India Business Law Journal 17

Cover story Corporate criminal liability

July/August 2010
C
ompanies in India have been accused of everything
from corrupt practices and fraud to causing envi-
ronmental damage and loss of lives. The story of
Satyam and its overnight fall from a company lauded for its
corporate social responsibility including an award from
UK Trade & Investment in 2008 to a failed, fraudulent
entity is one that continues to play itself out.
But questions remain about who is responsible and to
what extent companies and their staff should be held liable
for misdeeds.
Arguing that criminal liability cannot be equated with
civil liability, Sumeet Kachwaha, the managing partner of
Kachwaha & Partners, is worried about the emerging trend
for senior managers to be held criminally liable for corpo-
rate misconduct. If a chairman or a managing director of
a large company can be deemed to be criminally liable for
all that may go wrong in the company, without the need to
establish recklessness, negligence or a causal link, it would
become impossible to nd a person of standing or calibre
willing to hold such a position, he says.
Who is accountable?
The complexity of corporate liability in India is underscored
by the tragedy of Bhopal. Liability for thousands of deaths,
damage to the environment and inter-generational health
concerns was settled with a payment by Union Carbide of just
US$470 million in 1989. This is a far cry from the US$20 billion
provided recently by BP to compensate victims of the Gulf of
Mexico oil spill following pressure from the US government.
Earlier this year, seven of Union Carbides executives were
sentenced to two years in prison for their roles in the trag-
edy, but all were subsequently released on personal bond.
Warren Anderson, the former chairman of the company, has
not been brought to trial, giving rise to accusations that suc-
cessive Indian governments have pandered to US business
interests at the expense of holding companies accountable
for their actions.
However, corporate liability in India is dened by much
more than Bhopal. Indeed, the country is no stranger to
corporate mishaps and despite large public protests and
In the wake of the Bhopal verdict, the BP oil spill and Indias new
nuclear damage bill, fears over corporate liability and in some
cases the lack of it have resurfaced
Vandana Chatlani reports
Are your
hands clean?
Cover story Corporate criminal liability
India Business Law Journal 18
Cover story Corporate criminal liability
July/August 2010
extensive media coverage, redress for victims is often mea-
gre. There is a lack of clarity over how companies should be
held accountable for their wrongdoings and such ambiguity
has sometimes created sufcient wiggle-room for offending
entities to get off scot-free.
Corporate criminal liability is recognized by Indian law
but the issue which is yet to be effectively settled is how a
company should be penalized for malpractice, says Justin
Bharucha, a partner at Bharucha & Partners. While com-
panies do have a separate legal personality, clearly it is not
possible to imprison a company.
The traditional view was that a corporation could not
be guilty of a crime because criminal guilt required intent
and a corporation not having a mind could form no intent,
says Kirit Javali, an advocate at Jafa & Javali. Courts are
most likely to impose criminal liability on a corporation when
the criminal act is requested, authorized, or performed by
the board of directors, an ofcer or another person having
responsibility for formulating company policy, he adds.
In a landmark judgment in Standard Chartered and Ors v
Directorate of Enforcement and Ors in 2005, the Supreme
Court ruled that there was no blanket immunity for any
company merely because the prosecution would ultimately
entail a sentence of mandatory imprisonment.
However, what appears to be missing is the will to enforce
criminal sanctions on a corporation. There is no obstacle in
the criminal law jurisprudence whatsoever to impose crimi-
nal sanctions on a corporation, says Sachin Joshi, deputy
director at the Confederation of Indian Industries Centre
of Excellence for Sustainable Development. However, this
concept is still not contemplated in the statutes in India.
Nuclear drama
The debate over corporate liability resurfaced recently as
the Indian government fought to gain approval for its Civil
Liability for Nuclear Damage Bill. The bill was passed by the
Lok Sabha, Indias lower house of parliament, on 25 August.
It paves the way for foreign participation in the building of
nuclear power plants, but has been widely criticised by
opposition parties for capping the liability of operators and
equipment suppliers in the event of a nuclear accident.
The government offered some concessions in order to get
the bill through parliament. These included raising the cap
on liability from its proposed gure of Rs5 billion (US$107
million) to Rs15 billion.
Lobby groups in favour of foreign participation reacted
angrily to the change, arguing that the increased liability
limit would dissuade interest from overseas. This will stall
the growth of the nuclear manufacturing industry, said the
Confederation of Indian Industries in a letter to the govern-
ment, adding that there is no insurance coverage available
for suppliers in the nuclear business. The concerns over
insurance stem largely from clauses 17 and 17(b) of the bill,
which stipulate that the operator of the nuclear plant, after
paying the compensation for nuclear damage, will have a
right of recourse if the nuclear incident results from the sup-
ply of equipment or material with patent or latent defects or
sub-standard services.
Foreign operators want guaranteed safety from the Indian
government, said Suresh Mane, the head of the law depart-
ment at the University of Mumbai, at a public consultation.
But such protection for foreign investors may be falling
out of favour in certain quarters. In the US, for example, the
government is apparently regretting the caps it placed on
the liabilities of oil companies. Today the US senate wants
the cap removed, says Sunita Narain, a director of the
Society for Environmental Communications at the Centre for
Science and Environment in Delhi. Otherwise it will have to
prove that BPs oil spill was the result of deliberate and gross
negligence and/or regulatory non-compliance.
Prithviraj Chavan, Indias minister of science and technol-
ogy, stressed that the cap would not necessarily be a nal
amount, but merely a benchmark to allow plant operators to
arrange insurance coverage. Chavan said the total compen-
sation was unlimited and would be decided by a govern-
ment claims commissioner, according to the gravity of an
accident.
Criminal laws fail to deter
While the Civil Liability for Nuclear Damage Bill provoked
a healthy debate over the civil liabilities of companies
engaged in the nuclear power sector, it has done little to
remove the ambiguities over criminal liability. Except for a
minor chapter on offences, the bill doesnt look at criminal
liability, said Mane.
Under the Indian Penal Code, 1860, companies can be
held liable for a number of offences including death by
negligence, endangering the personal safety of others,
Criminal liability cannot be
equated with civil liability
Sumeet Kachwaha
Managing Partner
Kachwaha & Partners
There is a need to evolve new
forms of punishment
Sachin Joshi
Deputy Director
Confederation of Indian
Industries Centre of Excellence
for Sustainable Development
India Business Law Journal 19
Cover story Corporate criminal liability
July/August 2010
negligent conduct with respect to machinery or poisonous
substances, misappropriation of property and falsication of
accounts. However, Indian law on corporate criminal liability
is not conned to the IPC, but is spread across several stat-
utes, including the Prevention of Corruption Act, 1988, the
Prevention of Money Laundering Act, 2002, the Negotiable
Instruments Act, 1881, the Information Technology Act,
2000, the Prevention of Food Adulteration Act, 1954, the
Essential Commodities Act, 1955, and several others.
In cases of criminal liability, violations are normally pun-
ished by imprisonment or the payment of a ne. But many
observers have criticized the nes, arguing that they are too
low to be of consequence and relatively easy to evade. It is
easy for them to get away with criminal liability and [a ne]
does not [achieve] the purpose of punishment, says Joshi.
There is a need to evolve new forms of punishment which
could effectively deter the corporate from engaging in any
criminal activity.
Atul Dua, a senior partner at Seth Dua & Associates, sug-
gests some possibilities: Economic and social sanctions
should be encouraged against corporate houses, such as
winding up of the company, temporary closure of the corpo-
ration and heavy compensation to the victims, he says.
Calls for tougher penalties
Tushar Chawla, a partner at Economic Laws Practice,
also suggests harsher penalties. He says depending on the
gravity of the offence companies should be blacklisted and
barred from participating in government sponsored projects
or their operations should be temporarily suspended. In
extreme cases where repeated, malicious and grave mal-
practice has taken place, resulting in extreme damage to
the public at large, company operations should be perma-
nently suspended, Chawla adds. Further, in cases where
such companies have a foreign direct investment compo-
nent, then the suspension of such companies should also
be extended to the parent companies vis--vis their India
operations.
However, in order to encourage corporate responsibility and
prevent negligence, ruthless punishment alone may be insuf-
cient. Shareholder activism from institutional shareholders
and reinforcing the role of independent directors on the board
is critical to enhancing good corporate governance, says
Suchitra Chitale, a partner at Chitale & Chitale Partners.
The new Companies Bill seeks to address corporate foul
play by awarding shareholders greater power in order to
improve corporate governance. Kaviraj Singh, managing
partner at Trustman & Co, says the bill will revamp archaic
laws to help Indias growing corporate sector adopt interna-
tional best practice and make boards and senior manage-
ment of companies more accountable.
Javali, however, disagrees, saying that the core issues
of accountability and liability have not been tackled. The
Companies Bill, which is in its last stages of being approved,
is silent. While the purpose of this new legislation is primarily
to improve the control and regulation of domestic and for-
eign companies, it doesnt have any clauses with regard to
these problems, he says. The government, despite getting
a rude awakening like the Bhopal or Uphaar [cinema] trag-
edy should get on with its job of actually doing something
about the liability of the company.
Better remedies?
Aside from the absence of effective laws to deal with
corporate criminal liability, there is a worrying tendency
of courts to impose liability solely on the board of direc-
tors or ofcers of a company. It does seem incorrect to
obviate the possibility of imposing liability on employees
of the company who are in default, says Bharucha. In an
increasingly complex technical and technological environ-
ment, [it is important to] query whether the board alone
should be responsible if it has acted in good faith and
sought to enforce the highest possible standards, but the
failure lies with employees.
Some observers say India could benet from legislation
modelled on laws in other jurisdictions. The Netherlands
has introduced corporate criminality (the Economic
Offences Act, 1950, and article 51 of the Criminal Code),
which can be imposed directly on a company as a whole
without rst holding an individual ofcer of the company
liable, explains Chawla of Economic Laws Practice. Thus
the company could be held liable for decisions taken by
the company, even though these could not be accredited
to any particular individual or group of individuals.
Similar legislation exists in Switzerland, imposing liability
on corporations directly if an offence is committed on its
In extreme cases company
operations should be
permanently suspended
Tushar Chawla
Partner
Economic Laws Practice
In the event of gross
negligence ... a corporation
should plead guilty and in fact
proceed towards rehabilitation
activities
Suchitra Chitale
Partner
Chitale & Chitale Partners
India Business Law Journal 20
Cover story Corporate criminal liability
July/August 2010
behalf and the fault cannot be attributed to a specic indi-
vidual. And in France, as Chawla notes, a company may be
held directly liable under French criminal law for a criminal
act if the company violates any criminal statute. Such a
violation should have been carried out by the companys
representatives or organs and as a result the company
should have beneted.
When wrongdoing occurs
Where a company falls foul of the law, most observers
agree that honesty is the best policy. In the event of gross
negligence or malpractice by a corporation which results in
widespread damages, a corporation should plead guilty and
in fact proceed towards rehabilitation activities to minimize
damages, advises Chitale.
If a company pleads guilty, it can expect that the quan-
tum of punishment would be reduced, says Mamta Tiwari,
a partner at FoxMandal Little. She adds, however, that this
is the only benet a company can have in pleading guilty.
When high prole corporations are involved, contact with
the media should be handled extremely carefully. The media
circus that surrounded the BP oil spill in the Gulf of Mexico,
and the widely reported public relations gaffes made by the
companys chief executive, compounded BPs woes. It is
most important for the company in question to be honest
and to manage public relations in an adverse situation,
says Donnie Dominic George, an associate at Bharucha
& Partners. It is perhaps best for the company to quickly
and thoroughly evaluate the situation and thereafter issue
an appropriate public statement and take remedial action.
There is a very ne line which the company must walk to
ensure that matters are not judged outside the court.
Resisting the temptation to cut corners can also prove
protable. Principled economic behaviour is a long-term
investment in the security of nations, says Singh. The
world cannot afford economic misconduct.
g
Principled economic behaviour
is a long-term investment in
the security of nations. The
world cannot afford economic
misconduct
Kaviraj Singh
Managing Partner
Trustman & Co