A Discussion on the Criminal Responsibility of Directors under Company Law

I. Introduction

According to the principle of alter ego, a business may be held legally responsible for the deeds of the people in charge of running its activities. The theory seeks to lift the corporate veil by treating the corporation and its directors/shareholders as a single entity. This essay analyses many significant Indian court rulings to chart the development of the idea of an alter personality in India.

Sunil Bharti v. CBI² and Iridium India Telecom Ltd. v. Motorola Inc.³ set the way for a more complex view of corporate criminal liability. The recent amendments to the Companies Act, 2013, which further the Indian government's goal of striking a balance between making the legal framework more business-friendly while also ensuring that reasonable measures for wrongdoing by companies remain in place, are the culmination of the rapidly changing legal landscape discussed in this article, which draws on that context. The recent changes are a positive start toward making India more business-friendly, but this paper emphasises the urgent need to get over the challenges that the new framework's implementation is expected to bring about.

The concept of a separate legal entity,⁴ which Indian courts eventually adopted, provided the foundation for the creation of company law under common law.⁵ The courts, on the other hand, have looked into this concept and made the decision not to abide by it strictly.⁶ As a result, the corporate veil may be lifted under some conditions, especially when two essential components—mens rea, or a "guilty mentality," and the imposition of bodily harm—are absent.

A well-established corporate law principle is the sanctity of the fiduciary relationship between the company and the directors,⁷ and a director of a company is required to carry out his duties in good faith.⁸ Recent examples of corporate directors betraying the firm and making money from their unlawful conduct do exist, nevertheless. In light of this, several fundamental ideas have emerged to justify the imposition of criminal liability on a company's directors via piercing the corporate veil, even though a corporation has its own legal existence.

1. The Alter-Ego Doctrine: Criminal prosecution for the company's governing philosophy is required.

2. Ultra-Vires: A director is personally responsible for any conduct that exceeds the scope of his official authority and responsibilities.

The director must thus act in accordance with his powers.

A director may be held personally liable in a number of circumstances in addition to the company's responsibilities since it is assumed that the director acted on behalf of the corporation.⁹ The "officer" who is in default for committing a wrongdoing or any conduct in violation of the Statute is susceptible to criminal punishment, even if the Act does not expressly state the director's criminal liability. The term "officer" as used in the Act includes directors, ¹⁰ and a director who is facing any penalties, prison time, or fine is referred to as a "officer who is in default."¹¹ As a result, laws that hold a corporate officer criminally responsible may also hold the Director accountable.

By examining decisions that led to changes in present law, this paper aims to dissect the idea of an alter ego and the wisdom of its reverse application because it is not a notion that can stand alone. In an effort to put the current system in a broader context of how other countries approach corporate criminal liability, it also analyses and contrasts the stances in the UK and the US.

II. Integration of significant penal provisions

Under the Companies Act, the directors are accountable for their actions. A director might face legal action for their actions in the following instances:

a. Section 39:¹² if the business does not reimburse potential shareholders for their application fees after collecting the required minimum subscription.

b. Sections 34-35:¹³ a false statement made in a company's prospectus

c. Section 53:¹⁴ Shares cannot be issued at a discount.

d. Section 92:¹⁵ The Company is required to complete and submit the annual return to the RoC.

e. Section 128-129:¹⁶ The Company is required to keep accurate books of accounts and financial statements in the format required.

f. Section 229:¹⁷ The director will be held accountable if he makes any false statements or destroys the papers.

g. Section 339:¹⁸ During the company's dissolution, a director's fraudulent behaviour was discovered.

h. Sections 447-452:¹⁹ Fraud, fabrication of information, and sham evidence are all crimes. For instance, the Satyam Scam and the Harshad Mehta Scam served as justifications for the Act's inclusion of a criminal provision for the offence of fraud.²⁰

The aforementioned provisions of the Companies Act, which upholds transparency and establishes a system of checks and balances inside the company, outline some criminal obligations. These limitations serve as a disincentive, keeping directors from engaging in misbehaviour.

III. Quondam stance of law

In Assistant Commissioner, Assessment-II, Bangalore v. Messers Velliappa Textiles Ltd.,²¹ where the procedural barrier of being unable to arrest companies for crimes was raised, a single judge bench of the Supreme Court previously endorsed the theory that a company can be held criminally liable for the actions of its directors. The private corporation was charged with breaking provisions of the Income Tax Act of 1961, which carried penalties including jail time and fines. The court determined that the company could not be imprisoned because it lacked a physical form, and since the fine required confinement as well, one could not be enforced without the other. This took a very literal approach to designating firms as criminal, and it was discovered that the long-standing issue of being unable to punish corporations for crimes because of their lack of physical existence still existed. According to Merriam Webster, a second self is a distinct identity. The Alter Ego Principle is an exception to the generally accepted position in jurisprudence across the world that a corporation is an entity independent from its shareholders/directors. By considering the directors/shareholders of the corporation and the company as a single entity, the Alter Ego Doctrine removes the corporate veil.

The Supreme Court later reversed its stance in Standard Chartered Bank v. Directorate of Enforcement, ²² concluding that “the legislature could not have intended to punish corporations for minor offences while completely exempting them from more serious offences simply because the statute required a fine to be accompanied by imprisonment. The Supreme Court panel decided that companies might face criminal charges and fines even if it did not go on to decide whether they were capable of mens rea.”

In addition to addressing procedural issues inherent in criminal law, the Supreme Court's rulings in Iridium India Telecom Ltd. v. Motorola Inc.²³ and Sunil Bharti Mittal v. CBI²⁴ paved the way for a more nuanced approach to corporate criminal liability and held businesses more accountable for their actions. This meant that criminal laws could not apply to organisations in the same manner that they applied to individuals, which paved the way for a more complicated approach to corporate criminal culpability in India. On a procedural level, it answered whether fines may be levied on corporations instead of jail time when the offence required both.

The Iridium ruling, which held that the actions of persons in control of a corporation's business are ascribed to the firm and that criminal allegations levelled against such individuals may be imputed to the company as well, gave the concept of alter ego further momentum.

In the Iridium decision, the Supreme Court cited Tesco Supermarket v. Nastrass²⁵ and held that those with the authority to direct the company's course, as established by the Articles of Association, Memorandum of Association, approvals in meetings, or specifically designated by directors, would be liable for the company's alleged violations. The Iridium Court then expanded the list of individuals who may be deemed essential to the company's operations to include any natural person in control of the business. This choice does not, however, address a number of issues: (A) What if no one officer was in charge of the alleged incidents? What liability does the corporation have in the event that its officials are found to be at fault? (c) What are the size and nature of the company's possible liabilities? And (d) how would shareholders be made whole for the loss of their assets? The Iridium ruling established the judiciary's stance on corporate criminal liability and paved the way for subsequent decisions and legislative reforms in light of the gravity of the unresolved issues.

During the CBI investigation into the issuance of Unified Access Services Licenses, which the Supreme Court is overseeing, the CBI has identified the Deputy General Directors of three cellular carriers. The main accusation was that the accused public employees and the alleged beneficiary companies worked together to create a choice that provided them an unfair financial benefit and cost the Exchequer money.²⁶

The learned Special Judge also called the directors of M/s Bharti Cellular Limited and M/s Sterling Cellular Limited, Mr. Sunil Bharti and Mr. Raavi Ruia, respectively, in addition to the defendants listed on the charge sheet. This was justified by the fact that, in their capacity as directors, these people might be deemed to be in command of the operations of the several enterprises and represent their respective guiding minds and wills. Since their acts could be linked to them, they acted as the "alter ego" of their individual enterprises. Based on this, the Special Judge determined that there was sufficient evidence in the case file to bring charges against the three directors as well.

The alter ego principle established in Iridium was then examined by a Supreme Court bench in Sunil Bharti Mittal v. CBI, which added a few more levels of intricacy to a problem that had already been crucial to the discussion of corporate criminal culpability. If the businesses' culpability may be transferred to the person(s) in control of the company's activities by invoking the concept of alter ego, this analysis of the disputed order followed by a complete conclusion.

The appellants claimed that the alter ego principle had been overturned, transferring the company's responsibilities to the person or persons in control of its business. The respondents responded to this claim by stating that since the offences did not fall under the strict liability doctrine, they had to be connected to malice, and as corporations could only act via their directors and officers, it was necessary to consider their mens rea.

The order calling the directors was reversed because the court found that it had erred in relying on the idea of an alter ego. According to the criteria described above, it was determined that the Special Court had failed to express satisfaction regarding the existence of material sufficient to incriminate the directors for the offences in the contested order. The Supreme Court reiterated the significance of the phrase "grounds for proceeding" in the pertinent legislation, finding that an order might be reversed if it fails to specify the grounds for establishing a prima facie case against the controlling parties. Even while the Supreme Court made this legal issue clear, it left it to the Special Court to further examine the available information and decide if there were sufficient grounds to prosecute the Directors in question.

The court also maintained the fundamental rule of criminal law that vicarious guilt must result directly from the law and that vicarious liability cannot be automatically imposed where a corporation is deemed to have committed a crime without any express legislative declaration to that effect. The Court continued by stating that although the alter ego concept might be used to assign mens rea to a business, a reverse application of that principle would need the satisfaction of one of the two aforementioned requirements. Later, the Securities and Exchange Board of India declared in In Reference Amazan Capital Ltd that errant directors could not be found criminally culpable unless they could be held personally accountable for their deeds. The aforementioned rulings prevented the courts from digging into the merits of corporate criminal liability, allowing the shift from absolute immunity to holding firms criminally responsible to take place. Unanswered questions include whether this has served as a deterrence or provoked reprisals. Furthermore, the Iridium judgment's unresolved issues remain unanswered since it has not been considered that criminal prosecution of a corporation might cause the loss of the company's assets and image, endangering the interests of stakeholders. Even while the Sunil Bharti Mittal ruling said that directors could not be held vicariously liable for the company's illegal actions, a more thorough investigation of the reasons why this was the case may have dispelled some confusion. The Report of the Committee to Review Offences under the Companies Act, 2013, which served as a major impetus for the ensuing legal changes, resolved some of the uncertainty.

IV. Criminal liability provisions and the companies act decriminalization: a curse

To raise India's ranking on the "Ease of Doing Commercial" Index and draw in international investment, several initiatives have been made to decriminalise business regulations.²⁷ Due to this, lawmakers changed the Companies Act of 2013 so that it will be legal in 2020.²⁸ The director's criminal culpability has therefore been erased or diminished in a number of situations.

(A) Penalties are less severe — A number of major penal laws have been repealed.

Before the modification, if the director was found to have violated a specific clause, there were provisions that called for his imprisonment as well as a fine. However, the revision has eliminated the possibility of imprisonment in some circumstances, erasing a component of the former legislatively defined preventative measure. For instance, the formerly applicable term of jail has been removed if a Director disregards the requirements of a charitable company.²⁹ The clause was added as a preventative measure, but removing such a punishment provision might have a detrimental effect since the firm's directors might become more careless in their job, which would hurt the company.

Likewise, the clause that called for imprisonment in the past if a director published a prospectus in contravention of Section 26 of the Act has been removed.³⁰ An essential document called a prospectus makes it possible for the general public to buy stocks in a corporation.³¹ The possibility of criminal penalties if any misrepresentations are made in the prospectus serves to restrain the directors.³² Because of this, any deviation from the prospectus-issuing process may cause it to be null and invalid, posing a serious risk to the public, and the elimination of the prison time penalty hasn't made things any better. When the public gets outraged because of omissions in the prospectus, it might set off further instances and destroy the business even before it starts up. The possibility of going to jail has also been removed if a director violates the rules for trading equities on the stock exchange or for repurchasing securities.³³ The absence of the option for imprisonment has eroded the essence of the criminal provision, notwithstanding the existence of a financial punishment.

(B) Penalties Omitted - Obliteration of the Goal

There are sections that have totally removed the penalties, which defeats the purpose of incorporating such consequences in the first place, even if it has been highlighted that other penal clauses have been rendered less harsh but still have the ability to do the firm significant harm.

For instance, the penalty clause under Section 16 that applied if the Government's instructions on the rectification of the company's name were not followed has been abolished.³⁴ Similarly, if the director disregards the Tribunal's directive on the redemption of debentures under Section 71, there would be no liability.³⁵ Because of this, if a director disobeys government directives, he will escape responsibility, rendering the insertion of such a clause worthless.

Other cases, such as declining to help a tribunal for an individual's prosecution and refusing to comply with a company's liquidator, have fully abolished criminal culpability.³⁶ As a result, it is clear that the court system and even the liquidation process may be impaired in the lack of any criminal sanctions.

Another significant element of the Amendment that directly affects the director's criminal liability is the modification to the penalties. The maximum sentence that can be imposed on a director as well as the maximum fine have been altered in many parts. This alteration may have a material adverse effect on the business of the Company since the deterrent effect of the punitive provision has been diminished.

V. Modern stance of law

The investigation of corporate criminal liability by Indian courts has alternated between revealing new avenues and coming into barriers comparable to those seen in the seventeenth century. As a result, legislative support was necessary for a long-term solution to the liability attribution issue. The Government of India (hereinafter referred to as "Government") has struggled for a long time to strike a balance between its two important goals of fostering an environment that is business-friendly and making sure that there are enough repercussions for corporations' illegal actions or omissions. Steps have been done to attain this balance in order to make sure that India fosters a business-friendly environment and that foreign investment inflows rise.

With the passage of the Companies (Amendment) Act, 2019, the government reclassified a number of criminal offences under the previous Companies Act, 2013, as civil defaults. The Companies Amendment Bill, 2020 was also proposed by the government, and it sought to decriminalise a new group of compoundable offences under the prior Act.

The government's desire to uphold the letter of the law could be seen even before the CAB 2020 was passed in programmes like the Companies Fresh Start Scheme, 2020, which exempted certain types of companies from late filing fees with the Registrar of Companies and granted those companies immunity in situations where the Registrar had pursued criminal charges against them.³⁷

The CAA 2019 also introduced an In-House Adjudication Framework, ³⁸ which created an online portal administered by the Ministry of Corporate Affairs to deal with a number of compoundable Act offences, substituting the current method of adjudication before the National Company Law Tribunal. With the aim of reducing the enormous backlogs that most Indian courts experience and ensuring that cases are speedily concluded, the In-House Adjudication Framework entails the resolution of specific offences by the administration of fines by an Adjudicating Officer. These orders may be contested before the regional director of the ministry. One of the deterrents in place is the enforcement of criminal penalties for disregarding the rules, as well as higher fines for repeat offences.

The majority of the revisions that are part of the CAB 2020 were sourced from a report that the Company Law Committee released in November 2019.³⁹ Only compoundable offences were addressed in the research in terms of corporate criminal liability, leaving other, more serious offences unchanged. The amendments to the Companies Amendment Act of 2020 steer the courts' focus away from crimes that can be proven objectively and don't affect the general welfare. The report went on to say that the objective judgement could only be made because the wrongdoings lacked the mens rea necessary for criminal prosecution and were thus properly classified as civil offences that could be resolved by paying penalties. Due to how much simpler it would be to prove civil responsibility under the "preponderance of likelihood" test, this would also promote swift dispute settlement.

The conclusions of the aforementioned research were included into the CAA 2020, especially in regards to the decriminalisation of the compoundable offences under the previous Act. The CAA 2020 made a number of changes in this area, including removing criminal offences from the Act, exempting some compoundable offences from jail time, reclassifying fines as penalties, and lowering the fine amount for a number of other offences.

These changes in the new CAA 2020 represent a more nuanced view of how duties are assigned to enterprises, while also maintaining a strong foundation for commercial ease, punishing major crimes, and lightening the load on the legal system. However, this new paradigm has its own set of risks and flaws that may be remedied by studying the finest legal structures from across the globe.

VI. Conclusion

A comprehensive examination of the regulations pertaining to the criminal responsibility of a Director under Indian Firm Law shows that the insertion of the provisions under the Statute to impose guilt on the directing mind who oversees the behaviour within the company is warranted. It is impossible to guarantee a punishment, nevertheless, due to a variety of factors, including the prosecution's transfer of a greater degree of weight. Furthermore, the decriminalisation of the Companies Act would be a complete failure of the plan. The change was meant to encourage "ease of doing business" and "foreign investment," but checks and balances and internal control were not upheld by lawmakers. A tremendous deal of freedom has been provided by the change, endangering the underlying rationale for including criminal penalties in the Act. Although the expedited trial system provided by the Companies Act is something the author respects, efforts will be made to reverse its effects, which might have a negative net effect. Legislators should review the provisions and replace the only listed in the legislation penalties with those that can really be applied.

The Supreme Court's Iridium ruling opened the door to the concept of alter ego by concluding that criminal allegations made against individuals who have primary responsibility for the functioning of the company may also be applied to the business as a whole. In the Sunil Bharti Mittal case, the Supreme Court rejected the reversal of this strategy, concluding that the company's crimes could not be assigned to the directors or those who speak for the company's mind and intent. Given the effectiveness of criminal prosecution as a deterrent and the already overcrowded Courts and Tribunals, the Law Committee's Report recommended that certain criminal offences be reclassified as civil wrongs in order to address the issue of corporate criminal liability. The CAA 2019 and CAA 2020 were approved as a result of this study and considerable legislative discussion, ending the difficulties that many Indian courts were experiencing and completing the gaps in several individual judgements. However, there is still room for improvement in a number of areas, including how serious offences that affect the public at large would be identified (the Law Committee Report left this aspect unaltered) and the extent of their impact, how courts would examine the internal governance structures of businesses in order to impose fines, and how fines would vary depending on the type of businesses. It is recognised that there is an overcriminalization of corporate offences in India despite the country's continued "compliance or else" policy, which forces people to obey the law at all costs. This problem has been addressed by decriminalising some particular offences. We thus concur that someplace has to be where the strict approach is toned down. The "comply or explain" approach is still not popular, though.

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