White collars, black letters: Corporate criminal liability in India

When the BluSmart scandal erupted earlier this year, startup directors across the industry were jolted by how quickly boardroom decisions could turn into criminal allegations.

A director’s signature isn’t just ink on paper, it can become a summons to the court if corporate oversight slips. In India, this isn’t an anomaly, but the cost of doing business. How did we get here?

Since the early 19th century, it has been established that a company upon incorporation becomes a distinct legal entity, separate from its shareholders, directors or employees. This legal fiction raised thorny questions: Can artificial entities commit crimes? When are directors personally liable for corporate misconduct? How do you compel a company’s appearance at a criminal trial? And if convicted of a crime, how do courts enforce imprisonment against fictitious entities?

Modern jurisprudence recognises that corporations may be indicted for criminal offences, except those involving personal malice, which a company by nature cannot possess. While a company lacks the ability to ‘think’, courts may attribute the intent of key decision makers (the ‘alter ego’ of the company) to the company itself. In cases of absolute liability, where a breach of a law triggers automatic culpability, intent is irrelevant and corporations may be criminally prosecuted.

A landmark ruling in 2005 by the Supreme Court, in the case of Standard Chartered Bank and Ors. vs Directorate of Enforcement and Ors, affirmed that a company can be prosecuted for crimes, even where the consequence is imprisonment. But since an artificial entity cannot be physically jailed, the court has discretion to impose the applicable fine.

Directors and employees aren’t always shielded from legal jeopardy. However, Indian courts have frequently ‘pierced the corporate veil’ in cases of fraud or tax evasion to prosecute individuals personally. Section 447 of the Companies Act recognises personal liability for “any act, omission or concealment of any fact or abuse of position committed by an person…with the intent to deceive, gain undue advantage from, or to injure the interests of, the company…or any other person."

Crucially, the provision’s wide phrasing makes nearly any self-serving decision vulnerable to scrutiny for fraud.

As a director, it’s not always what you do that matters. In 2013, during the Satyam Computers scandal, the company’s chairman confessed to manipulating the company’s accounts by over ₹7,000 crore, leading to massive investor losses and criminal prosecution of its board. Despite certain directors claiming genuine ignorance, courts held several of them liable for failing in their duties of oversight and diligence. The Court’s approach was unequivocal: ignorance or delegation is no longer a shield for corporate leaders. They have to duty to actively prevent unlawful behaviour and ensure compliance.

Different regulations also impose vicarious liability on senior management for actions taken by companies. For instance, Section 141 of the Negotiable Instruments Act makes directors liable for dishonoured cheques unless they prove that the offence was committed without their knowledge. Under Section 16 of the Environment Protection Act, every person in charge is presumed guilty when there are corporate environmental violations. Section 127 of the Companies Act, 2013 provides for personal liability for a failure to distribute declared dividends. India’s legacy employment laws further complicate corporate accountability by attributing statutory violations directly to management.

Conversely, in the absence of automatic ‘deeming provisions’, directors are not liable without specific allegations of their involvement. In the 2G Spectrum Scam, the trial court issued summons not only against the accused companies (Bharti Cellular nd Hutchison Max Telecom), but also against the Managing Directors on the basis that these individuals were responsible for the conduct of their companies. The Supreme Court in Sunil Bharti Mittal v. Central Bureau of Investigation quashed the summons citing insufficient evidence of their active role in the commission of these offences. In the absence of such evidence, directors cannot be hauled up for a company’s actions.

Earlier this year, the Supreme Court in the case of Sanjay Dutt and Ors v. State of Haryana and Anr affirmed this principle. When directors were summoned and charged under the Punjab Land Preservation Act for the unlawful uprooting of trees by their employees in the district of Gurgaon, the Supreme Court quashed the order. It held,

“...mere authorization of an act at the behest of a company or the exercise of a supervisory role over certain actions or activities of the company is not enough to render a director vicarious liable. There must exist something to show that such [illegal] actions stemmed from their personal involvement."

These judicial decisions reflect India’s adoption of the Business Judgement Rule governing international corporate decision making. The rule protects directors from the consequences of their business decisions if they acted diligently and in good faith. Section 463 of the Companies Act, 2013 gives the court discretion to discharge a director from criminal proceedings if they acted honestly and reasonably, excluding cases of negligence or conflict of interest.

Still, if a company is ultimately charged with a crime, without the personal involvement of directors, how do you compel its appearance? Section 342(2) of the BNSS (India’s Criminal Procedure Code) gives the company a right, but not an obligation, to appoint a representative for trials. Section 342(4) provides that in the absence of an authorized representative, any legal stipulation that requires the personal presence of an accused (such as a formal reading of charges) stands waived.

What if the company refuses to appoint a representative and participate in the trial? In 2024, a magistrate in Calcutta issued warrants of arrest against an accused company in an attempt to attach its assets. In appeal, the Calcutta High Court (Hans Raj Jain vs. the State of West Bengal and Anr) overturned the decision and held that warrants of arrest against a company are non-executable in law. The word ‘arrest’ literally means apprehending a person. The actual physical apprehension of a corporate body is impossible. In any event, a company’s physical existence through a permanent registered office can never be perceived as evading trial.

The Calcutta High Court ruling is extraordinary. A warrant of arrest is an essential prerequisite to a proclamation of absconding and a consequential attachment of assets. If a company can never be subject to a proclamation, its assets can never be attached to force its participation. What this means for companies facing trial is that their presence can never truly be compelled and the worst outcome is a potential fine in the event of a conviction.

In the end, while statutes like the Companies Act, 201, and judicial doctrines provide a framework to bring corporate criminals to justice, the legal fiction of a company makes the business landscape one of immense opportunity and significant complexity. Yet, this complexity is double-edged. Robust corporate criminal liability builds trust and deters wrongdoing, but also compels directors to invest heavily in compliance and risk management. In a country where laws are unevenly applied, corporate success demands relentless legal vigilance. For directors, compliance is no longer a checkbox; it’s a cornerstone.

Rohin Dubey is a practicing lawyer at the Gurgaon-based law firm, N South, Advocates.