Legal Updates

There is a divergence of opinion amongst High Court about the liability of corporate entities.

In Champa Agency v. R. Chowdhury 1974 CHN 400, Sunil Banerjee v. Krishna Nath AIR 1949 Cal 689 and AK Khosla v. Venkatesan 1992 (98) CrLJ 1448 (Cal) the Calcutta High Court took the view that only natural persons could be ascribed with intention or “mens rea”. Resultantly, a juristic person such as a company could not be ascribed with criminal intent.

In Esso Standard Inc. v. Udharam Bhagwandas Japanwalla [1975] 45 Comp Cas 16 (Bom) the Bombay High Court took a different view. It considered the question whether a company can have mens rea, and on how the process of attribution would, in fact, operate, with the precise question being whose mens rea would be attributed to the company. The High Court held that a strict test of mens rea was required to locate or ascribe criminal responsibility of a company, on the concerned decision maker. The Court adopted this line of reasoning, approving Lord Diplock’s opinion in Tesco Supermarkets Ltd. v. Nattrass 1971 (2) All ER 127.

In Tesco Supermarkets Ltd. v. Nattrass 1971 (2) All ER 127 t was it was held that the question as to what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business, including the taking of precautions and the exercise of due diligence to avoid the commission of a criminal offence is to be found by identifying those natural persons who by the memorandum and articles of association or as a result of action taken by the directors, or by the company in general meeting pursuant to the articles, are entrusted with the exercise of the powers of the company.

A similar view was taken in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918. It was held that the primary rules of attribution are not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company’s primary rules of attribution, count as the acts of the company.

It was further held that the Company will then also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability or tort.

It was pointed out that any statement about what a company has or has not done, or can or cannot do, is necessarily a reference to the rules of attribution (primary and general) as they apply to that company. Judges sometimes say that a company ‘as such’ cannot do anything; it must act by servants or agents.

The company’s primary rules of attribution 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 an 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.

Lord Hoffmann, in his opinion stated that:

“their Lordships would wish to guard themselves against being understood to mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company.

Sometimes, as in In re Supply of Ready Mixed Concrete (No. 2) [1995] 1 A.C. 456 and this case, it will be appropriate On the other hand, the fact that a company’s employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule.”

In Iridium India Telecom v Motorola Inc [2010) 14 (ADDL.) SCR 591 the Supreme Court held that a corporation is virtually in the same position as any individual and may be convicted of common law as well as statutory offenses including those requiring mens rea. The criminal liability of a corporation would arise when an offense 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.

In Standard Chartered Bank v Directorate of Enforcement 2005 [Supp] (1) SCR 49 the Supreme Court referred to Section 11 of the IPC, which defined “person”. “The word “person” includes any Company or Association or body of persons, whether incorporated or not”; the court also referred to the 41st and 47th Law Commission reports. The Law Commission had stated that
“In every case in which the offence is only punishable with imprisonment or with imprisonment and fine and the offender is a company or other body corporate or an association of individuals, it shall be competent to the court to sentence such offender to fine only.”

The judges- in the majority held that all penal statutes are to be strictly construed, in the sense that the court must see that the thing charged as an offence is within the plain meaning of the words used and must not strain the words. Any act falling within the mischief that is addressed should be intended to be included and has to included if thought of. Further, all penal provisions, like all other statutes, need to be fairly construed in terms of expressed legislative intent.
The intent to prosecute corporate bodies for the offenses committed by them was clear and explicit, and the statute did not intend to exonerate them from prosecution. The court, therefore, held that it would be violence to common sense that the legislature intended to punish the corporate bodies for minor and silly offences while at the same time, extended immunity of prosecution to major and grave economic crimes.

What is Amalgamation?

According to Stroud’s Judicial Dictionary of Words and Phrases (9th edition), “amalgamation” is “welding or blending of two or more concerns into one.” It also states that “where there the companies concerned retain separate entities, there is no amalgamation”.

Black’s Law Dictionary, Eleventh Edition defines amalgamation as the “act of combining or uniting; consolidation < amalgamation of two small companies to form a new corporation >” The Companies Act, 2013 does not contain any express definition of amalgamation; it rather outlines and regulates the procedure for amalgamation and spells out its legal effect, which results in extinguishment of the corporate identity of the transferor company].

In Walker’s Settlement 1935 (1) Ch. D. 567, the term ‘amalgamation’ is defined as:

“The word ‘amalgamation’ has no definite legal meaning. It contemplates a state of things under which 2 companies are so joined as to form a third entity or one company is absorbed into and blended with another company.”

In Re: Skinner 1958 (3) All E.R 273 too referred to amalgamation schemes and their effect as follows:

“schemes and orders made by virtue of Section 206 and Section 208 of the Companies Act 1948 can only transfer such rights, powers, duties and property as are capable of being lawfully transferred by a party to the scheme if no such sections of the Companies Act existed. It is not necessary in a scheme to exclude specifically from its operation things incapable of such transfer as general words in the scheme and any order in furtherance must be taken to operate in a manner not to repugnant to the general law of England.”

In M/s. General Radio & Appliances Co. Ltd. vs. M.A. Khader (dead) by LR’s 1986 (2) SCR 607, the effect of amalgamation of two companies was considered by the Supreme Court. It was held that after the amalgamation of two companies, the transferor company ceases to have any entity, and the amalgamated company acquires a new status, and it is not possible to treat the two companies as partners or jointly liable in respect of their liabilities and assets.

In the context of income tax liability, the Supreme Court, in Saraswati Industrial Syndicate Ltd. vs. CIT, Haryana, H.P. & Delhi 1990 Supp (1) SCR 332, observed that:

“The true effect and character of the amalgamation largely depends on the terms and scheme of merger but there cannot be any doubt that when two companies amalgamate and merge into one the transferor company loses its entity as it ceases to have its business. However, their respective rights or liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective.”

McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri & Ors 2014 (9) SCR 162 was a case involving default in paying provident fund dues under the Employees Provident Fund Act, 1952 (“the EPF Act”). In this case, one Mathura Tea Estate owned Saroda Tea Company Ltd., which was covered by the EPF Act. During the pendency of recovery and penalty proceedings, the entire management of Mathura Tea Estate (including ownership of Saroda Tea Co. Ltd and the estate) was taken over by Eveready Industries (India) Ltd., which discharged the principal EPF liability but sought to disclaim penalty (for noncompliance in the requirement to remit or deposit EPF contributions). This court negatived its position by noticing that the takeover document clearly noted the liability and how it was to be treated as McLeod Russel’s liability:

“13. There is no gainsaying that criminal liability remains steadfastly fastened to the actual perpetrator and cannot be transferred by any compact between persons or even by statute. But this incontrovertible legal principle does not support or validate the contention of Mr. Jayant Bhushan, Learned Senior Advocate for the Appellants, that damages levied in terms of Section 14B of the EPF Act cannot be foisted onto his clients.

We shall abjure from writing a dissertation on this compelling legal nodus; save to clarify that modern jurisprudence recognizes that the imposition of punitive damages, quintessentially quasi-criminal in character, can be resorted to even in civil proceedings to deter wilful wrongdoing by making an admonished example of the wrongdoer. This is the essential purpose, it seems to us, of Section 14B of the EPF Act, and an imposition within its confines does not assume criminal prosecution so as to stand proscribed insofar as transfer of establishment from one management/employer to its successor is concerned.”

In Shyam Sundar v State of Haryana (supra), the liability of a partnership firm, based on the agency of every partner for the individual criminal acts of its partners, was negatived:

“9. But we are concerned with a criminal liability under penal provision and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence whether they do business or not.”

In Religare Finvest Ltd. Vs. State of NCT of Delhi & Anr the Supreme Court held that the criminal liability of a company

(a) is recognized where it can be attributable to individual acts of employees, directors or officials of a company or juristic persons (Tesco, Meridian Global Funds, Standard Chartered Bank, and Iridium)

(b) recognized even if its conviction results in a term of imprisonment (Meridian, Iridium);
(c) cannot be transferred ipso facto, except when it is in the nature of penalty proceeding (McLeod Russel)

(d) the legal effect of amalgamation of two companies is the destruction of the corporate existence of the transferor company (in this case, LVB); it ceases to exist.

(e) that apart, only defined legal proceedings, are succeeded to by the transferee company.