With a rise in corporate misdeeds, India’s courts and parliament are rethinking the definition and treatment of executive liability, writes Vikramaditya Khanna

India’s economic rise has been accompanied by greater revelations of corporate wrongdoing. Whether we look at the Satyam scandal, the 2G or coal controversies, or the alleged behaviour of Vijay Mallya and Nirav Modi, corporate wrongdoing needs to be addressed. The law has responded – in the past decade or so the Supreme Court and the parliament have taken steps to police and sanction corporate wrongdoing. This article examines these changes, how they compare to global developments and what might be on the horizon.

Vikramaditya Khanna
William W Cook professor of law and faculty co-director
Joint Centre for Global Corporate and Financial Law and Policy

Before discussing the changes in Indian law, it is important to remind ourselves that corporations are legal fictions that don’t act on their own. It is their employees who act, but they are often under-deterred because they don’t have sufficient assets to pay for the harm caused, they may be difficult to identify and sanction, or they may be unaware that their behaviour is a violation of the law.

This leads to one of the key objectives of corporate liability – providing further incentives to corporations to monitor their employees’ behaviour to reduce wrongdoing. Other parties may also be good monitors, such as the supervisors of those employees, and imposing liability on them can further incentivize monitoring of employee wrongdoing. Liability for corporate employers and supervisors has witnessed substantial growth in India in the past 20 years and this article will focus on them.

The Supreme Court had held, in Assistant Commissioner v Valuable Textiles Limited (2003), that a company cannot be criminally prosecuted for offences that carry a mandatory prison term, as a corporate entity cannot be put in jail. However, that holding was reversed two years later, by a five-judge bench in the Supreme Court’s decision in Standard Chartered Bank v Directorate of Enforcement (2005), creating the base for a broader application of the concept of corporate criminal liability in India.

Peering behind the veil?

This was extended yet again in 2011, in Iridium India Telecom Ltd v Motorola Incorporated & Ors (2011), where Motorola was accused of cheating, under sections 420 and 120B of the Indian Penal Code, for alleged misstatements in a private placement memorandum designed to raise funds for a project. These offences required intent to deceive and Motorola argued a corporation – as a legal fiction – doesn’t have a mind or a state of mind.

The court disagreed and held, relying on the UK House of Lords decision in Tesco Supermarkets Ltd v Nattrass (1972), and the law in Canada, that corporations can be criminally liable for crimes of intent when: “An offence is committed by those in control of its affairs. Further, the degree and control need to be so intense that a corporation may be said to think and act through them.”

In a matter of a few years, these cases removed the traditional concerns that might restrict corporate criminal liability in India: That corporations cannot go to jail (so a key criminal law sanction is missing) and cannot easily possess a state of mind as they have no consciousness (so another key attribute of criminal law [mens rea, or guilty mind] is satisfied in perhaps unusual ways). In addition, the court details when a corporation might be held criminally liable.

The court had at least two options to consider: (1) respondeat superior (let the master answer), which is the dominant approach in the US, and attributes liability to the corporation based on any agent’s acts and knowledge; or (2) the alter ego approach, which is the UK standard, and common in much of the rest of the world, and attributes liability for the acts and knowledge of someone who is in the “directing mind” of the corporation (i.e., a higher up).

In the Iridium case, the court opted for the alter ego approach, relying on a long line of English case law that states that the firm’s fault is assessed from those whose actions are the very actions of the firm (upper management).

Although these cases open up the grounds for greater imposition of corporate criminal liability, the courts have consistently held that criminal liability requires a statutory basis. There is no shortage of statutory basis in India, including: The Income Tax Act, 1961; the Negotiable Instruments Act, 1881; the Securities and Exchange Board of India Act, 1992; and the Companies Act, 2013.

In particular, the Companies Act adds further details to which agents are considered the “directing mind” by providing a list including the managing director, whole-time directors, chief executive directors, chief financial officers, company securities, those responsible for maintaining and filing accounts and records, directors having knowledge of defaults committed, and others.

In the driver’s seat

India’s version of corporate criminal liability is increasing in scope, even though it is limited by the application of the “alter ego” theory and in that sense is more restrictive than the American approach. This does not end matters because India, like a number of other countries, also imposes criminal liability on corporate leaders for defaults of the firm. This is in essence a form of supervisory liability noted earlier.

This area has seen many judicial and legislative developments in the past few years. The most important is the Supreme Court’s decision in Sunil Bharti Mittal v Central Bureau of Investigation (2015). The case revolved around the infamous grant of telecoms licences by the government that eventually led to bribery investigations and charges against Bharti Cellular and some of its executives (for example, Sunil Bharti Mittal – the managing director and chairman).

The court held that officers could not be liable for crimes committed by the firm or other employees unless provided for in statute, and when there was sufficient evidence of the officer’s active role in wrongdoing. The latter was not supported by sufficient evidence, which led the court to remand the case back to the lower courts.

The requirement for a statutory basis before imposing supervisory liability is met in many Indian statutes – e.g., the SEBI Act and Income Tax Act – but usually comes with wording that attaches liability to “every person who, at the time the offence was committed, was in charge of and responsible to the company for the conduct of the business of the company”. However, an officer could avoid liability if he could show the offence occurred without his/her knowledge, or that he/she exercised all due diligence to block the offence.

This creates a number of ways in which an officer might not be liable: (1) he/she is not “in charge of” the company; (2) he/she is not “responsible to” the company; (3) the offence occurred without his/her knowledge; or (4) he/she exercised “due diligence”.

The Supreme Court has held that “in charge of” is a factual matter assessed by determining whether the person has overall control of the daily operations of the business. This seems to mean that mid-level managers would not satisfy this test. Second, “responsible to” is a legal test that is satisfied when an officer is the managing director, full time director, manager or secretary (and a handful of other individuals enumerated in the Companies Act, 2013). Like other legislation, the Companies Act also provides that the absence of knowledge (or consent) and the exercise of due diligence vitiate criminal liability for officers.

Applying supervisory liability

The imposition of supervisory liability is not unique to India. Both the UK and the US have some version of it, but there are noteworthy differences. In the US, the US v Park (1975) decision provides for supervisory liability in the context of food and drug violations under a strict liability offence. Its holdings have been extended to crimes of intent under the food and drug laws, as well as environmental laws among a few others.

The responsible corporate officer is liable because of the responsible relationship he/she has with the firm, and has no defence except to show that it was objectively impossible for the officer to have prevented the harm. This is not a due diligence defence, but rather something closer to a causation defence (the officer was powerless to stop the harm). This doctrine attaches liability to officers more easily than the approach in India. However, the cases to date in the US have focused on just a few areas of law and many of the sanctions have been fairly modest by US standards.

In the UK, the written law is much closer to that in India, although supervisory liability does not apply across as broad a series of offences as in India. One example is the UK Bribery Act 2010, which holds a senior officer criminally liable if the offence was committed with his/her consent or connivance. On paper, this looks much more like the Indian approach, with defences of lack of knowledge and engaging in due diligence.

However, UK case law predating the Bribery Act suggests an approach closer to that in the US, where if the statute defines an offence as the failure to prevent something, then the fact that it occurred under the supervisor’s watch could be used to infer consent or connivance. This creates a rebuttable presumption of consent or connivance based on proof of the underlying offence, making this somewhere between India’s approach and that in the US.

It then appears that Indian law veers toward the general approach taken in the UK with respect to corporate criminal liability – and does not adopt the broader respondeat superior standard used in the US. Further, on paper, India’s approach to supervisory liability tracks the UK’s, but the UK’s interpretation of its statutes makes the UK closer to the US and thus stricter than India (allowing what appears like fewer defences), but of more limited application (statutes in India subject supervisors to a wider range of offences).

The developments of the past two decades may just be the beginning, as more developments are visible on the horizon. One is the rise of compliance and compliance programmes across many jurisdictions. Better compliance efforts, including internal investigations and greater use of technology, may impact the likelihood of wrongdoing, the chance of prosecution and the penalties suffered. As these considerations increasingly impact India, they will raise a host of issues for courts and legislatures, such as whether “good” compliance efforts should amount to some kind of defence to liability, or a reduction in the magnitude of sanctions.

Greater attention on protecting and rewarding those who provide information about wrongdoing, such as whistleblowers, and on other parties that might be able to monitor corporate wrongdoing, such as lawyers, auditors and others, is likely to animate developments in India, too.

Greater regulatory and enforcement cooperation across the globe will shape the contours of the debate. As corporations continue to grow in importance in the Indian environment, that will lead to greater discussion of these and related issues, making this a topic of increasing and continuing significance.

Vikramaditya Khanna is the William W Cook professor of law and faculty co-director of the Joint Centre for Global Corporate and Financial Law and Policy, a collaboration between the University of Michigan and Jindal Global Law School.