Friday, November 19, 2010

Corporate Criminal Liability: The Iridium/Motorola Case

The judgment of the Supreme Court in Iridium India Telecom Ltd. v. Motorola Inc. is now available on JUDIS (date: 20 October 2010).

M.J. Antony has a summary and analysis of the case in the Business Standard:
The question of punishing a corporation came up recently in the Supreme Court in a criminal case filed by Iridium India Telecom Ltd against Motorola Incorporated. The allegations were cheating and criminal conspiracy. The magistrate in Pune started proceedings against Motorola. It moved the Bombay High Court against the prosecution. The high court quashed the proceedings giving several reasons, one of them being that a corporation was incapable of committing the offence of cheating as it has no mind. According to the high court, although a company can be a victim of deception, it cannot be the perpetrator of deception. Only a natural person is capable of having a guilty mind to commit an offence.

However, the Supreme Court set aside the high court’s finding and asserted that a corporate body can be prosecuted for cheating and conspiracy under the Indian Penal Code. The offences for which companies can be criminally prosecuted are not limited only to the specific provisions made in the Income Tax Act, the Essential Commodities Act, and the Prevention of Food Adulteration Act. Several other statutes also make a company liable for prosecution, conviction and sentence.

The court allowed the prosecution to go on, stating that companies and corporate houses can no longer claim immunity from criminal prosecution on the ground that they are incapable of possessing the necessary mens rea for the commission of criminal offences. The legal position in England and the United States has now crystallised to leave no manner of doubt that a corporation would be liable for crimes of intent. This is the position all over the world where rule of law supreme.
In its ruling, the Supreme Court reiterated the legal position on two counts: (i) the scope of jurisdiction of the High Court in quashing criminal proceedings under Section 482 of the Criminal Procedure Code; and (ii) the fact that companies can be prosecuted for offences involving mens rea. On the second count, the Supreme Court merely reiterated the principles laid down in the previous case of Standard Chartered Bank v. Directorate of Enforcement [(2005) 4 SCC 405].

The Supreme Court, however, did not have the opportunity to rule on certain other important aspects of the case, which relate to the liability of a company for misstatements or non-disclosures in an information memorandum issued in connection with an offering of securities. That would be the subject-matter of the prosecution that would continue now that the Supreme Court has flashed the green signal.

The criminal complaint pertains to a charge of cheating under section 420 read with section 120B (conspiracy) under the Indian Penal Code (I.P.C.). The allegation is that Motorala Inc., the respondent in the case and the primary contractor for the Iridium system/project, floated a private placement memorandum (PPM) to obtain funds/investments to finance the Iridium project. The project was “represented as being the world’s first commercial system designed to provide global digital hand held telephone data … and it was intended to be a wireless communication system through a constellation of 66 satellites in low orbit to provide digital service to mobile phones and other subscriber equipment locally.” Several financial institutions invested in the project based on the information contained in the PPM. However, it is alleged that the representations were false and that the project turned out to the commercially unviable resulting in significant loss to the investors.

The facts of the case provide the basis for potentially interesting legal issues.

First, it must be noted that the complaint has been brought under the I.P.C. (being the general criminal law) and not under any specific corporate or securities legislation. That is understandable because the PPM did not pertain to a “public” offering of shares, and hence the relevant prospectus provisions (and concomitant liability issues therein) are not attracted. The transaction appears to be in the nature of a private placement and hence governed contractually rather than as a matter of public securities laws. Whether or not the use of general offences of cheating and conspiracy to offerings of corporate securities would enure to the benefit of the complainant or the respondent remains to be seen.

Second, the issuer has placed reliance on the extensive nature of risk factors and disclaimers in the PPM as a defence against criminal liability. Although the High Court was persuaded by the existence of such cautionary language in the PPM, the Supreme Court did not place much importance to risk factors, at least at the present stage of deciding whether to allow the prosecution to continue. The validity of, and weightage given to, disclaimers and risk factors in a PPM is sure to be tested.

Third, it would be necessary to consider the question whether sophisticated investors such as financial institutions would be held to a higher standard while considering whether there had been “deception” practised by the issuer company.

Finally, the court would have to draw a clear line on the facts as to whether there was deception and inducement “fraudulently and dishonestly” on the part of the issuer company, or whether it was merely a case of bad business judgment. Although the distinction may be fairly stark as a matter of law, it may not always be quite as clear on a given set of facts and circumstances.

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