Monday, January 12, 2015

Supreme Court on Corporate Officers’ Criminal Liability

The Supreme Court of India on Friday issued its judgment in Sunil Bharti Mittal v. Central Bureau of Investigation on whether senior corporate officers are to be held criminally liable for acts of their companies. After an analysis of the law on the issue and its application to the facts of the case, the Court answered the question in the negative.

Conceptual Background

Corporate criminal liability is a broad and developing field with courts and commentators continuing to grapple with both philosophical and practical issues, as evident from this very case. There are two distinct aspects in the field, which unfortunately often tend to be conflated. First, it is necessary to consider the principles of attribution, whereby the actus reus and/or mens rea of a corporate officer is attributed to that of the company. In other words, the action or state of mind of a corporate officer is treated as if it is that of the company so as to make the company liable in criminal law. This area of the law has evolved significantly, probably more so in the UK than in India, as Mihir and I discuss in a fair amount of detail in this paper. The essence of the principle of attribution is that the company (which is a legal fiction and a separate legal personality) is held liable for the act and/or state of mind of its corporate officers (who, through their human intervention, are therefore able to act on behalf of, or even as, the company).

Second, it becomes necessary to consider the converse scenario, which is where a corporate officer may be made liable under criminal law for an offence committed by the company. This scenario usually arises when such an officer is “the directing mind and will” of the company. The principle of attribution is not appropriate in this context. Courts have, however, sought to apply the principle of vicarious liability, which can be invoked only if the state expressly provides for criminal liability of one person (such as a corporate officer) for the acts of another (such as the company). Another option, which has been less explored in the context of criminal liability, is that of piercing the corporate veil, where a shareholder or officer of a company may be held liable for the offences committed by the company.

While the two-way flow of liability and the principles invoking them are clear: (i) corporate attribution for making the company liable for offences committed by officers, and (ii) vicarious liability or piercing the corporate veil for making the officers liable for offences committed by the company, the judicial exposition on this count has been unclear. It is in this unsatisfactory state of affairs that the Supreme Court’s recent decision enters the arena to clear the air. While it does so to some extent, I humbly argue that some gaps continue to remain.

Supreme Court’s Decision

The factual matrix in this case is relatively straightforward and does not require elaboration. This is an appeal from an order of a Special Judge recording to his satisfaction that there was enough material to proceed against certain persons in connection with the award of certain telecom licences that have been the subject matter of considerable legal controversy in the last few years. Specifically, it was noted that “at the relevant time, Sh. Sunil Bharti Mittal was Chairman-cum-Managing Director of Bharti Celluar Limited, … and Sh. Ravi Ruia was a Director in Sterling Cellular Limited …” and that “they represent the directing mind and will of each company and their state of mind is the state of mind of the companies”. For this reason, the court took cognizance of the case and issued summons to various persons, including the two offices mentioned above. The two officers challenged the order before the Supreme Court.

The key legal issue in this case goes to the heart of the controversy discussed in the background above. The Supreme Court unequivocally laid down its ruling as below:

35.       It is abundantly clear from the above that the principle which is laid down is to the effect that the criminal intent of the “alter ego” of the company, that is the personal group of persons that guide the business of the company, would be imputed to the company/corporation. The legal proposition that is laid down in the aforesaid judgment is that if the person or group of persons who control the affairs of the company commit an offence with a criminal intent, their criminality can be imputed to the company as well as they are “alter ego” of the company.

36.       In the present case, however, this principle is applied in an exactly reverse scenario. Here, company is the accused person and the learned Special Magistrate has observed in the impugned order that since the appellants represent the directing mind and will of each company, their state of mind is the state of mind of the company and, therefore, on this premise, acts of the company is attributed and imputed to the appellants. It is difficult to accept it as the correct principle of law. As demonstrated hereinafter, this proposition would run contrary to the principle of vicarious liability detailing the circumstances under which a direction of a company can be held liable.

37.       No doubt, a corporate entity is an artificial person which acts through its officers, directors, managing director, chairman etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so.

40.       It is stated at the cost of repetition that in the present case, while issuing summons against the appellants, the Special Magistrate has taken shelter under a so-called legal principle, which has turned out to be incorrect in law.

Principally on account of the questionable application of the law by the Special Magistrate (and for other reasons expounded in its judgment), the Supreme Court allowed the appeal and set aside the summons issued against the two officers. However, the Supreme Court expressly conferred leeway on the Special Magistrate to reconsider the evidence in the light of the principles of law clarified in the judgment.


From a legal standpoint, the Supreme Court has clarified the dichotomy between corporate attribution and vicarious liability, while underscoring the fact that the principle of corporate attribution cannot be used to impose liability on corporate officers but rather only on the companies. To that extent, the clarificatory function of this judgment somewhat fills the vacuum in the law. For this reason, it is somewhat difficult to quarrel with the judgment and reasoning of the court on the fundamental legal principles themselves.

However, one issue which continues to linger is whether the invocation of the doctrine of piercing the veil would have resulted in a different outcome so long as the conditions for piercing exist in this case. At the outset, this issue was not raised before the court. Even if it was, the outcome would have depended upon a detailed legal and factual analysis of the presence (or otherwise) of various factors that lead a court to pierce the veil so as to impose liability on the officer. But, it would have been difficult to reject liability on that ground by finding the application of an incorrect legal principle, as the Supreme Court did in this case.


Renganath said...

Can the employee/director not be made liable as an accomplice?

Umakanth Varottil said...

@Reganath. You raise a valid question, although the answer might require a more nuanced analysis under criminal law. On first principles, it appears that an accomplice might have to be involved personally in the offense in that capacity, whereas for officer liability through other means specific to corporate criminal liability the officer may be liable (e.g. through vicarious liability or piercing the veil) even without personal involvement in the offense.

Renganath said...

Yes. I was just wondering, in a situation where the regulator/prosecutor wishes to make liable the allegedly “directing mind and will” of the company, without the tailwind of a specific statutory provision stipulating vicarious liability, taking the ‘accomplice’ path may be better than taking the one-way road of attribution. In essence, the equations could be something like this:
1. directing mind/personal involvement, but no statutory stipulation = accomplice; 2.
no personal involvement, but statutory stipulation of liability = vicarious liability.

As regards piercing the veil, if Lord Sumption's ratio in Petrodel (2013, UKSC) were to be applied, the prosecutor may find there is no "existing legal obligation or liability".