ROGUE CORPORATES…BEWARE
It was 5th May, 2005, which epitomizes the red-letter day in the sphere of corporate criminal jurisprudence, when a historic Supreme Court judgement of Standard Chartered Bank[1] delivered by a five judge constitution bench (split verdict of 3:2), made companies liable to be prosecuted and punished with imposition of fine for a slew of offences – income tax violations, economic crimes, fraud, mismanagement, financial irregularities and adulteration reversing an earlier ruling of Velliappa Textiles Ltd.[2] where it was held that the corporates cannot be prosecuted for offences which require imposition of mandatory term of imprisonment coupled with fine.
Question at hand
The important issue for consideration before the Apex Court was ‘whether a company or a corporation, being a juristic person, could be prosecuted for an offence for which mandatory punishment prescribed is imprisonment and fine.’
The controversy had arisen in the context of provisions of Section 56 of the Foreign Exchange Regulation Act, 1973. The appellant Corporation sought to be prosecuted under the said provision for violation of the relevant provisions of the Act. The appellant contended that they couldn’t be subjected to criminal action under Section 56 of the FERA as the section prescribed a minimum sentence of imprisonment and fine and company being a juristic person couldn’t be imprisoned.
Under Section 56 of the FERA Act, in respect of certain offences, if the amount or value involved therein exceeds one lakh of rupees, the punishment prescribed is imprisonment for a term which shall not be less than six months, but which may extend to seven years and with fine. In other lesser cases, the punishment prescribed is imprisonment for a term, which may extend to three years or with fine or with both.
Going by the said provision, if the view expressed in Velliappa Textiles was to be accepted as a correct law, the company could be prosecuted and punished for a lesser offence while giving an option to the Court to impose a sentence of imprisonment or fine, whereas for an offence of higher degree, the Court is not given a discretion to impose imprisonment or fine, and therefore, the company cannot be prosecuted as the custodial sentence cannot be imposed.
To counter the legal difficulty arising out of the above situation, the Law Commission in its 41st and 47th Report suggested some amendments to the Indian Penal Code, wherein if the offender is a company or a body corporate or an association of individuals, it shall be competent to the Court to sentence such offender to fine only. But the IPC (Amendment) Bill, 1972, prepared on the basis of the recommendations of the Law Commission lapsed and did not take shape of a law.
The next question to be considered is ‘whether the Court has got the discretion to impose the sentence of fine alone where an accused is found guilty and the punishment to be imposed is imprisonment and fine.’ As all the civilized systems of law import the principle of ‘lex non cogit ad impossibilia’ i.e. the law compels no impossibility, the Court while dealing with corporate bodies cannot impose the sentence of imprisonment owing to the impossibility of sending the company to prison. This principle can be found in Bennion’s Statutory Interpretation 4th Edition, where Bennion while discussing the legal impossibility states that, ‘If an enactment requires what is legally impossible it will be presumed that the Parliament intended it to be modified so as to remove the impossibility element.’ This could be done only in respect of juristic persons and not natural persons and by doing so the Court does not alter the provisions of the law by interpretation, but merely carries out the mandate of the legislature. But, then does the maxim by itself empower the Court to break up the section into convenient parts and apply them selectively.
It is true that the penal statutes are to be strictly construed but more importantly these are to be fairly construed according to the legislative intent as expressed in the enactment. Here, the legislative intent to prosecute corporate bodies for the offences committed by them is clear and explicit and the statute never intended to exonerate them from being prosecuted. It is sheer violence to commonsense that the lawmakers intended to punish the corporate bodies for minor and silly offences and extended immunity of prosecution to major and grave economic crimes.
The distinction between a strict construction and a more free one has disappeared in modern times and mostly the question is ‘what is true construction of the statute.’ It may be valuable to mention that the original FERA of 1947 did not prescribe a mandatory punishment of imprisonment and fine, and the 1973 Act sought to make the penal provision more severe and, therefore, prescribed that in case of high valuation cases punishment by way of imprisonment and fine, both will be necessary. When the statutory intention was to make the graver offences punishable more severely, are we justified in holding that in such a situation the offender totally escapes liability?
The law cannot be allowed to result in such absurdity and corporations should not be allowed to go scot-free.
There is no dispute to the fact that a company is liable to be prosecuted and punished for criminal offences, although committed through its agents except for crimes, which the company is held incapable of committing by reason of personal malicious intent. Moreover, in the statutes defining crimes, prohibition is frequently directed against any ‘person’ who commits the prohibited act, and often in many statutes the term ‘person’ is defined, like in case of Section 11 of the Indian Penal Code as well as in Section 3 (42) of General Clauses Act where the term ‘person’ includes any company or association or body of persons whether incorporated or not. Even if not specifically defined, it necessarily includes a corporation.
Gainsay Approach
In light of the judgement in Velliappa Textiles and critical review by the minority judges in the instant matter, it can be pointed out that the situation is not one of an interpretational exercise but one that calls for rectification of an irretrievable error in drafting of the concerned statutes. Furthermore it is nothing but the impossibility of implementing such a provision without transgressing the well established bounds of judicial functions and taking on the role of the legislature. Legislative activism is the only solution in such circumstances as has been recognised in several jurisdictions like Australia, France (Penal Code of 1392), Belgium (in 1934, Cour de Cassation recognised the punishment of a corporate body by making it a subject of Belgian Criminal Statute), Netherlands (The Economic Offences Act, 1950 and Article 51 of the Criminal Code) and Canada.
Treading on the conventional path, the maxim ‘judicis est just dicere’ best expounds the role of the Court as to interpret the law and not to make it. The Court cannot act as a systematic caddie who nudges the ball into the hole because the putt missed the hole. Even a caddie cannot do so without inviting censure and more. If the legislation falls short of the mark, the Court could do nothing more than to declare it to be thus, giving reasons, so that the legislature may take notice and promptly remedy the situation.
There was a question mark on the view that by ‘judicial heroics’ it is open to the Court to remedy an irretrievable legislative error by resort to the theory of presumed intention of the legislature. In a House of Lords decision,[3] Lord Simonds elucidated this ‘to be a naked usurpation of legislative function under thin disguise of interpretation’. The language of Acts of Parliament and more especially of the modern Acts must neither be extended beyond its natural and proper limits, in order to supply omissions or defects, nor strained to meet the justice of an individual case.[4]
To condense the above proposition in shape of a fallacious mathematical syllogism, the argument is that the statute mandates (‘A + B’), where presumably A = imprisonment and B = fine; if A is impossible, then A = 0. Then, the statutory mandate would be only (Zero + B), which is equal to B i.e. imprisonment, which is the crux of the recent verdict. Though there is no warranty that the value of A reduces to zero merely because it is impossible in case of a corporate offender. It could very well be that A is indeterminate, then, (Indeterminate + B = Indeterminate), which is exactly held by the case of Velliappa Textiles.
Conclusion
Underlying the ruling is the basic principle that the law has conferred and assigned a special status to companies, which is not available to other forms of associations. On incorporation, a company acquires a separate legal entity, distinct from and independent of its directors. Unlike a partnership, which has no legal entity, a company has a separate corporate existence. Whenever a fraudulent, dishonest or improper use is made of the legal entity, the Court will break through the corporate shell and apply the principle of ‘lifting of the corporate veil’. After all, the special status assigned to companies also enjoins upon them to perform their ‘social responsibilities’.
Some companies were escaping liability for cheating and fraud. But, post this ruling; there can be no blanket immunity to any company, just because at the end of the trial, they cannot be sentenced to imprisonment. True, the law cannot put a company in prison but atleast you can use its money (through imposition of fines) for setting things right by compensating the wronged.
The victims of fraud would rather prefer getting compensated for their loss than wait endlessly and have the grim satisfaction of seeing the directors of that company getting arrested and paraded in fetters. The verdict, in fact, is akin to the internationally accepted ‘polluter pays principle’ which guides our environmental laws.
Thus, the Supreme Court by this ruling may have issued a wake up call to the shareholders. The rulings such as these are as much about making management accountable for irregularities as they are about priming up the shareholders to the perils of allowing the management to act, thus, in their name and with their money.
(This article was authored in the year 2005 when the writer was pursuing his Bachelor of Laws (LL.B.) course at New Delhi.)
[1] Standard Chartered Bank. v. Directorate of Enforcement; (2005) 4 SCC 530
[2] The Assistant Commissioner, Assessment -II, Bangalore v. Velliappa Textiles Ltd.; (2003) 11 SCC 405
[3] Magor & St. Mellons R.D.C. v. Newport Corporation (1951) 2 All ER 839 (HL)
[4] Craies on Statute Law, 7th Ed. Pg.70-71
No comments:
Post a Comment