Vicarious the director behind the act. Therefore, it

Vicarious liability as a concept
of law is a traditional doctrine of tort law relating to the liability of
employers. An employer is liable for the torts committed by his employee within
the course of his employment by virtue of the agent-principal relationship. Since
the employee acts on behalf of or on instructions of the director of the
company, it is the intention of the director behind the act. Therefore, it is
only fair to hold him/her for the consequences. It did not take long for the
principle of vicariously liability to be extended beyond tort law and into criminal
law (specifically white-collar crime) and become an important site for the
imposition of vicarious liability.

The concept developed in Rylands v. Fletcher1,
where Fletcher employed contractors to build
a reservoir, playing no active role in its construction. When the contractors
discovered a series of old coal shafts improperly filled with debris, but
ignored the hazards and continued to work rather than properly blocking them
up. When the reservoir burst and flooded a neighbouring mine, run by Rylands,
causing £937 worth of damage, Fletcher was found liable for acts of the
contractor.

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Criminal liability for Indian companies

Recently, the Supreme Court in Iridium
India Telecom Ltd. v Motorola Inc. considered the issue of a
company being criminally responsible for the actions of its employees. In Iridium,
Motorola sold a technology product to Iridium that was accompanied
by assertions and promises by Motorola that allegedly turned out to be false. Iridium
brought a case of cheating against Motorola. The case was brought not
against Motorola’s employees but against Motorola itself. Under the provisions
of the Indian Penal Code, cheating requires an intention to deceive.

Motorola argued that a corporate
body, being an artificial person, is not capable of a mental state and
therefore cannot be held criminally liable for offences such as cheating.
Motorola’s arguments were rejected by the Supreme Court after it considered the
modern approach to the problem of corporate criminal liability in the English
courts. Of particular relevance to the discussion in this essay is the Supreme
Court’s reference to the House of Lords decision in Tesco Supermarkets Ltd. v
Nattrass2 where it was held that, in the absence of a specific statutory or
common law exception, the principle of corporate criminal liability was not
based on the vicarious liability of an employer for the acts of its agents and
employees. Instead it was based on the concept of attribution. A company cannot
think and act on its own as it is a juristic personality. It thinks and acts
through certain of its employees. In other words, the mental states and actions
of its employees are attributed to the company. This is a legal fiction but a
necessary legal fiction in order for the separate legal personality of the
company to sustain itself over a period of time. Otherwise, the company would
not be able to sign contracts, acquire property, negotiate with business partners,
sue and be sued and make public disclosures and statements. It follows from
Tesco Supermarkets that corporate criminal liability is not a species of
vicarious liability but is a species of attribution of natural actions and
states of minds to artificial entities

The two-prong test: In-charge & Responsibility

The special vicarious liability
provisions were in play in K.K. Ahuja v
V.K. Vora2,
a Supreme Court decision concerning dishonour of a cheque due to inadequacy of
funds. Herein, Mr. Ahuja, the Deputy General Manager of the company, was
prosecuted under the Negotiable Instruments Act, because he was said to be ‘in
charge of, and responsible to the company for the affairs of the company.’ The
Supreme Court went through the two prongs:
in charge of and responsible to of
the corporate officer special vicarious liability. By the in-charge aspect, the
court looked at the factual aspect of the case and by the responsible aspect,
the legal aspect of the case was considered.

Under the Companies Act, the
corporate officers considered as responsible to the company for the conduct of
the business of the company are its managing director, whole time directors,
manager and secretary. So, to attribute vicarious liability, the prosecution
should prove both the prongs, i.e. the accused must both be in-charge of the
affairs of the company and should have significant control over and a direct
nexus with the wrong committed.  Regarding the factual prong of the test, the
Supreme Court stated that a person would be in charge of the business of the
company if the person is in overall control of the day to day business of the
company. Apart from the official title of the director, his powers and working
of the company should also be looked at. 
Since the accused herein wasn’t even the person in-charge, he couldn’t
be held criminally liable.

Liability on the basis of a two-way attribution

As per the
concept of corporate veil, the actions and the mental states of the companies’
directors are deemed to be the actions and the mental states of the companies.
When the corporate veil is lifted, the directors of the company may be
attributed with criminal consequences of the act of the company (through its
employees). In Sunil Bharti Mittal v Central Bureau of Investigation,3
the telecommunication license
process came under scrutiny for certain irregularities (related to bribery of
public officials) as a result of which a criminal investigation was launched
into the actions of Bharti Cellular Ltd. (BCL). These were attributed to
Sunil Bharti Mittal, its Chairman cum Managing Director, and made him an
accused in the proceedings.  The Apex
Court refused to hold Mr. Mittal criminally liable without statutory backing.

However,
in Iridium India Telecom Ltd. v Motorola Inc4. found a company being
criminally responsible for the actions of its employees
in a diametrically opposite decision. The court found that merely because a
company can’t be sentenced to imprisonment, it doesn’t get a blanket immunity
from criminal prosecution. The corporate bodies undertake a series of
activities that seriously life, liberty and property of citizens. In such
cases, the court can impose punishment by way of fine which can be enforced
against the juristic person. Relying on the organic theory adopted by the House
of Lords decision in Tesco Supermarkets
Ltd. v Nattrass 5
where it was held that, in the absence of a specific statutory or common law
exception, the principle of corporate criminal liability was not based on the
vicarious liability of an employer for the acts of its agents and employees.
Instead it was based on the concept of attribution. A company cannot think and
act on its own as it is a juristic personality. It thinks and acts through
certain of its employees. In other words, the mental states and actions of its
employees are attributed to the company. This is a legal fiction but a
necessary legal fiction in order for the separate legal personality of the
company to sustain itself over a period of time. Otherwise, the company would
not be able to sign contracts, acquire property, negotiate with business
partners, sue and be sued and make public disclosures and statements. It
follows from Tesco Supermarkets that corporate criminal liability is not a
species of vicarious liability but is a species of attribution of natural
actions and states of minds to artificial entities.

 

primary liability v. vicarious LIABILITY: the scenario in united states of America

In
the United States, the courts adopted a stricter view towards persons in charge
of companies that commit offences. In United States v Park6,
the US federal government upon detecting a rodent infestation in some of
Acme’s warehouses warned Mr. Park of potential legal liability arising thereof.  When the problem continued, the federal
government sued both Acme and Mr. Park for trading in adulterated food. The
U.S. Supreme Court stated that a person who has a responsible relationship to
a corporate activity that leads to criminal liability is also criminally liable.
When the corporate officer was in such state of affairs that the said wrong was
directly within his control knowledge, a statutory offence was converted,
through prosecutorial zeal and judicial interpretation, into an offence similar
to criminal negligence.

One
way to evade such liability the Supreme Court itself stated, was to affirmatively
prove to the court that the responsible officer was powerless to prevent
the commission of the crime. That a person had to prove an impossibility in
order to escape from liability demonstrates how the Park doctrine in
practice is a responsible position test.

 

Is there a milder version of vicarious criminal liability?

The United Kingdom follows what,
at least on the face of it, might be considered as a more liberal version of
vicarious criminal liability, a sample can be seen in the Bribery Act, 2010. Here,
a corporate officer is liable for an offence committed by his company if he or
she is a senior officer of the company and the offence committed with consent
or connivance of the senior officer.

The test of consent or connivance
has been discussed in the House of Lords decision in R v Chargot Ltd.7.
 This case involved death of an employee
while operating a truck on a farm owned by the defendant company. The company and
its director were subject to criminal prosecution for violation of the relevant
legislation. The relevant legislation contained the vicarious liability
provisions relating to ‘consent or connivance’ mentioned above. The House of
Lords established that the purpose of the Bribery Act and the health and safety
legislations was for the directors to prevent a certain crisis, or achieve
certain outcome, thus, found the corporate officer to have a supervisory
function over the state of affairs that led to the offence, that the corporate
officer had consented to or connived in the commission of the offence.
Therefore, it follows from Chargot, that
whenever a corporate offence is proven, the inference that the corporate
offence was done with the consent or connivance of its directors would be, in
practice, a foregone conclusion. This makes the English test as harsh as its
American and Indian counterparts.

 

Vicarious criminal liability under the Companies Act, 2013

The issue of vicarious criminal
risk for the directors (executives) and other key staff of organizations takes
a to some degree disturbing turn with regards to the arrangements of the
Companies Act, 2013 (The Companies Act). The Companies Act approaches the issue
of criminal obligation in a widely inclusive manner when contrasted with the
statutes saw above. Much like the other enactment worried about financial
wrongdoing, the Companies Act likewise criminalizes different sorts of
exercises throughout the monetary existence of the organization, primary among
them being false exercises carried out by the organization (through its
workers). For all offenses conferred by the organization, the Companies Act
forces exceptional vicarious obligation on officers (of the organization) who
are ‘in default’. Section 2(60) of the Companies Act determined the people who
might be considered as officers who seem to be ‘in default’. The details nearly
take after the portrayals of the staff considered in the previous enactment
(Companies Act, 1956) as people mindful to the organization for the direct of
the matter of the organization.

Four classifications of faculty
come surprisingly close to officer ‘in default’.

1.    
The main class incorporates what the Companies
Act supportively terms as ‘Key Managerial Personnel’ (KMP). KMP incorporates
the overseeing chief, entire time executives, Chief Executive Officers (CEO),
Chief Financial Officers (CFO) and Company Secretaries (CS).

2.    
The second class involves those work force who,
while answering to the KMP, are in charge of keeping up, documenting or
disseminating records and effectively take an interest in, intentionally allow
or purposely neglect to find a way to keep any default.

3.    
The third classification is remarkably wide in
its abundancy. It covers any individual who is in charge of ‘keeping up records
and records’. It positively resembles the consistence officers of banks would
be secured, for instance. Arrangements in regards to the third class can be
appeared differently in relation to practically identical arrangements in area
5(f) of the enactment, the Companies Act, 1956, which made officers of the
organization at risk under comparative conditions gave two conditions were
satisfied. The Board should have given the officer the significant obligation,
for instance, the duty of documenting certain records for administrative
purposes. Further, the officer being referred to more likely than not agreed to
going up against such an obligation. On its substance, the antecedent enactment
looks somewhat less burdensome as it incorporates the assent prerequisite. In
any case, by and by such an assent would likely be gotten from the officers
being referred to. In one sense the antecedent authoritative arrangements were
more cumbersome as they didn’t require, at any rate on its substance, a
specific mental state or governmental policy regarding minorities in society by
the dependable officer. Then again, the present form requires the dependable
executive to approve, effectively take an interest, intentionally allow or
purposely come up short concerning his obligations.

4.    
The fourth class is worried about executives who
knew about the contradictions (that prompted or constitute the offense
submitted by the organization) either on the grounds that they took an interest
(without questioning) in the board procedures that prompted such negations or
they were in receipt of such board procedures, regardless of whether the case
they were absent amid these board procedures. Since entire time executives are
as of now secured under the principal class, this classification, on its
substance, may be understood as applying to autonomous chiefs.

The potential risk required here
seems, by all accounts, to be disproportional to the obligations and elements
of free chiefs. In any case, the Companies Act mitigates the potential risk of
free chiefs by giving that two conditions need to join for an autonomous
executive to be held obligated for offenses submitted by his organization. To
begin with, he should know about the offense inferable through board procedures.
Second, (take note of this is an extra necessity) the offense more likely than
not been submitted either with his assent or in view of his absence of
perseverance. Given that the overseeing executive and entire time chiefs are
secured under the principal classification and autonomous executives have an
alternate obligation administration in light of an express arrangement in the
Companies Act, who precisely is the fourth class expected to cover? Some
direction on this issue can be found in Section 149(6) of the Companies Act,
which characterizes a free executive. An autonomous chief is any executive
other than the overseeing executive, entire time chief or a chosen one chief of
the organization. It takes after from this definition that a candidate chief
isn’t a free executive. Subsequently chosen one executives are the sort of
chiefs that are at risk to be incorporated into the fourth class. The fifth
class comprises of individuals who don’t run the organization on an everyday
premise except are rather connected with the issue or the exchange of an
organization’s offers. Section 2(60) states that concerning any offenses
related with the issue or exchange of the offers of the organization, the
officers in default would be considered to be the offer exchange specialists,
enlistment centres and the vendor investors to the issue or exchange of the
offers. A criminal arraignment may bring about huge and correctional money
related harms for the officers of an organization. The ancestor enactment
limited the capacity of organizations to repay their officers against the
malicious money related results of a criminal indictment. Segment 201 of the
Companies Act 1956 voided any endeavour by an organization (either in its
articles or through a different concurrence with the concerned officer) to
reimburse its officers for any lawful obligation emerging out of criminal
procedures. However, there was a constrained special case accommodated by a
similar segment under which an organization could reimbursement an officer for
the legitimate costs caused by him in defending criminal procedures wherein he
was acquitted. There is no arrangement practically identical to Section 201 in
the present Companies Act offering ascend to the theory that executives and
officers under the current corporate administration can profit repayment for
any monetary risk emerging out of criminal procedures.

Special vicarious criminal liability under the
Prevention of Corruption Bill, 2013- 254th law commission report

So far, the POCA has been used to
punish bribe takers and not bribe givers however, through the Prevention of
Corruption Bill, 2013 (POCA Bill), certain amendments to POCA in order to make
bribe givers including corporates punishable have been introduced. A
‘commercial organisation’8 is
guilty of an offence under the POCA Bill if a person ‘associated’9
with the commercial organisation bribes a public official.  This is a very wide definition and would
cover persons who would be employees of the commercial organisation. The POCA
Bill was referred to the Indian Law Commission which expressed some
reservations regarding this amplitude of the vicarious liability provisions.

The commission was particularly
concerned about the impact of Section 10 of the POCA Bill that imposed special
vicarious criminal liability on the persons in charge of and responsible to the
company. Its effect would have been that if an employee (P) of a company (C),
sitting in Bangalore, bribes a local official (R) to get its clearance on time,
then Section 10 will operate to deem every single person in-charge of, or
responsible to for the act of bribery. Thus, every Director on the Board of
Directors have the burden upon them to prove they had no knowledge or had
exercised due diligence. The situation could be even worse if for instance, P
had the clearance of one of the sitting directors to bribe R, because of which
every other director would be faced with the difficult task of discharging
their high burden of proof. There are two interesting aspects to the Commissions’
concerns about the absurdity of vicarious criminal liability provisions. First,
the Commission laid great stress on the POCA Bill’s provisions ability to make
innocent directors liable for the crimes of guilty directors.

But, in the aftermath of the Satyam scandal10,
the issue of collective responsibility of directors has gained attention. One
of the reasons for the Satyam scandal was that the directors on the Satyam
board didn’t voice their concerns while their fellow directors were about to
commit a major accounting fraud. Thus, POCA Bill can be justified since under
it directors have a responsibility to each other in taking positive steps
towards avoiding corporate misfeasance. However, in order to fix this
responsibility, there is no need to rely on the special vicarious liability
provisions. The provisions that make corporate officers liable if they consent
or connive in the commission of corporate offences or are negligent in
performing their duties are sufficient to address the corporate governance
concerns arising out of the Satyam scam.

1  1868 UKHL 1

 

2 (2009) 10 SCC 48 

3 AIR
2015 SC 923

4 Supra Note 5

5 1972
AC 153

6 United States v. Park, 421 U.S. 658 (1975)

7 2008
UKHL 73.

8 A
commercial organisation has been defined widely in section 9 (3)(a) of the POCA
Bill to include companies (Indian and foreign), partnerships (Indian and
foreign)

9 According
to Section 9(3)(c) of the POCA Bill, a person is associated with a commercial
organisation if the person performs services for an on behalf of the commercial
organisation

10 Venture Global Engineering v. Satyam Computer Services Ltd.,
2008 (1) CTC 348 (SC)