Court of Appeal: Clarification of 'Meridian' attribution

 The theory of attribution in common law turns significantly on the application of the two main cases: Tesco Supermarkets v. Nattrass [1972] AC 153 (which provides for a strict reading of who the ‘directing mind and will’ of a company is), and Meridian Global Funds v. Securities Commission [1995] 2 AC 500 (which, in certain instances, allows for a more flexible understanding). In the application of the attribution rules to criminal law, Courts have understandably been more hesitant in applying a broad-based, flexible rule. Tesco v. Nattrass is seen as the default rule; and Meridian flexibility will be used only when the policy or words of the statute necessarily requires such a flexible reading. An illustration of the English approach to these questions is provided in St. Regis Paper Company v. R [2011] EWCA Crim 2527, where the Court of Appeal has again underscored the point that the default Tesco rules cannot be easily undermined in the criminal law context.

The question in St. Regis pertained to whether the company could be liable under certain pollution-control Regulations for the offence of “intentionally making a false entry”. The company owned five mills. The smallest of these five was the Cullompton Mill. The Cullompton Mill had 129 employees; amongst them was one Mr. Steer, the technical manager. Mr. Steer deliberately falsified records, and intentionally made a false entry. The question was whether this could be attributed to the company, such that the company could be said to have committed the offence. It was argued that (following Meridian) the actions of Mr. Steer could be attributed to the company. This was on the basis that the Regulations were intended to control the activities of companies in relation to environment protection, and unless the actions of persons like Mr. Steer were attributed to the company, the point of the Regulations would be emasculated.

Instinctively, one is drawn towards this argument; for it stands to reason that particularly in areas such as environmental protection, companies should not be able to evade obligations by pointing out to a lower-level functionary who actually performed these acts. However, in a considered judgment, the Court of Appeal rejected this argument, and held that the company could not be liable in the facts of the case. The Court gives several reasons for this. First, the Regulations would not be emasculated – the Regulations provided several strict-liability offences; and the Court held that these strict-liability offences would serve to uphold the purpose of the Regulation and would prevent companies from evading the Regulations. Thus, the effectiveness of the Regulations would not be eroded by refusing to adopt a flexible approach to attribution. Secondly, it was held that Mr. Steer was far too low in the corporate hierarchy. Mr. Steer was the technical manager of the smallest of the five mills. He reported to the Mill’s (not the company’s) Managing Director. That Managing Director reported to divisional technical officers and divisional environment officers, who in turn reported to the senior management of the company. In the absence of any fault with any of these intervening functionaries, Mr. Steer’s actions could not be attributed to the company. Further, the directors had expressly set out an environmental policy; under this policy, no discretion in respect of maintaining records was given to Mr. Steer. Under the policy, the Court held, Mr. Steer was simply not one who was in actual control of the operations of the company or part of the operations. The Court of Appeal held, “The importance of avoiding environmental pollution cannot be overstated. But the Regulation has sought to meet that danger in a carefully graduated way imposing both offences of strict liability and those which require proof of intention such as in 32(1)(g) and (h)…” Accordingly, it was held that the more flexible approach of Meridian could not be invoked in respect of Mr. Steer, who was far too low in the corporate hierarchy to be treated as an embodiment of the company.

The decision reiterates that Tesco operates as the default rule; and ordinarily only the acts of the senior management can be attributed to the company. This default rule can be displaced (by following the Meridian approach) only when the policy or words of the statute are clear in this regard. Further, the creation of an extensive strict-liability regime also played an important part in the Court’s reasoning: the policy of the statute would not require the flexible approach to mens rea being adopted, as the statute itself completely dispensed with mens rea in several situations, meaning thereby that the company could not automatically avoid responsibility by pointing towards a lower-level functionary. Whether the Meridian rules are attracted in the context of criminal law depends on a careful analysis of the relevant statute. [The approach in India is not yet clear – the Supreme Court in Iridium v. Motorola approved Tesco, but did not cite Meridian at all. However, the Supreme Court was concerned only with a prima-facie enquiry (pertaining to quashing u/s 482 Cr.P.C.); and it is not completely out of the question for Meridian flexibility to yet be imported. A discussion of the Indian position can be found in these two posts and this article.]

The Bhopal Case: Supreme Court's order on CBI's Curative Petition

We had previously highlighted discussions on the Law and Other Things blog pertaining to the decision of the Chief Judicial Magistrate in the Bhopal gas leak case. The CJM had purported to follow a 1996 judgment of the Supreme Court; in which, the Supreme Court had quashed charges under Section 304 (Part II) of the Indian Penal Code. Last week, a Constitution Bench of the Supreme Court dismissed a curative petition (CBI v. Keshub Mahindra) filed by the Central Bureau of Investigation against the 1996 judgment. The issue in the cases pertained to whether Union Carbide companies and executives were liable to be charged for offences under Sections 304 (Culpable homicide not amounting to murder), 324 (voluntarily causing hurt by dangerous weapons or means), 326 (voluntarily causing grievous hurt by dangerous weapons or means), etc. The 1996 judgment, at the stage of framing of charges, had found that there was no sufficient material to proceed under these Sections, and directed the trial Court to proceed only on the basis of charges u/s 304A (causing death by negligence). A curative petition was filed against this order of the Supreme Court. Last week’s order dismissing this petition has been met with dismay by activists, who wish to highlight the ‘failure of justice’ for the victims of the tragedy; however, a perusal of the Court’s order shows that these  voices of dismay are not quite justified. The Court observed:

“It is clear to us that in the criminal revisions filed by the CBI and the State of M.P. the legal position is correctly stated. But the curative petitions are based on a plea that is wrong and fallacious. As noted above, one of the main planks of the curative petitions is that even though in course of trial before the Magistrate, additional evidences have come on record that fully warrant the framing of the higher charge (s) and the trial of the accused on those higher charges, as long as the 1996 judgment stands the Sessions Court would feel helpless in framing any higher charges against the accused in the same way as the trial court observed that in view of the judgment of the Supreme Court no court had the power to try the accused for an offence higher than the one under Section 304A of IPC. The assumption is wrong and without any basis. It stems from a complete misapprehension in regard to the binding nature of the 1996 judgment. No decision by any court, this Court not excluded, can be read in a manner as to nullify the express provisions of an Act or the Code and the 1996 judgment never intended to do so. In the 1996 judgment, this Court was at pains to make it absolutely clear that its findings were based on materials gathered in investigation and brought before the Court till that stage. At every place in the judgment where the Court records the finding or makes an observation in regard to the appropriate charge against the accused, it qualifies the finding or the observation by saying “on the materials produced by the prosecution for framing charge”. “At this stage”, is a kind of a constant refrain in that judgment. The 1996 judgment was rendered at the stage of sections 209/228/240 of the Code and we are completely unable to see how the judgment can be read to say that it removed from the Code sections 323, 216, 386, 397, 399, 401 etc. or denuded a competent court of the powers under those provisions. In our view, on the basis of the material on record, it is wrong to assume that the 1996 judgment is a fetter against the proper exercise of powers by a court of competent jurisdiction under the relevant provisions of the Code. If according to the curative petitioner, the learned Magistrate failed to appreciate the correct legal position and misread the decision dated 13.9.1996 as tying his hands from exercising the power under Section 323 or under Section 216 of the Code, it can certainly be corrected by the appellate/revisional court.”

On this basis, although the curative petition was dismissed, the Supreme Court clarified that the 1996 judgment should not be seen as limiting the powers of the trial court under Section 323/216 of the Code of Criminal procedure.

Under Section 323, if it appears to the Magistrate, in any inquiry into an offence or a trial before him, at any stage of the proceedings before signing judgment, that the case is one which ought to be tried by the Court of Session, then the Magistrate has to commit the case to the Sessions court. Under Section 216, a court may alter, add to or amend the charge at any time before the judgment is pronounced. What the Supreme Court seems to be saying is that the 1996 judgment is restricted to framing of charges, and if during the course of trial any fresh material on record indicated the possibility of a more serious charge, the 1996 judgment cannot be understood as protecting the accused even then. The proper remedy was not before the Supreme Court by way of a curative petition, but before the appellate or revisional court. Issues of corporate criminal liability were not specifically addressed by the Constitution Bench, but these issues – including attribution of knowledge/intention to companies, liability of officers etc. – are now likely to arise in the appellate proceedings.

Corporate Criminal Liability for Securities Offerings

Mihir and I had previously discussed (here and here) the Supreme Court’s judgment in the Iridium Motorola case rendered in October 2010. We have now posted a more detailed analysis in a case note titled “Corporate Criminal Liability and Securities Offerings: Rationalizing the Iridium-Motorola Case” that is scheduled to be published in the National Law School of India Review. The abstract is as follows:

This case note analyzes the decision of the Supreme Court of India in Iridium India Telecom Ltd. v. Motorola Incorporated & Ors (AIR 2011 SC 20, [2010] 160 Comp Cas 147). The decision is momentous as it clarifies the position under Indian law that a legal person such as a company is capable of having mens rea. It is an important step in promoting the use of criminal sanctions to regulate corporate behavior.

At the same time, it is crucial to note that the Supreme Court stops short of ruling convincingly on the methods by which mens rea of a company can be proved. It places reliance on the anthropomorphic approach of the English courts in Tesco Supermarkets Ltd. v. Nattrass ([1972] AC 153 (HL)) without in any way considering the subsequent crucial development in the form of the more flexible approach in Meridian Global Funds Management Asia Ltd. v. Securities Commission ([1995] 2 AC 500 (PC)). Similarly, the Supreme Court does not conclusively deal with the effect of Risk Factors in determining the existence of ‘deception’ as an ingredient of an offence of cheating due to misrepresentation in a private placement offering document. Of course, the Supreme Court was concerned only with an appeal on preliminary aspects relating to an order of quashing under section 482 of the Code of Criminal Procedure, 1973.

In this note, the authors argue that while Iridium must hold the field on the ability of a company to have mens rea, its rulings on the other aspects must be accepted in measured terms only as possible guidance for further specific judicial determination.

MCA Circular on Prosecution of Directors

One of the disincentives that operate against directors, particularly non-executive directors, is that they are often susceptible to prosecution for offences committed by the company that it not within their knowledge. Occasionally, innocent directors have been subject to victimization by requiring to answer allegations that are often frivolous in nature. This concern has now been addressed, at least partially, by a Circular issued on March 25, 2011 by the Ministry of Corporate Affairs to all Regional Directors, Registrars of Companies (ROC) and Official Liquidators.

The Circular relates primarily to independent directors and nominee directors, who are not in charge of the day-to-day affairs of the company. It calls upon the ROC to take extra care in examining the cases where such directors are identified as “officers in default” for the purposes of actions to be taken under the relevant penal provisions of the Companies Act. The Circular further states:

No such Directors as indicated above shall be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred without his knowledge attributable through Board process and without his consent or connivance or where he has acted diligently in the Board process. The Board process includes meeting of any committee of the Board and any information which the Director was authorised to receive as Director of the Board as per the decision of the Board.

The Circular imposes greater obligations on the ROC to verify relevant information and records before initiating prosecution against independent or nominee directors. These include the status of the director and timing of resignation relative to the commission of the offence by the company. Special provisions have been made for identification of the appropriate “officer in default” in connection with violation of the provisions relating to accounting and financial statements. In sum, the Circular moves away from the erstwhile regime where ROC could potentially adopt a trigger-happy approach while initiating criminal prosecution of directors to one where the ROC is compelled to exercise “proper application of mind”. 

This is a welcome move as it prevents harassment of innocent directors who have been kept in the dark by managements. The Circular, however, does not go as far as proposals discussed in the context of the Companies Bill, 2009 that call for complete immunity to independent directors from prosecution. By conferring discretion on the ROC (to be exercised in an informed manner), the Circular adopts a principles-based approached by avoiding the rigidity involved in complete immunity. This would continue to spur non-executive directors to perform their role diligently, but at the same time protect them against prosecution risks in the event of their innocence.

Procedural leniency under the Negotiable Instruments Act

Over the past few years, the Supreme Court has gone a long way towards reducing the use of section 138 of the Negotiable Instruments Act (“Act”) as the basis for the vicarious liability of directors. In February last year, National Small Industries v. Harmeet Singh Pantial, the Supreme Court emphasised the high standards required in order to invoke vicarious liability of creditors under section 141 of the Act. As discussed earlier, this is a stance which has been adopted by the Supreme Court in K.K. Ahuja v. V.K. Vora. Hence, under section 141 of the Act, being ‘in charge of, and was responsible to, the company for the conduct of the business of the company’ has been held to contain two independent requirements of both being legally in charge of, and factually responsible for the day-to-day affairs of the company. Further, the Court has held that the complaint needs to have a specific averment of the role played by the director in the particular case. While this may be unexceptional, a decision of the single judge of the Kerala High Court in TGN Kumar v. State of Kerala, was much more far-reaching. The Court had issued a set of directions to Magistrates to treat ‘technical’ offences like section 138, involving ‘no moral turpitude’ to be treated differently from other offences.

The case involved an application by an accused to dispense with personal appearance at trial for an offence under section 138. The High Court judge allowed the application, and held that there was a “great need for rationalising, humanising and simplifying the procedure in criminal courts with particular emphasis on the attitude to the "criminal with no moral turpitude" or the criminal allegedly guilty of only a technical offence, including an offence under Section 138 of the N.I. Act”. For this purpose, the High Court had provided detailed guidelines to the trial courts, which exempted all accused of offences under section 138 of the Act from personal appearance at any stage of the trial, and also provided that only bailable warrants may be issued in such cases. Although the High Court did provide for this procedure to be departed from in exceptional cases, the guidelines were quite wide-ranging and significantly impinged on the discretion of the trial court.

These guidelines were appealed against to the Supreme Court, which reversed the decision of the High Court. It held that the discretion of the trial judge must be left untrammelled, and that the Supreme Court in Bhaskar Industries Ltd. v. Bhiwani Denim & Apparels Ltd. was right in saying that “it is within the powers of a Magistrate and in his judicial discretion to dispense with the personal appearance of an accused either throughout or at any particular stage of such proceedings in a summons case, if the Magistrate finds that insistence of his personal presence would itself inflict enormous suffering or tribulations on him, and the comparative advantage would be less. Such discretion need be exercised only in rare instances where due to the far distance at which the accused resides or carries on business or on account of any physical or other good reasons the Magistrate feels that dispensing with the personal attendance of the accused would only be in the interests of justice”. To this dictum, the Court only adds that “the order of the Magistrate should be such which does not result in unnecessary harassment to the accused and at the same time does not cause any prejudice to the complainant. The Court must ensure that the exemption from personal appearance granted to an accused is not abused to delay the trial”.

Thus, it is clear that the Supreme Court has firmly set its face against allowing a greater degree of leniency in cases involving section 141 of the Act, even when dealing with matters of criminal procedure. Given the language of the Code of Criminal Procedure, and the scope of appellate interference permitted into the exercise of discretion by the trial court, the decision is based firmly on statutory language and past precedent. Equally however, given the proactiviness of the Supreme Court in laying down guidelines for the exercise of discretion in other areas of the law, a watered down version of the High Court’s recommendations would not have been unjustified. The requirement that personal presence should be done away with only when it inflicts “enormous suffering or tribulations” or when it is justified “due to the far distance at which the accused resides or carries on business or on account of any physical or other good reasons” is surely setting the bar too high, especially when dealing with offences under the provisions like section 138 or section 141 of the Act. However, as the law stands today, it appears that barring the satisfaction of the detailed requirements of section 141, there are no other procedural safeguards for persons accused of offences under the Act.

The Court of Appeals on Dishonest Assistance

The United Kingdom Court of Appeals recently considered an interesting case concerning the standard of dishonesty required to hold a person guilty of assisting in the breach of trust. The factual background in Starglade Properties v. Roland Nash is complex, but for the purposes of this discussion, it is sufficient to note that as a result of certain contractual obligations, Larkstore Ltd., the company of which the defendant Mr. Nash was the sole director, held certain amounts in trust for the claimants Starglade Properties Ltd. However, in breach of this trust, Mr. Nash distributed large parts of the amount held to several persons. On facts, it was not argued that these payments in themselves were fraudulent, and they were considered to be discharges of debt. However, it was established on facts that all the debts discharged were owed to people who were connected with Mr. Nash. Also, it was established that although Mr. Nash had legal advice, that legal advice was vague, and only dealt with the question of whether he could pay off the largest creditor (which was not ultimately paid off) in preference to Starglade.

The crux of the appeal hinged around what the legal test for determining dishonesty is. The High Court Judge, Nicholas Strauss QC, came to the following conclusion,

The question whether a company director may prefer some creditors over others is not one to which most people would know the answer as a matter of law, nor in my judgment would there be a general view as to what was honest or dishonest in this connection. It might well be dishonest to prefer creditors having received advice that it was unlawful, or having actual knowledge of the decided cases referred to above establishing that it was unlawful, but not in my view otherwise. In the absence of such specific advice of knowledge, Mr. Nash's conduct was not conduct which would have transgressed generally accepted standards of commercial behaviour on the part of a person in his position, even if he had had greater commercial experience. His lack of experience and lack of understanding as to the legal position are additional relevant factors. [emphases supplied]

The meaning of dishonest assistance has had a chequered history in English law, with two Privy Council decisions, and one House of Lords decision, arriving at seemingly different conclusions. Lord Nicholls, in Royal Brunei Airlines v Tan, [1995] 2 AC 378, observed that honesty is to be determined by an objective standard, but “does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.” At the same time, he also clarified that “these subjective characteristics of honesty do not mean that individuals are free to set their own standard of honesty in particular circumstances”. The House of Lords however, in Twinsectra Ltd v Yardley, [2002] 2 AC 164, complicated matters. Lord Hutton, approved of the test laid down by Lord Nicholls, observing, “I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct”.

The House of Lords thus added two components to Lord Nicholls’ test- (1) that while the conduct need not be dishonest according to the defendant’s subjective standards of honesty, it needs to be dishonest according to the beliefs of reasonable and honest people; and (2) that the defendant should know that his conduct is dishonest according to the beliefs of reasonable and honest people. The second of these additions was successfully challenged before the Privy Council in Barlow Clowes Ltd v Eurotrust Ltd, [2006] 1 WLR 1476. Lord Hoffman observes that Lord Hutton’s speech was “intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. It did not also to require him to have thought about what those standards were”.

So, the position that seems to emerge from the three decisions discussed above is that the conduct of a person is to be determined in light of his knowledge at the time of his act (subjective), and whether such conduct was dishonest given his knowledge is to be determined by the beliefs of reasonable and honest people (objective). On facts here, Mr. Nash was aware that he was preferring other creditors over Starglade. He was also aware that the company was bound to make the payment to Starglade since the money was held in a trust for Starglade. Thus, the question to be asked according to the Court of Appeals was whether such a frustration of Starglade’s rights could be considered as being honest.

It was argued by the counsel for Mr. Nash that his conduct was not something that would be considered dishonest in the commercial world. This clearly derived some force from the first addition which Twinsectra had made to Royal Brunei Airlines. However, the Court of Appeals rejected this argument, observing that,

The relevant standard, described variously in the statements I have quoted, is the ordinary standard of honest behaviour. Just as the subjective understanding of the person concerned as to whether his conduct is dishonest is irrelevant so also is it irrelevant that there may be a body of opinion which regards the ordinary standard of honest behaviour as being set too high. Ultimately, in civil proceedings, it is for the court to determine what that standard is and to apply it to the facts of the case.

...

the question was whether the relevant conduct of Mr Nash in seeking to frustrate Starglade, given that he knew that Larkstore was insolvent but otherwise had sufficient assets to pay a dividend to its creditors, was dishonest. The deputy judge never looked at that issue. He concentrated on whether payments to or security given to Glancestyle might be set aside in due course by a liquidator of Larkstore. No advice was sought or given on what Mr Nash proposed to do or did or his reasons for doing so. The deliberate removal of the assets of an insolvent company so as entirely to defeat the just claim of a creditor is, in my view, not in accordance with the ordinary standards of honest commercial behaviour, however much it may occur. Nor could a person in the position of Mr Nash have thought otherwise notwithstanding a lack of understanding as to the legal position.

Thus, the test for determining whether a particular act amounts to dishonest assistance of a breach of trust is whether given the knowledge of the defendant, the acts alleged to be assisting the breach would be considered dishonest by objective standards. In that sense, the test does not depart from that which emerged after Barlow Clowes. However, what the Court of Appeals does clarify is the nature of objective inquiry. When talking of ‘the beliefs of reasonable and honest people’, it is not the actual subjective beliefs of people that is conclusive, but the hypothetical reasonable man test adopted in many different areas of the law.

Some further thoughts on Iridium/Motorola: Deviating from Meridian?

As Mr. Umakanth discussed in this post, the Supreme Court of India in Iridium India Telecom v. Motorola Inc. (Criminal Appeal No. 688 of 2005, judgment dated October 20, 2010) has confirmed that companies can be prosecuted for offences involving mens rea. The Court in Iridium appears to have approved of the theory through which the intention of the directing mind and will of a company is attributed to the company. The Supreme Court has expressly approved of Lord Denning’s comparison of the company with a human body; and has also approved of the decision in Tesco v. Natrass.

Lord Denning and Tesco:

Lord Denning had stated in H.L. Bolton (Engg.) Co. Ltd. v. T.J.Graham, [1957] 1 QB 169, “A company may in many ways be likened to a human body. They have a brain and a nerve centre which controls what they do. They also have hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what they do. The state of mind of these managers is the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company. That is made clear in Lord Haldane's speech in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. (AC at pp. 713, 714). So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company themselves guilty…” 

In Tesco Supermarkets v. Nattrass, Lord Reid clarified the distinction between primary liability through attribution and vicarious liability, and observed, “I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these; it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.”

The decision in Meridian:

It is noteworthy that in Meridian Global Funds Management Asia Ltd. v. The Securities Commission, [1995] UKPC 5, Lord Hoffman specifically rejected what he called the “anthropomorphism” of Lord Denning. Lord Hoffman noted, “But this anthropomorphism, by the very power of the image, distracts attention from the purpose for which Viscount Haldane said he was using the notion of directing mind and will, namely to apply the attribution rule derived from section 502 (of the relevant Act in Lennard’s case) to the particular defendant…” In Lord Hoffman’s inimitable style, the question “is one of construction not of metaphysics”. The principles in relation to attribution were then summarised (after taking into account Tesco, as well as In Re Ready Mixed Concrete [a decision which is not noticed by the Supreme Court in Iridium]) in a passage which is now widely regarded as laying down the correct position of English law on the point of when attribution may occur:  

“The company's primary rules of attribution (by this, Lord Hoffman means the rules in the companies constitutional documents) together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself", as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company? One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or a unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”

Thus Lord Hoffman qualified what appear to be absolute statements in Bolton and Tesco; to suggest that while a company will be imputed with mens rea of its directing mind, who that directing mind is will depend on the specific interpretation of the relevant statutory provisions.

The Meridian test under Indian Law:

The judgment of the Supreme Court however does not mention the decision in Meridian, and whether this Meridian principle applies in India or not is thus an open question. (This is somewhat surprising – Meridian is widely regarded as the locus classicus on the subject in general and the facts in Meridian also were concerned with securities transactions. The difference is of course that – as Mr. Umakanth has pointed out – the complaint in Iridium was under the IPC and not under securities legislation. I am not sure however that this is enough to completely distinguish Meridian) The Court has stated, “The criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such circumstances, it would be necessary to ascertain that the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons.” This perhaps indicates that the Supreme Court has adopted a “one size fits all” approach; treating the issue of ‘who is the directing mind and will’ as a question independent of the underlying statutory provision, contrary to the approach in Meridian. It appears that the test is the same regardless of the statutory language of the provisions concerned. For example, there may be several situations where a statutory construction approach would indicate that the acts of (say) a local manager could be attributed to the company. The Supreme Court’s test of the entire corporation “thinking and acting” through such person need not be satisfied. The difference between the Supreme Court’s approach and the Meridian approach can be illustrated through an example. Let us suppose that a statute punishing environmental pollution requires mens rea. A local branch manager of a company branch which has caused the relevant actus has the required mens rea. Is his mens rea to be imputed to the company? Under the Meridian statutory construction approach, this would be an arguable case dependant on the wordings of the statute – it could be argued that the relevant mens rea under the statute specifically was the mens rea of the person in charge of the polluting unit. On the other hand, a strict application of the Supreme Court’s decision in Iridium would not leave such a possibility open at all (unless of course the Chairman/Board of Directors/senior executives also had the relevant mens rea). (The facts in Meridian itself also show how the tests are different.)

Other related issues:

Another aspect which the Supreme Court has not dealt with is whether there can be any exceptions to the attribution – once it is admitted that a person is the directing mind and will, can there still be cases where attribution should not take place? One instance comes to mind – when the directing mind is himself playing a fraud on the company; or when the company is a victim of the directing mind’s criminal/fraudulent acts. The decision of the Canadian Supreme Court in Canadian Dredge & Dock suggests that such an exception does exist. The Supreme Court in India has in one sentence approved of the general Canadian position on the point; but without any specific reference to this issue. We have discussed some similar issues in relation to the decision of the House of Lords in Stone & Rolls v. Moore Stephens elsewhere. Admittedly, the case before the Supreme Court was an appeal against a quashing petition under Section 482 of the Code of Criminal procedure, so possible exceptions would not be in issue before the Court. However, the issue is likely to be important in an analysis of the Indian law on attribution as a whole; and is still an unsettled one.

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.

Should Shareholders Pay for Corporate Misconduct?

The U.S. SEC’s settlement last week with Citigroup has revived the debate about the efficacy of payments by way of settlements, fines and penalties by companies as a consequence of breaches of law. Under this settlement, Citigroup is required to pay $75 million for making “misleading statements about the extent of its holdings of assets backed by sub-prime mortgages in earnings calls and public filings”, thereby affecting the interests of its shareholders. SEC also settled with two of Citigroup’s officers – Gary Crittenden who has been penalized to the extent of $100,000 and Arthur H. Tildsley, Jr. $ 80,000 – sums which are trifling in the context of the overall settlement.

New York Times’ Andrew Ross Sorkin asks whether it is fair to expect the shareholders to bear the burden of the payment when they themselves have been victims of the lack of proper disclosures. In other words, would shareholders not suffer a double-whammy – once when they were kept in the dark and next when they bear the impact of the fine paid by the company? Others find merit in the approach that involves penalizing the company and not just its directors or officers – using a blend of legal and economic analysis.

Similar issues arise under corporate law and governance in India as well. For example, one of the key deterrents used by SEBI and the stock exchanges against breaches of corporate governance norms is the threat of delisting (which has also been exercised on occasion). Even here, it is the shareholders who suffer due to the loss of liquidity in their shares although they are they are not involved in the breach. Similarly, under principles of corporate criminal liability, it may not serve as adequate deterrent merely for the company to be held liable, but it would be necessary for directors and officers responsible for the misconduct to be made liable too. However, there is some evidence in practice to indicate that responsible individuals tend to go scot free, while the companies bear the burden of fines and penalties. The problem may get compounded if the companies plunge into bankruptcy, as they often do in the aftermath of an epochal crisis afflicting it, which makes any recovery difficult, if not impossible.