The concept of Doctrine of Identification finds its roots in the English Law. The growth of this doctrine has helped in the implication and prosecution of the criminal activities of directors/ managers of many companies. The corporate personality of a company is different and separate from the promoters, directors or owners of the company. This is a widely known principle in law and has its source in the celebrated case of Solomon v. Solomon. In this case, the Court held that the corporate entity is different from the people who are in the business of running of the company. The misuse of this principle led to “Lifting of the Corporate Veil” wherein the shareholders or creditors of the company are protected if the company is engaged in any fraud or other criminal activities.
A corporate entity can sue and be sued in its own individual name. In criminal cases, the company can be prosecuted against but it is quite ineffectual as the company cannot be punished with imprisonment or death. The only punishment that can be levied on the company is by way of fine, which at times is quite minimalistic. The question then raised is whether a company can ever be prosecuted for criminal offences and be punished with more than just a monetary fine.
EVOLUTION OF THE DOCTRINE OF IDENTIFICATION
The 1940s saw the emergence of a new mechanism to impute criminal liability to Corporations in the form of the “identification principle.” Until the 1940s, the courts stuck firmly to the view that it was inappropriate to bring a prosecution against a Company for common law offences requiring proof of a subjective mental element. However, through the 1940s it was observed in a variety of cases that a Company is capable of being malicious, can intend to deceive and can conspire.
First, was the case of DPP v. Kent and Sussex Contractors, in which the Company was charged under the Defence (General) Regulations, 1939 of making use of a document which was false in a material particular and making a statement which they knew to be false in a material particular, with an ‘intent to deceive.’ The Company was made liable.
Next, was the case of R v. ICR Haulage Ltd., in which the Company was charged and found guilty for ‘conspiring to defraud’ and thirdly, was the case of Moore v. Bresler, in which the Company faced charges for embezzlement and tax evasion under the Finance Act No. 2, 1940.
Among the three, the most important was the case of R v. ICR Haulage, since it was the only case among the three to deal with a nonstatutory offence.
In H.L. Bolton Company v. T.J. Graham & Sons, Lord Denning as explained the position and said that the company could in many terms be equated with a human body. They do have a brain and a nervous centre which controls the entire body. They have people as their hands and legs, under instructions of whom work of the nervous centre is carried out. Lord Denning equated the brain and nervous system to the directors and managers who represent the directing will of the company. He held that:
“The state of mind of these managers is the state of mind of the company and is treated by law as such. 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 the celebrated case of Tesco Supermarkets Ltd. v. Nattrass, the Appellant was marketing a packet of washing powder at a price lower than the market price, but the Defendant did not find the packet of washing powder at the reduced price, as advertised. The Defendant therefore filed a complaint under the Trade Descriptions Act, 1968. One Mr. Clemant of the Appellant was in charge of the packets with the reduced price being displayed in the store. Lord Reid discussed the law relating mens rea and the importance of the same in criminal law.
“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 a 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”
Lord Reid also discussed which people can be ‘identified’ with the company. He stated that the main considerations are the relative position he holds in the company and the extent of control he exercises over its operations or a section of it without effective superior control. In this case, it was held that the shop manager could not be identified with the company.
In Meriden Global Funds Management Asia Ltd. V. Securities Commissioner, Lord Hoffman discussed the principle of identification and stated that if an employee had be considered the ‘directing mind and will’ of the company, the employee should have the authority to act as he did. In the same case, the Court in its obiter stated that conviction of a smaller company is easier (on application of this principle) because the relationship between the culprit and the company can be identified with more ease and certainty. That is not the case in larger companies.
In Lennard’s Carrying Co. v. Asiatic Petroleum Co., Viscount Haldane propounded the “alter ego” theory and distinguished that from vicarious liability. The House of Lords stated that the default of the managing director who is the “directing mind and will” of the company, could be attributed to him and he be held for the wrongdoings of the company. It was famously stated that:
“a corporation is an abstraction. It has no mind of its own any more than a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes maybe called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”
There was a different view taken in Tesco Stores Ltd. V. Brent London Borough Council wherein a store clerk sold a over -18 video to an underage customer. The Court noted that Doctrine of Identification could not be applied here and the company was hence not liable. The reason for this decision was that in a large company, the senior management could not be expected to know each and every customer and whether the customer was a minor or not. In that event to locate a person for this knowledge was hence impossible and the doctrine of identification was hence inapplicable in this case.
Again in R v. Redfern & Dunlop Ltd. (Aircraft Division), the Court held that where the employees who were not in the decision making level could not be ‘identifiable’ with the company and therefore were not deemed to be the controlling mind of the company. The question that comes up is that if a person at a lower level commits a crime in the name of the company, the company cannot be held liable for the same. This may pose to be a problem in the sense that the company may make a division between the senior management and the employees to avoid criminal proceedings against them.
SCOPE IN INDIA
We are also going to examine the growth and importance of the Doctrine of Identification in Indian Law during the recent years. The most recent judgment of the Supreme Court in the Reliance Natural Resources Limited v. Reliance Industries Limited, discusses the Doctrine of Identification. This case is a dispute over two brothers namely Mukesh Ambani led RIL and Anil Ambani led RNRL. After the death of their father Mr. Dhirubhai Ambani, the entire Ambani Group of Companies was divided between the two brothers. An arrangement was reached between the parties, with their mother as the mediator. Mukesh Ambani had in this family arrangement, made certain concessions on behalf of the RIL, which RNRL had sought to rely upon in the present case.
The Bombay High Court in its judgment held that Mukesh Ambani being the majority shareholder of the company was hence the ¨controlling mind and will¨ of the company. The observation of the judges was that in the Identification Doctrine, the company was “identified with such key personnel through whom it works”. These “key personnel” were described to be the alter ego of the company and their actions were deemed to be the actions of the company itself.
The Supreme Court overruled the judgment of the Bombay High Court in respect of the Identification Doctrine. It observed that the family arrangement was between three parties namely the mother and the 2 sons.
The legal entity of the company was different than the individual entity and in the present case, the company having more than a million shareholders, one person could not be said to have had the knowledge with respect to the company, which knowledge he had in his personal capacity. The court discarded this doctrine on the fact that the facts of the case did not fall into their preview.
The other Indian cases where the Courts have followed the doctrine of identification are Union of India v. United India Insurance Co. Ltd. and others and Assistant Commissioner, Assessment –II, Bangalore and others v. Velliappa Textiles Ltd. & Ors.
The first case was about an accident that occurred at an unmanned level railway crossing in Kerala when a hired vehicle was hit by a train passing through and passengers were injured and the driver was also killed. Claims were made by the injured and the relatives of the deceased and after many appeals, the case reached the Supreme Court. The question in that scenario was whether the passengers were to be held liable as the driver who was negligent was appointed or retained by them. The court discussed the principle of identification or imputation, in the present case whether the defendant can plead contributory negligence of the plaintiff or of an employee of the plaintiff where the employee is acting in the course of his business.
In the second case, the question was whether in the case of criminal misdemeanors, the employees can be charged with imprisonment or is the company is liable for fine and/or imprisonment. The Court held that the director / mangers of the company, who are the directing will and mind of the company, should be held liable. The case of U.S. Supreme Court in New York Central & Hudson River Railroad Company v. United States stated that.
“It is true that there are some crimes which, in their nature, cannot be committed by corporation. But there is a class of offences, of which rebating under the Federal statutes is one, wherein the crime consists in purposely doing the things prohibited by statute. In that class of crimes we see no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred on them. If it were not so, many offences might go unpunished and acts be committed in violation of law where, as in the present case, the statute required all persons, corporate and private, to refrain from certain practices, forbidden in the interest of public policy.”
The directors/ managers try to avoid the penalty by taking the defense that the company being a separate legal entity, should be prosecuted separately. The problem that arises in particularly criminal cases is that, the punishment for the crimes are fine and / or imprisonment. If the offender is a company, only a monetary penalty can be imposed. This led to more offences being committed on the name of the company by the directors/ managers, who are protected under the “separate legal entity” theory.
By this doctrine of identification, those offenders are being held liable for the acts committed by the company. The main objective of the doctrine is to punish the people who are actually committing the crime who are the brain and mind of the company through which the crime is being committed.
The Bombay High Court in its judgment held that Mukesh Ambani being the majority shareholder of the company was hence the ¨controlling mind and will¨ of the company. The observation of the judges was that in the Identification Doctrine, the company was “identified with such key personnel through whom it works”. These “key personnel” were described to be the alter ego of the company and their actions were deemed to be the actions of the company itself