of governmental authority within the meaning of article 5”.

The major change should have been brought to article 8, which in its original form states thus:

“The conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact acting on the instructions or under the direction or control of, that State in carrying out the conduct.”

The acts of non-state actors such as TNCs in which the state becomes complicit are not given due attention in the above article. The Draft Articles on responsibility of States for internationally wrongful acts is incapable to fix responsibility on the states involved in human rights abuses carried out by the TNCs ((Daniele Amoroso, ‘Moving Towards Complicity as a Criterion of attribution of private conducts: Imputation to states of corporate abuses in the US Case Law’, 2011 LJIL 989)).

Thus, it is stated that where the state responsibility is highly inadequate to combat the activities of corporations and there is in fact none to be responsible for the activities of the corporation, it is better to have a concrete national policy on corporate responsibilities.

Corporate Social Responsibility under Companies Act 2013

The Companies Act, 2013 has ushered a wave of change by making far-reaching consequences on all companies in India. The talk of the nation, amongst all the new changes brought out by the new legislation, has been the incorporation of provisions relating to Corporate Social Responsibility. The mandate of CSR has been provided under Section 135 of the 2013 Act which ensures that in every financial year, a company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more spends at least two per cent of its average net profits made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy ((Section 135 of the Indian Companies Act, 2013: The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.)).

The trend that has been seen in India over the years is that most of the companies set up their establishments in an area which results in violating the environmental standards or forced displacement or disturbing the societal set up in that local area. Then they establish cancer research centres or other concerns in an entirely different area that qualify them as companies observing CSR practices. Tata group is one of the best examples. The instance in Singur (popularly known as Tata Nano Singur controversy), where they set up a car manufacturing unit violated several human rights and caused large-scale displacements. This was done without any regard to the land laws of the state. However, they are known to have undertaken many philanthropic activities and have established institutions of higher learning, promoted art and culture of the country and funded scientific research. POSCO steel plant in Odisha is another example, which boasts of initiating educational programmes and scholarships but has caused displacement of several inhabitants and environmental hazards in the local area ((Jaya Srivastava, ‘Social Movements, CSR and Industrial Growth: An Indian Experience, 11 The IUP Journal of Corporate Governance 60 (2012).)). The current Companies Act of 2013 has taken care of this situation by adding a proviso to section 135, which states that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

The Companies Act of 2013 has given due care to the interests of the community and environment and not just in business/profit affairs of the company. As per Section 166 of 2013 Act, the director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This is in tune with the provisions of similar legislation in UK. Section 172 of the UK Companies Act 2006 states that the director of a company must act in good faith to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to the impact of the company’s operations on the community and the environment ((Section 172 of the UK Companies Act, 2006: Duty to promote the success of the company: (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.)).

The amendments made to Schedule VII of the Companies Act, 2013 has in fact widened the scope of CSR activities ((In Schedule VII, for items (i) to (x) and the entries relating thereto, the following items and entries shall be substitutes, namely:-“(i) eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;(ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and differently abled and livelihood enhancements projects;(iii) promoting gender equality, empowering women, setting up homes, and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources, and maintaining quality of soil, air and water;(v) protection of national heritage, art and culture including restoration of buildings and sites for historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;(vi) measures for the benefit of armed forces veterans, war widows and their dependants;(vii) training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;(viii) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government; (x) rural development projects))and the much criticized clause (x) in Schedule VII before the amendment that stated “such other matters as may be prescribed” has been removed in the newly framed version. At the same time, the new amendment has made the list exhaustive and it has to be seen whether all the essential CSR activities have come under the schedule ((It has been mentioned in the Companies (Corporate Social Responsibility Policy) Rules 2014 that “Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act”, but it is silent as to what all the other activities could be)). It would have been better if the ten fundamental principles of UN Global Compact were given more attention in the VII Schedule and in the overall framework of the provisions relating to CSR in the Companies Act 2013.

UN Global Compact and the 2013 CSR mandate

The UN Global Compact was launched in July 2000 as a framework for the companies worldwide for responsible business practices. The UN Global Compact consists of principles set for the companies to follow in their activities in the areas of human rights, environment, labour standards and anti corruption. These principles enjoy universal consensus and has been derived from UDHR, ILO’s Declaration on Fundamental Principles and Rights at Work, Rio Declaration on Environment and Development and the United Nations Convention against Corruption ((Available at http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html last accessed on July 24, 2014 at 7:59 AM)). The UN Global Compact also ensures that the companies undertake due diligence to comply with its national laws and work to identify any violations of human rights and prevent it. It is doubtful whether Schedule VII encompasses all the human rights principles that were thought about in the Global Compact. Moreover it seems that the Companies Act of 2013 has given a lot more preference to CSR polices by remaining silent on ethical business practices or in other words called ‘responsible business practices’ ((Available at http://www.nfi.org.in/sites/default/files/nfi_files/Comments%20on%20draft%20CSR%20rules.pdf Last accessed on July 24, 2014 at 8:01 AM)). For example, the first principle of UN Global Compact states, “businesses should support and respect the protection of internationally proclaimed human rights.” This principle reiterates the fact that like the government, individuals and other organisations, companies also do have a responsibility in ensuring protection of human rights. By ensuring protection of human rights it should be understood that the business community should not infringe human rights. This has been stressed by the UN Human Rights Council that the corporate responsibility to respect human rights is a requirement of business everywhere ((Available at http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html Last accessed on July 24, 2014 at 8:11 AM)). This principle encompasses within its ambit promotion of rule of law, addressing consumer concerns, increase in worker production and retention and building good community relationships. Schedule VII only deals with the steps that the companies have to undertake towards CSR policies. Due regard has to be given to respect the human rights and not to violate them during set up of the company’s activities as well.  For example, the activities of the corporations such as POSCO in Odisha and Tata Nano in Singur have created massive violations of human rights, land and environmental laws ((Tata Nano project in Singur (West Bengal) had caused severe displacement of farmers and deprived many of land and homes due to the takeover of 997 acres of farmland by the State Government for Tata to build its factory.Though the law authorized the takeover only for public improvement projects, the project was in blatant violation of this)). It is better not to forget the corporate human right abuses that have taken place at the national and international level too. Activities of Barclay’s Bank, in South Africa, Wal-Mart in failing to discontinue dealers from committing labor misuses ((Doug Cassel, ‘Corporate Aiding and Abetting of Human Rights Violations: Confusion in the Courts’ (2007) 6 Nw. U. J. Int’l Hum. Rts. 304)), TNCs as well as Coca Cola in Sudan, the incident of release of toxic gas from Trafigura in Abidjan affecting more than a lakh of people, the environmental degradation and poisoning caused by operations of Rio Tinto in Papua New Guinea, Texaco in Ecuado, Shell in Ogoniland, Nigeria, Union Carbide in Bhopal, issues in Bano v. Union Carbide Corporation ((273 F.3d 120 (2d Cir 2001).)), Exxon’s Valdez oil-spills off Alaska are all examples of environment and human rights abuses by multinationals. Asking the multinationals to invest on CSR after violating human rights and environmental standards by not following ethical/responsible business practices seems to be unrewarding.

The VII Schedule has incorporated the labour and the environmental principles/activities in a comprehensive manner and this is something, which is commendable. On the other hand it seems to have missed the anti corruption principle of the UN Global Compact. Principle no.10 of the UN Global Compact states, “Businesses should work against corruption in all its forms, including extortion and bribery.”

However, the effectiveness of UN Global Compact has always been in question as they are purely voluntary commitments. The companies or the participants are required to communicate their progress in implementing the ten principles annually to all the stakeholders and if they don’t they will be listed as “non-communicating” on the website and the company will be delisted after the expiration of one year from the initial deadline. Though the company has to follow the Global Compact principles once it becomes a part of the commitment, the basic issue is whether a company voluntarily joins the commitment and strives to protect human rights and other related rights. It is true that the companies like Royal Dutch Shell, Novo Nordisk, and BP Amoco have publicly proclaimed their cooperation with the UN to safeguard human rights, but it is still to be seen whether they will be really following what they have proclaimed in the light of future events. If the facts alleged in the recent case of Esther Kiobel v. Royal Dutch Petroleum Co. ((133 S.Ct. 1659 (2013).))are assumed to be true, it can be concluded that nothing has changed much even after the advent of the UN Global Compact and that it is not a very effective step towards making companies follow responsible business practices.

The proviso to Section 135 clearly stipulates the requirement of specifying the reasons for not spending the required CSR amount but it is unclear about the penal consequences that the particular company need to face for not spending the amount towards CSR. The after effect of not mentioning the reasons for not spending the amount is also unclear from the said provisions. It is in this regard that the Chhattisgarh Corporate Social Responsibility Policy 2013 assumes significance.

Chhattisgarh Corporate Social Responsibility Policy 2013

Chhattisgarh Corporate Social Responsibility Policy 2013, published in the Gazette of Chhattisgarh on May 3, 2013, mandates that public and private companies with net profits in the previous year of less than Rs 500 crore will contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund, and those with net profits above Rs. 500 crore will contribute 2% of their annual profits towards CSR with a minimum threshold of Rs. 15 crore.

This 2013 state policy goes against the central legislation in many respects and may be held to be invalid as it is doubtful whether the state can assume such kind of power when the central legislation is in force. Moreover, the fact that the amount has to go to the CM’s community development fund may act as a hindrance for companies from earning the goodwill of the local area/community through developmental projects as part of CSR. Nevertheless, the state policy has to be appreciated for reasons manifold. Firstly, the cut off of a net profit of Rs. 500 crore for CSR initiatives fixed by Companies Act 2013 has been removed. As per this policy, even companies whose net profits in the previous year is less than Rs 500 crore have to contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund. This is one important aspect, which has been completely missed out in the Companies Act 2013.

The 2013 state policy also provides for punishment for non-compliance. According to the policy, industrial units that are obtaining facilities or grant from various departments of State of Chhattisgarh or according to the prevailing industrial policy will have to mandatorily deposit the money for CSR initiatives in the Chief Minister Community Development Fund. Non-compliance of this will result in taking back of grant or facilities that have been provided by the administration. The state government cannot be blamed for taking such a bold step in this regard, as many of the huge corporate houses like Jindal Steel Power Limited, JSW Steel Ltd, Bhushan Power & Steel, Vandana Group, DB Power Ltd etc are in Chhattisgarh.

One major criticism to the Chhattisgarh CSR policy would be that the amount deposited in the CM Community Development Fund could be used for many purposes other than CSR objectives and there are no adequate safeguards against the same. However, a perusal of Schedule VII of the Companies Act 2013 shows that one of the CSR activities stipulated under it is “contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women”. If the corporate can be asked to contribute to the PM’s National Relief Fund or any other Central Government, then requiring them to contribute to the CM’s fund should not provoke much criticism. It is also to be noted that as per the 2009 decision of the Central Information Commission in Shri A. K. Goel v. Prime Minister’s Office, ((Available at  http://indiankanoon.org/doc/1459130/ last accessed on July 25, 2014 at 01:07 AM))although the Prime Minister’s National Relief Fund can be treated as public authority, it cannot be treated as a government Department and for the same reason, information on both those making contribution to this fund and those receiving benefits from it is to be treated as personal information held in confidence by the Prime Minister’s National Relief Fund and therefore exempt from disclosure u/s 8(1) (j) of the Right to Information Act ((Section 8(1) (j) of the RTI Act: Exemption from disclosure of information. – Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen,— information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information)).

This policy may seem to be a compelling measure by the government on the companies and against the concept of CSR as envisaged under the Companies Act 2013 whereby corporate are entitled to perform welfare schemes in their neighbourhood for the benefit of the society. But, it should be admitted that the 2013 state policy has taken care of one major situation. CSR, if left entirely to corporates, will become an extremely distrustful activity in the future due to lack of adequate monitoring/verification by the state.

Conclusion

By incorporating the provisions relating to CSR and CSR reporting procedures, the new Companies Act of 2013 has in fact corrected a historic wrong of making CSR a matter of discretion of companies. It is certainly a new step towards transforming the voluntary CSR initiatives to binding principles but there is still a long way to go for achieving a strict compliance with the CSR policies. In the subsequent amendments, it is worthwhile if the following concerns are given adequate focus.

Main Concern: The definition of Corporate Social Responsibility in the present Indian scenario could be seen from the Companies (Corporate Social Responsibility Policy) Rules 2014 where it has been defined thus,

“Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act; or
(ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.”

Other concernsIt is true that the concept of CSR is not limited to the activities laid down under Schedule VII of the 2013 Act. However, keeping in mind the meaning and the essence of the concept of CSR (as mentioned in the introduction), it is quite doubtful whether the essence of CSR is reflected in the definition. Moreover, if the true meaning of CSR was embedded in the definition, then there is no reason why discrimination has been shown between companies whose net profit is above Rs. 500 crore and others for CSR initiatives. The essential elements of CSR as enunciated in the above definition which includes responsibility for the impact of its activities upon the company’s employees, customers, community and the environment; voluntary improvement commitments and performance reporting, the deliberate inclusion of public interest into corporate decision-making, honouring of a triple bottom line- People, Planet and Profit are equally applicable to all companies irrespective of their net profit or annual turnover. In the alternative, the 2013 legislation could have at least opted for a bottom down approach (employee-centered CSR approach) for companies with less net profits or annual turnover than top down approach mentioned for companies coming under the ambit of Section 135 ((For more information, See Walter R. Nord & Sally Riggs Fuller, ‘Increasing Corporate Social Responsibility Through an Employee-centered Approach’ 21 Employ Respons Rights J 279 (2009).)). The employee-centered approach is where CSR initiatives come from the part of the bottom level employees. The famous story of one of the largest fashion retailers, Nordstrom that refunded the customer’s money who tried to return a set of tires despite the fact that Nordstrom does not sell tires is a great example of high level of customer service and employee-centered CSR approach.

1)      The uncertainty when companies do not give preference to local area where it operates. Are we talking about a legal framework that does not completely prohibit the corporate/multinationals to disturb environmental safety, promote forced displacement and upset the societal set up in the local area where the company is situated but satisfies the mandate of CSR by setting up a cancer research institute or like establishments in an entirely different area?

2)      The after effects/sanctions meted out to those corporations who fail to comply with Section 135 of the 2013 Act are not clear despite the introduction of mandatory CSR

3)      It is yet to ascertain what would be the so called “social responsibilities” of companies whose net profits fall below Rs. 500 Crore or who do not satisfy the criteria laid down under Section 135(1) of the Companies Act 2013.

4)      The effectiveness of the CSR activities when it comes to its implementation due to lack of adequate verification/monitoring by the state.

5)      The reflection of UN Global Compact principles in the Schedule VII and generally in the CSR provisions in the 2013 legislation.

6)      The failure to give importance to the concept of ethical/responsible business practices in the scheme of the Act.

Analysis of Corporate Criminal Liability in India

Sibani Panda, Research Associate

A company can only act through human beings and a human being who commits an offence on account of or for the benefit of a company will be responsible for that offence himself. The importance of incorporation is that it makes the company itself liable in certain circumstances, as well as the human beings – Glanville Williams

Corporations are considered to be an integral part of the society. Besides the governmental agencies, the corporations are deemed to be the effective agents of action in our society.  But, corporations, as it is understood today, have not been same in the past. But over a period of time, the development of the society has had a direct influence on the structure and functions of the corporation. This had led to an ever increasing demand for the law to recognize the change and suit its applications ((Balakrishnan. K; “Corporate Criminal Liability – Evolution of the concept” (1998) Cochin University Law Review p.255)). Over the last few decades, lot of complexities has evolved in the corporate sector because of globalization and privatization of different kind of business entities all over the world. The word ‘Corporation’ has no strictly technical or legal meaning ((Stanley, Re [1906] 1 Ch. 131)). It may be described to imply an association of persons for some common object. The purposes for which people may associate themselves are multifarious and includes economic and non- economic objectives. But in common parlance, the word ‘corporation’ is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain. A corporation is an artificial entity that the law treats as having its own legal personality, separate from and independent of the persons who make up the corporation ((Salomon v. Salomon (1897) AC 22)). A corporation has an independent existence which is separate from the shareholders constituting it. The corporations are run by natural persons and these people’s actions can be criminal in nature and can sometimes even result in great economical as well as human loss to the society.

CRIMINAL LIABILITY: THE CONCEPT

Criminal Liability is only attached to those acts in which there is violation of Criminal Law ((Abhishek Anand, Holding Corporations Directly Responsible For Their Criminal Acts: An Argument, www.manupatra.com)). The basic rule of criminal liability revolves around the basic Latin maxim actus non facit reum, nisi mens sit rea which means in order to make a person or entity criminally liable, it is required to establish that an act or omission has been committed which is forbidden by law and it has been done with guilty mind. So every crime constitutes two elements ((Russell, W.O., Russell on Crime p.17-51 (J.W.C. Turner Ed., New Delhi; Universal Law Publishing Pvt., 2001).  )):

  • Actus reus: Actus reus connotes those result of human conduct which is forbidden by law and hence constitutes of Human action; result of conduct and act prohibited by law.
  • Mens rea. On the other hand, mens rea is generally considered as blame worthy mental condition.

CONCEPT OF CORPORATE CRIMINAL LIABILITY:

Corporations play a significant role in creating and regulating the business activities and also in managing the lives of the common people, as a result of which, the modern criminal law systems overlooked the possibility of holding the corporations criminally liable for the commission of a criminal offence.

The doctrine of corporate criminal liability turned from its infancy to almost a prevailing rule ((Thiyagarajan, T. Sivananthan; “Corporate Criminality-concept”, available at: http://www.manupatra.com/Articles/artlist.asp?s=Corporate/Commercial)). It is very difficult to define corporate criminal liability in the present day scenario as it covers wide range of offences. However for understanding its purpose, it can be defined as an illegal act of omission or commission, punishable by criminal sanction committed by an individual or group of individuals in the course of their occupation ((Williams, K.S.; “Text Book on Criminology”, Universal Law Publishing Pvt., New Delhi, 2001, p.64)).  It can be even defined as socially injurious acts committed in course of occupations by people who are managing the affairs of the company to further their business interest ((Siegal, L.J.; “Criminology” , Wadsworth/ Thomson Learning, London, 2000, pp.398-99)). Corporate criminal liability also represents a kind of instrumentalities through which the trust of the people continues to be betrayed by persons in positions of responsibility, authority and power in the business sector. Corporate crime has been defined as “the conduct of a corporation or of employees acting on behalf of a corporation, which is prescribed and punishable by law ((Braithwaite, John ; Corporate Crime in the Pharmaceutical Industry, 1st Edition, Routledge and Kegan Paul, London, 1984, p.6.)).” Thus the “Corporate criminal Liability” refers to the imposition of criminal liability on either the corporation or its employees and agents and it is also referred to as white-collar crime.

ORIGIN OF CORPORATE CRIMINAL LIABILITY

During the early sixteenth and seventeenth centuries, the general notion was that corporations could not be held criminally liable. In the early 1700s, corporate criminal liability faced four obstacles:

  • First obstacle was attributing acts to a juristic fiction, the corporation. During Eighteenth-century, courts and legal thinkers approached corporate liability with an obsessive focus on theories of corporate personality; a more pragmatic approach was not developed until the twentieth century.
  • The second obstacle was that legal thinkers did not believe corporations could possess the moral blameworthiness necessary to commit crimes of intent.
  • The third obstacle was the ultra vires doctrine, under which the courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters.
  • The fourth obstacle was court’s literal understanding of criminal procedure; for e.g. the Judges required the accused to be brought physically before the court ((V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 Harv. L. Rev. 1477; Beck & O’Brien, Corporate Criminal Liability, 37 American Criminal Law Review 261; Reinier H. Kraakman, Corporate Liability Strategies and the Costs of Legal Controls, 93 Yale L.J. 857, 857-58 (1984).)).

In the modern era, the activities of the corporations has had a tremendous impact on the society and it has also helped in the development of the society to a large extent  but at times, the activities of the corporation has also been proved disastrous to the society which then falls under the category of corporate crimes. Despite those disastrous activities of the corporations, the law was not willing to impose criminal liability upon corporations because ((Zee Tele films Ltd. v. Sahara India Co. Corporation Ltd., 2001 (3) Recent Criminal Reports (Criminal) 292; Motorola Inc. v. UOI, 2004 Cri LJ 1576)):

  • Corporations cannot have the mens rea or the guilty mind to commit an offence;
  • Corporations cannot be imprisoned.

Even the common law did not impose criminal liability on corporations because it was based on the belief that a corporation lacked moral blameworthiness and the requisite mens rea, which is an essential element of a crime. Further, the thought that was prevalent was that a corporate has ‘no soul to damn and no body to kick’. But from the early 20th century onwards, the importance of the criminal liability of the corporation was recognized by various courts.

THEORIES OF CORPORATE CRIMINAL LIABILITY

  • Theory of Vicarious Liability – The doctrine of vicarious liability recognizes that a person may be bound to answer for the acts of another. Similarly in the case of corporations, the company may be liable for the acts of its employees, agents, or any person for whom it is responsible. The traditional theory of vicarious liability holds the master liable for the acts of the servant in the course of the master’s business without proof of any personal fault on the part of the master.
  • Identification theory– In this theory, the corporations are held criminally liable for true crimes and regulatory offences. This theory recognizes that the acts and state of mind of certain senior officers in a corporation are the directing minds of the corporation and thus deemed to be the acts and state of mind of the corporation itself. The corporation is considered to be directly liable under this theory.
  • Aggregation Theory- – Under the aggregation theory, the corporation aggregates the composite knowledge of different officers in order to determine liability. The company aggregates all the acts and mental elements of the important or relevant persons within the company to establish whether in toto they would amount to a crime if they had all been committed by one person.180 According to Celia Wells, aggregation of employees’ knowledge means that corporate culpability does not have to be contingent on one individual employee’s satisfying the relevant culpability criterion ((Celia Wells, Corporations and Criminal Responsibility, 2nd ed. (Oxford: Oxford University Press, 2001) p. 156.)).

POSITION OF CORPORATE CRIMINAL LIABLITY IN INDIA:

Until recently, courts in India were hesitant to attribute criminal liability to a company for an offence that required a criminal intent and they were of the opinion that they could not prosecute companies for offences that entailed a mandatory sentence of imprisonment because the corporations could not be criminally prosecuted for offenses requiring mens rea as they could not possess the requisite mens rea.

In A. K. Khosla v. S. Venkatesan ((A. K. Khosla v. S. Venkatesan  (1992) Cr.L.J. 1448)), two corporations were charged for committing fraud under the Indian Penal Code. The Magistrate issued orders against the corporations and the Court observed that in order to prosecute corporate bodies, there were two pre-requisites, the first being that of mens rea and the other being the ability to impose the mandatory sentence of imprisonment. A corporate body could not be said to have the necessary mens rea , nor can it be sentenced to imprisonment as it has no physical body.

In Oswal Vanaspati & Allied Industries v. State of U.P. ((1993 1 Comp LJ 172)), the Full Bench of the Allahabad High Court held that a company being a juristic person cannot obviously be sentenced to imprisonment as it cannot suffer imprisonment.

In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd ((2004 Cri LJ 1576))., the court dismissed a complaint which was filed against Zee Tele films under Section 500 of the IPC. In this case, it was alleged that Zee had telecasted a program which was based on falsehood and thereby defamed Sahara India. The court held that mens rea was one of the essential elements of the offense of criminal defamation and that a company could not have the requisite mens rea.

In Motorola Inc. v. Union of India ((Motorola Inc. v. Union of India,(2004) Cri.L.J. 1576)), the Bombay High Court quashed a proceeding against a corporation for alleged cheating and the court concluded that it was impossible for a corporation to form the requisite mens rea, which was the essential ingredient of the offense. Thus, the corporation could not be prosecuted for cheating under section 420 of the IPC.

In the case of The Assistant Commissioner, Assessment-II, Bangalore & Ors.  v. Velliappa Textiles ((The Assistant Commissioner, Assessment-II, Bangalore & Ors.  V. Velliappa Textiles, (2004) 1 Comp. L.J. 21)), a private company was prosecuted for violation of certain sections under the Income Tax Act. Sections 276-C and 277 of the Income Tax Act provided for a sentence of imprisonment and a fine in the event of a violation. The Supreme Court held that the respondent company could not be prosecuted for offenses under certain sections of the Income Tax Act because each of these sections required the imposition of a mandatory term of imprisonment coupled with a fine and the court could not only impose fine on the corporation. After strict interpretation, the Court held that a corporation did not have a physical body to be imprisoned and therefore could not be sentenced to imprisonment. The Court also noted that while interpreting a penal statute, if more than one view is possible, the court is obliged to lean in favor of the construction that exempts an accused from penalty rather than the one that imposes the penalty.

In MV Javali v. Mahajan Borewell & Co and Ors ((AIR 1997 SC 3964))where the Supreme Court 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 then fine will be the only punishment.

Thus the Indian courts never felt about inclusion of company on certain criminal liability.

The legal difficulty arising out of the above situation was noticed by the Law Commission and in the 41st Report of Law commission of India, the Law Commission suggested amendment to Section 62 of the Indian Penal Code by adding the following lines:

  • “In every case in which the offence is only punishable with imprisonment or with imprisonment and fine and the offender is a company or other body corporate or an association of individuals, it shall be competent to the court to sentence such offender to fine only.”
  •  In every case in which the offense is punishable with imprisonment and any other punishment not being fine and the offender is a corporation, it shall be competent to the court to sentence such offender to fine.
  •  In this section, “corporation” means an incorporated company or other body corporate, and includes a firm and other association of individuals.

But this bill prepared on the basis of the recommendations of the law commission lapsed and it did not become law. However few of these recommendations were accepted by parliament and by suitable amendment some of the provisions in the taxation statutes were amended. The Law Commission has tried consistently to find a formula which would solve the problem of fixing appropriate punishment for the Corporations which commit offences; this has been done with a view to punish a corporation where mandatory minimum punishment is both punishment and fine, in such a case it needs to be fixed as to how the law courts would advance if this question comes up before them.

But the view of the courts on corporate criminal liability was changed in a landmark case of Standard Chartered Bank and Ors. v. Directorate of Enforcement (([2005] 4 SCC 530)). In this case, Standard Chartered Bank was prosecuted for the alleged violation of certain provisions of the Foreign Exchange Regulation Act, 1973 and the Supreme Court did not go by the literal and strict interpretation rule required to be done for the penal statutes and held that the corporation could be prosecuted and punished with fines, regardless of the mandatory punishment required under the respective statute. The Court observed that all the penal statutes are to be strictly construed in the sense that the Court must see that the thing charged as an offence is within the plain meaning of the words used and must not strain the words on any notion that there has been a slip that the thing is so clearly within the mischief that it must have been intended to be included and would have included if thought of ((Tolaram Relumal and Anr. v. The State of Bombay MANU/SC/0057/1954)).

After the decision of the Standard chartered bank case, the courts were generally of the view that the companies won’t be exempted from prosecution merely because the prosecution is in respect of offences for which punishment prescribed is a mandatory imprisonment.

In Iridium India Telecom Ltd. v. Motorola Incorporated and Ors ((AIR 2011 SC 20)), the Hon’ble Supreme court held that a corporation is virtually in the same position as any individual and may be convicted under common law as well as statutory offences including those requiring mens rea. The criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such circumstances, it would be necessary to ascertain that the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons. In this case, it was also held that the corporations can no longer claim immunity from criminal prosecution on the grounds that they are incapable of possessing the necessary mens rea for the commission of criminal offences.

In CBI v. M/s Blue-Sky Tie-up Ltd and Ors ((CBI v. M/s Blue-Sky Tie-up Ltd and Ors ,Crl. Appeal No(s). 950 of 2004)), an appeal arose from criminal application which was quashed by the Calcutta High Court. The Appellant filed criminal applications against the respondents for committing criminal offences under the provisions of the Indian Penal Code and under Section 13(2) read with 13(1)(c) and (d) of the Prevention of Corruption Act, 1988. Pursuant to that, the Respondents filed applications under Section 482 of the Criminal Procedure Code for quashing of the said proceedings. The Calcutta HC quashed the proceedings against the Respondent No. 1 on the false premise that the company being a body corporate cannot be prosecuted, but the Supreme Court held that the companies are liable to be prosecuted for criminal offences and fines may be imposed on the companies.

The criminal intent of the ‘alter ego’ of the company or corporate body, i.e. the person or group of people that guide the business of the company would be imputed to the corporation. It is now an established legal position in India that a corporation can be convicted of offences that require possession of a criminal intent, and that corporation cannot escape liability for a criminal offence, merely because the punishment prescribed is ‘imprisonment and fine’.

But it is always a controversial issue that Corporations cannot be sentenced to imprisonment and since, there is no explicit provision relating to it, the Supreme court  have held in various cases that it is better to impose fine upon the corporation even in the cases where there is a punishment for imprisonment. The imposition of fines may be made in four different ways as provided in the IPC. It is the sole punishment for certain offences and the limit of maximum fine has been laid down; in certain cases, it is an alternative punishment but the amount is limited; in certain offences, it is imperative to impose fine in addition to some other punishment and in some it is obligatory to impose fine but no pecuniary limit is laid down ((Angira Singhvi ,”Corporate Crime and Sentencing in India: Required Amendments in Law”, International Journal of Criminal Justice Sciences ,Vol 1 Issue.2 July 2006)). Section 357, Cr PC, empowers a Court imposing a punishment of fine or a sentence of which fine forms a part, to order payment of compensation, out of the fine recovered, to a person for any loss or injury caused to him by the offence.

Even the environmental degradation arising out of industrial pollution in recent years has become a positive danger to social security. Thus, Legal provisions have been incorporated in the Indian Penal Code ((Indian Penal Code, 1860 S. 277. Fouling water of public spring or reservoir: Whoever voluntarily corrupts or fouls the water of any public spring or reservoir, so as to render it less fit for the purpose for which it is ordinarily used, shall be punished with imprisonment of either description for a term which may extend to three months, or with fine which may extend to five hundred rupees, or with both.)), to punish industrial and business organizations which pose danger to public life by polluting water ((Water Pollution (Amendment) Act,1978)), and District Magistrate can initiate proceedings against them under Section 133 of the code of Criminal Procedure, 1973.

Section 16 of Environment (Protection) Act, 1986 and Section 47(2) of the Water (Prevention and Control Pollution) Act, 1974 also explicitly lays down provision for the offences by companies. It states companies can be prosecuted under certain circumstances and thus, reflects the concept of vicarious criminal liability.

Corporate liability may appear incompatible with the aim of deterrence because a corporation is a fictional legal entity and thus cannot itself be “deterred.” In reality, the law aims to deter the unlawful acts or omissions of a corporation’s agents. To defend corporate liability in deterrence terms, one must show that it deters corporate managers or employees better than does direct individual liability ((Lewis A. Kornhauser , An Economic Analysis of the Choice Between Enterprise and Personal Liability for Accidents, 70 CAL. L. REV. 1345 passim (1982).)).

CONCLUSION:

At one point of time, the concept of a separate legal personality of a corporation was exploited by individuals to evade personal liability. But now it is well established that a corporation cannot escape liability for offences simply on the basis that they have no body or soul and cannot possess any mental state. The statutes in India are not in pace with these developments and they do not make corporations criminally liable and even if they do so, the statutes impose no other punishments except for fines. The laws relating to corporate criminal liability in India are vastly insufficient. The legislature needs to be active in this regard and form certain concrete laws which would ensure that the corporations do not go unpunished and a better social order needs to be established. Certain Provisions relating to procedural law also needs to be created and modified so that the corporations can be adequately dealt with. It is therefore recommended that amendments should be carried out by the legislature to avoid the judiciary from defining the law and make certain provisions relating to procedural laws so that the corporations can be adequately dealt with and the courts are also required to make the statutes fit for strict interpretation by providing for infliction of criminal liability on the corporations as also providing for various kinds of punishments apart from fines only.