In the wake of the Bhopal verdict, the BP oil spill and India’s new nuclear damage bill, fears over corporate liability – and in some cases the lack of it – have resurfaced
Companies in India have been accused of everything from corrupt practices and fraud to causing environmental damage and loss of lives. The story of Satyam and its overnight fall from a company lauded for its corporate social responsibility – including an award from UK Trade & Investment in 2008 – to a failed, fraudulent entity is one that continues to play itself out.
But questions remain about who is responsible and to what extent companies and their staff should be held liable for misdeeds.
Arguing that “criminal liability cannot be equated with civil liability,” Sumeet Kachwaha, the managing partner of Kachwaha & Partners, is worried about the emerging trend for senior managers to be held criminally liable for corporate misconduct. “If a chairman or a managing director of a large company can be deemed to be criminally liable for all that may go wrong in the company, without the need to establish recklessness, negligence or a causal link, it would become impossible to find a person of standing or calibre willing to hold such a position,” he says.
Who is accountable?
The complexity of corporate liability in India is underscored by the tragedy of Bhopal. Liability for thousands of deaths, damage to the environment and inter-generational health concerns was settled with a payment by Union Carbide of just US$470 million in 1989. This is a far cry from the US$20 billion provided recently by BP to compensate victims of the Gulf of Mexico oil spill following pressure from the US government.
Earlier this year, seven of Union Carbide’s executives were sentenced to two years in prison for their roles in the tragedy, but all were subsequently released on personal bond. Warren Anderson, the former chairman of the company, has not been brought to trial, giving rise to accusations that successive Indian governments have pandered to US business interests at the expense of holding companies accountable for their actions.
However, corporate liability in India is defined by much more than Bhopal. Indeed, the country is no stranger to corporate mishaps and despite large public protests and extensive media coverage, redress for victims is often meagre. There is a lack of clarity over how companies should be held accountable for their wrongdoings and such ambiguity has sometimes created sufficient wiggle-room for offending entities to get off scot-free.
“Corporate criminal liability is recognized by Indian law but the issue which is yet to be effectively settled is how a company should be penalized for malpractice,” says Justin Bharucha, a partner at Bharucha & Partners. “While companies do have a separate legal personality, clearly it is not possible to imprison a company.”
“The traditional view was that a corporation could not be guilty of a crime because criminal guilt required intent and a corporation not having a mind could form no intent,” says Kirit Javali, an advocate at Jafa & Javali. “Courts are most likely to impose criminal liability on a corporation when the criminal act is requested, authorized, or performed by the board of directors, an officer or another person having responsibility for formulating company policy,” he adds.
In a landmark judgment in Standard Chartered and Ors v Directorate of Enforcement and Ors in 2005, the Supreme Court ruled that there was no “blanket immunity” for any company merely because the prosecution would ultimately entail a sentence of mandatory imprisonment.
However, what appears to be missing is the will to enforce criminal sanctions on a corporation. “There is no obstacle in the criminal law jurisprudence whatsoever to impose criminal sanctions on a corporation,” says Sachin Joshi, deputy director at the Confederation of Indian Industries’ Centre of Excellence for Sustainable Development. “However, this concept is still not contemplated in the statutes in India.”
The debate over corporate liability resurfaced recently as the Indian government fought to gain approval for its Civil Liability for Nuclear Damage Bill. The bill was passed by the Lok Sabha, India’s lower house of parliament, on 25 August. It paves the way for foreign participation in the building of nuclear power plants, but has been widely criticised by opposition parties for capping the liability of operators and equipment suppliers in the event of a nuclear accident.
The government offered some concessions in order to get the bill through parliament. These included raising the cap on liability from its proposed figure of Rs5 billion (US$107 million) to Rs15 billion.
Lobby groups in favour of foreign participation reacted angrily to the change, arguing that the increased liability limit would dissuade interest from overseas. “This will stall the growth of the nuclear manufacturing industry,” said the Confederation of Indian Industries in a letter to the government, adding that “there is no insurance coverage available for suppliers in the nuclear business”. The concerns over insurance stem largely from clauses 17 and 17(b) of the bill, which stipulate that the operator of the nuclear plant, after paying the compensation for nuclear damage, will have a right of recourse if the nuclear incident results from the supply of equipment or material with patent or latent defects or sub-standard services.
“Foreign operators want guaranteed safety from the Indian government,” said Suresh Mane, the head of the law department at the University of Mumbai, at a public consultation.
But such protection for foreign investors may be falling out of favour in certain quarters. In the US, for example, the government is apparently regretting the caps it placed on the liabilities of oil companies. “Today the US senate wants the cap removed,” says Sunita Narain, a director of the Society for Environmental Communications at the Centre for Science and Environment in Delhi. “Otherwise it will have to prove that BP’s oil spill was the result of deliberate and gross negligence and/or regulatory non-compliance.”
Prithviraj Chavan, India’s minister of science and technology, stressed that the cap would not necessarily be a final amount, but merely a benchmark to allow plant operators to arrange insurance coverage. Chavan said the total compensation was “unlimited” and would be decided by a government claims commissioner, according to the gravity of an accident.
Criminal laws fail to deter
While the Civil Liability for Nuclear Damage Bill provoked a healthy debate over the civil liabilities of companies engaged in the nuclear power sector, it has done little to remove the ambiguities over criminal liability. “Except for a minor chapter on offences, the bill doesn’t look at criminal liability,” said Mane.
Under the Indian Penal Code, 1860, companies can be held liable for a number of offences including death by negligence, endangering the personal safety of others, negligent conduct with respect to machinery or poisonous substances, misappropriation of property and falsification of accounts. However, Indian law on corporate criminal liability is not confined to the IPC, but is spread across several statutes, including the Prevention of Corruption Act, 1988, the Prevention of Money Laundering Act, 2002, the Negotiable Instruments Act, 1881, the Information Technology Act, 2000, the Prevention of Food Adulteration Act, 1954, the Essential Commodities Act, 1955, and several others.
In cases of criminal liability, violations are normally punished by imprisonment or the payment of a fine. But many observers have criticized the fines, arguing that they are too low to be of consequence and relatively easy to evade. “It is easy for them to get away with criminal liability and [a fine] does not [achieve] the purpose of punishment,” says Joshi. “There is a need to evolve new forms of punishment which could effectively deter the corporate from engaging in any criminal activity.”
Atul Dua, a senior partner at Seth Dua & Associates, suggests some possibilities: “Economic and social sanctions should be encouraged against corporate houses, such as winding up of the company, temporary closure of the corporation and heavy compensation to the victims,” he says.
Calls for tougher penalties
Tushar Chawla, a partner at Economic Laws Practice, also suggests harsher penalties. He says depending on the gravity of the offence companies should be blacklisted and barred from participating in government sponsored projects or their operations should be temporarily suspended. “In extreme cases where repeated, malicious and grave malpractice has taken place, resulting in extreme damage to the public at large, company operations should be permanently suspended,” Chawla adds. “Further, in cases where such companies have a foreign direct investment component, then the suspension of such companies should also be extended to the parent companies vis-à-vis their India operations.”
However, in order to encourage corporate responsibility and prevent negligence, ruthless punishment alone may be insufficient. “Shareholder activism from institutional shareholders and reinforcing the role of independent directors on the board is critical to enhancing good corporate governance,” says Suchitra Chitale, a partner at Chitale & Chitale Partners.
The new Companies Bill seeks to address corporate foul play by awarding shareholders greater power in order to improve corporate governance. Kaviraj Singh, managing partner at Trustman & Co, says the bill will “revamp archaic laws to help India’s growing corporate sector adopt international best practice and make boards and senior management of companies more accountable”.
Javali, however, disagrees, saying that the core issues of accountability and liability have not been tackled. “The Companies Bill, which is in its last stages of being approved, is silent. While the purpose of this new legislation is primarily to improve the control and regulation of domestic and foreign companies, it doesn’t have any clauses with regard to these problems,” he says. “The government, despite getting a rude awakening like the Bhopal or Uphaar [cinema] tragedy should get on with its job of actually doing something about the liability of the company.”
Aside from the absence of effective laws to deal with corporate criminal liability, there is a worrying tendency of courts to impose liability solely on the board of directors or officers of a company. “It does seem incorrect to obviate the possibility of imposing liability on employees of the company who are in default,” says Bharucha. “In an increasingly complex technical and technological environment, [it is important to] query whether the board alone should be responsible if it has acted in good faith and sought to enforce the highest possible standards, but the failure lies with employees.”
Some observers say India could benefit from legislation modelled on laws in other jurisdictions. “The Netherlands has introduced corporate criminality (the Economic Offences Act, 1950, and article 51 of the Criminal Code), which can be imposed directly on a company as a whole without first holding an individual officer of the company liable,” explains Chawla of Economic Laws Practice. “Thus the company could be held liable for decisions taken by the company, even though these could not be accredited to any particular individual or group of individuals.”
Similar legislation exists in Switzerland, imposing liability on corporations directly if an offence is committed on its behalf and the fault cannot be attributed to a specific individual. And in France, as Chawla notes, a company may be held directly liable under French criminal law for a criminal act “if the company violates any criminal statute”. Such a violation should have been carried out by the company’s representatives or organs and as a result the company should have benefited.
When wrongdoing occurs
Where a company falls foul of the law, most observers agree that honesty is the best policy. “In the event of gross negligence or malpractice by a corporation which results in widespread damages, a corporation should plead guilty and in fact proceed towards rehabilitation activities to minimize damages,” advises Chitale.
“If a company pleads guilty, it can expect that the quantum of punishment would be reduced,” says Mamta Tiwari, a partner at FoxMandal Little. She adds, however, that “this is the only benefit a company can have in pleading guilty”.
When high profile corporations are involved, contact with the media should be handled extremely carefully. The media circus that surrounded the BP oil spill in the Gulf of Mexico, and the widely reported public relations gaffes made by the company’s chief executive, compounded BP’s woes. “It is most important for the company in question to be honest and to manage public relations in an adverse situation,” says Donnie Dominic George, an associate at Bharucha & Partners. “It is perhaps best for the company to quickly and thoroughly evaluate the situation and thereafter issue an appropriate public statement and take remedial action. There is a very fine line which the company must walk to ensure that matters are not judged outside the court.”
Resisting the temptation to cut corners can also prove profitable. “Principled economic behaviour is a long-term investment in the security of nations,” says Singh. “The world cannot afford economic misconduct.”