Criminal Appeal No. 34 of 2015 (Arising out of Special Leave Petition (Crl.) No. 2961 of 2013), Criminal Appeal No. 35 of 2015 (Arising out of Special Leave Petition (Crl.) No. 3161 of 2013) and Criminal Appeal Nos. 36-37 of 2015 (Arising out of Special Leave Petition (Crl.) No. 3326-3327 of 2013)
AIR 2015 SC 923 or (2015) 4 SCC 609
Supreme Court of India
H L Dattu CJI., Madan B Lokur, A K Sikri JJ.
January 9, 2015
The criminal liability of directors is a core concept in corporate criminal law; it helps regulatory authorities and courts control, prosecute and punish crimes of a corporate nature. Given the artificial nature of companies and corporates, it is the employees and executives of the company that act as its agents. Executives are the ones who take the major decisions on behalf of the company. They can easily control the acts and omissions of the company on a short and long-term basis. Given the enormous controlling power that executives possess, it is vital to have laws, regulations and principles governing the actions of these executives. This ensures that they do not violate the law without fear of repercussions and do not use certain concepts of law to evade punishment.
In the case discussed below, there is a clear explanation of the requirements for holding executives responsible for the acts of their companies, especially in the context of the executives’ names being unlisted in the charge sheet.
Rule of Law decided upon by the Bench
The rule of law in this case is:
Section 120-B of the Indian Penal Code, 1860, read with Sections 13(2) and 13(1)(d) of the Prevention of Corruption Act, 1988.
Facts & Procedural History of the case
The central allegation, in this case, was regarding the 2G spectrum case. An additional spectrum that was beyond the usual spectrum that the Telecom Ministry approves. This approval of an additional spectrum was done with a 1% additional revenue share. Multiple cases had been registered, coupled with investigations by authorities. This transaction caused losses to Government Revenue. It was alleged in multiple investigations that this plan resulted from a conspiracy between Mr Ghosh, the then Telecom Minister and certain Cellular Operators.
The case in question is an appeal against an impugned order by a Special Judge, which had issued a summons to the accused in a charge sheet. This order, passed in March 2013, mentioned that the Special Judge was satisfied with the incriminating material recorded so that a summons could be issued against the accused. The Special Judge also stated that the summons was being issued to three executives – Mr Sunil Mittal of Bharti Cellular Ltd., Mr Asim Ghosh of Hutchison Max Telecom Ltd., and Mr Ravi Ruia of Sterling Cellular Ltd.
The Special Judge went on to specify the doctrine of ‘alter ego’ and applied the same to this case. He held that these executives (the appellants in the case) are the alter ego of their companies. So through vicarious liability, they shall be prosecuted for the crimes of their companies. It is pertinent to note that the Special Judge mentioned that their state of mind is the companies’ state of mind, and any acts of the companies shall be attributed to them. Notably, he had not mentioned the reasons for issuing an order of summons to the three executives.
The order was sought to be challenged by two of the three executives, to the extent of the order implicating them as the accused.
Issues raised in the Court of law
A singular issue was raised. However, the Court opined on a variety of topics concerning the issue below:
Is the impugned order of the Special Judge, which stated that the Appellants were not named in the charge sheet, valid in law?
The decision of the Court on the issues drafted
The Court decided that the order must be set aside, given the ambiguity in the impugned order and the wrongful application of a principle to the issue at hand. They had also mentioned clearly that they were not stating that the executives were free of guilt; they merely quashed the impugned order. It is up to the Special Judge to review the incriminating material again and issue fresh summons to the Appellants. Based on the evidence uncovered, the Special Judge may apply Section 319 of the Indian Penal Code, 1860, to include the Appellants in the proceedings to prosecute them further.
Analysis of the judgement
The judgement, which Justice A K Sikri wrote, was systematic in its breakdown of the facts and circumstances of the case, along with an analysis of the principle of alter ego and criticism of its application in the present case.
Initially, the counsel for the Appellants contended that the impugned order was erroneous in two parts. The first three paragraphs of the order are regarding Mr Ghosh and the cellular companies involved. The Special Judge had perused all the documents submitted on record to conclude that these accused persons can be further proceeded against. In paragraph four, the Judge detailed the principle of alter ego and stated that the executives of the three cellular companies were responsible for the acts of their respective companies. The Judge had connected these paragraphs to conclude that the three executives (two of whom are appellants) must be issued a summons. Explaining all this, Senior Advocate Salve (counsel for the Appellant) stated that the Judge’s order was erroneous and did not hold good in law.
Continuing, he detailed that the doctrine of ‘alter ego’ has been applied in reverse and that the companies were accused first rather than the directors. For the doctrine to apply, the directors must be held guilty, and so they shall be deemed guilty for the acts of the corporate body. Only when the principle is correctly applied can the agency mode of liability also be applied. For the same, he relied on Iridium India Telecom Ltd. v. Motorola Inc.1, Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd.2, and Aneeta Hada v. Godfather Travels and Tours Ltd.3, which are all landmark judgements by the Supreme Court of India.
Sr. Adv. Salve closed his arguments by pointing out that the CBI had investigated and concluded that there was no information or submitted material to implicate the Appellant.
Other counsels for the Appellants seconded these arguments and mentioned that some of the appellants were not mentioned in the charge sheet in the first place.
In terms of the arguments for the respondents, Senior Counsel K K Venugopal refuted the appellants’ submissions by bringing to the forefront the reasoning behind the decision to implicate the appellants. He stated that once companies are charged with mens rea offences, they need to be punished for the same, and the only way to do that is to punish their Directors or Officers. He then pointed out the actions of these executives on behalf of their companies, which had resulted in the 2G Scam. In a nutshell, Sr. Adv. Venugopal has reinforced the human agency doctrine and stated that, despite the omission of appellants’ names in the charge sheet, the Special Judge had powers to make an order such as the one in question.
In a rejoinder, counsel for the Appellant, Mr Fali Nariman, argued that for vicarious liability to be applied, there is a need for a statutory provision or something to be imputed. Therefore, the Special Judge has wrongfully applied the principle of alter ego.
After listening to the extensive arguments and contentions of the parties, the Court began examining the order and applying the principle of alter ego.
The Bench refused to discuss the comments made by the appellants concerning the 2G scam itself, making it clear that the matter is beyond the scope of their appeals.
Firstly, the impugned order was dissected. At the outset, the Court admitted the trial courts could issue that summons to persons not mentioned as accused in the charge sheet. The only requirement is that there must be sufficient incriminating material on record to empower the Judge to issue a summons. The question, in this case, is not about the incriminating material; instead, it is about the lack of a convincing reason behind the Judge’s decision to issue a summons. The Judge has not clearly stated why he had decided to implicate the three executives as accused and issue summons. He had merely stated that the executives were or are in control of their company’s affairs – this makes them the mind and will of the companies and that this makes them the alter ego of their companies.
Secondly, the doctrine of alter ego was dealt with. The Court reiterated a landmark Judgement from 2005 – Standard Chartered v. Directorate of Enforcement7, and explained that the Bench, in that case, opined that companies could be prosecuted and punished for offences with mandatory imprisonment. Then, the Iridium Infra case was discussed, wherein the same subject was discussed, with the addition of mens rea element. The judgement held that the criminal intent would be imputed to the corporate body. That is to say, the group of people controlling the company must have criminal intent, which will implicate the company to have criminal intent and therefore be punished.
In the case at hand, the company was first held guilty of criminal intent, following which the executives were held to have criminal intent. The Special Judge had applied the principle in reverse – the company’s criminal intent had been established first, and then its executives were implicated. Thus, applying this principle in this manner makes it erroneous to apply the theory of vicarious liability to the case.
Thirdly, the Court discussed the circumstances when the company is accused, and its executives can also be prosecuted. It is mainly concerning intent that the decision is made. There must be sufficient evidence for the same. In other cases, the statute in question must refer to the vicarious liability of the company’s executives. Cases discussed included Jethsur Surangbhai v. State of Gujarat.8, Sham Sunder v. State of Haryana9, Hira Lal Hari Lal Bhagwati v. CBI10 and Sharon Michael v. State of TN11 among others.
Based on these discussions, the Court concluded that the Special Judge had used an inaccurate principle of law. It is essential to the case that the Judge mention the reasons for his satisfaction with the incriminating material. However, the Judge failed to do the same.
After making a brief statement on the powers of the Special Judge to issue summons when the accused is not on the charge sheet, the Court went on to conclude its analysis of the case. They held the impugned order invalid in law as the Special Judge failed to adequately explain the reasons or grounds behind his act of proceeding with the case by issuing a summons. Therefore, the impugned order was quashed and set aside, and the appeal was allowed. However, the Special Judge does have the power to revisit the case, review the documents, and prepare a fresh order that lists the reasons for the satisfaction of incriminating material clearly and in a prima facie manner.
As seen from the case analysis above, Judges and legal professionals must be careful in their acts and omissions, as an error may lead to the entire proceedings being vitiated. While everything else on the part of the Special Judge’s order was abiding by the law, two points left the entire order of a significant financial scandal quashed. Therefore, it is vital that essential points are included in documents and that the law is followed to a T.
On the other hand, it is equally essential to ensure that executives of companies do not evade punishment on procedural or theoretical grounds. In order to recover money from white-collar crimes, theories of vicarious liability should be prudently applied in relevant circumstances.
- Iridium India Telecom Ltd. v. Motorola Inc., (2011) 1 SCC 74 (India)
- Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd., (2010) 10 SCC 479 (India)
- Aneeta Hada v. Godfather Travels and Tours Ltd., (2012) 5 SCC 661 (India)
- M C Mehta v. Union of India, (2007) 1 SCC 110 (India)
- Kishun Singh v. State of Bihar, (1993) 2 SCC 16 (India)
- Dharam Pal v. State of Haryana, (2014) 3 SCC 306 (India)
- Standard Chartered v. Directorate of Enforcement, (2005) 4 SCC 530 (India)
- Jethsur Surangbhai v. State of Gujarat, (1984) Supp. SCC 207 (India)
- Sham Sunder v. State of Haryana, (1989) 4 SCC 630 (India)
- Hira Lal Hari Lal Bhagwati v. CBI, (2003) 5 SCC 257 (India)
- Sharon Michael v. State of TN, (2009) 3 SCC 375 (India)
This case analysis is authored by Vibha Chinni Krishnan, a student of Symbiosis Law School, Hyderabad.