PROJECT OF COMPANY LAW

ON
COMPANYS LIABILITY WHERE
IMPRISONMENT IS
MANDATORY

SUBMITTED TO SUBMITTED BY
PROF. AVIJIT FAUJDAR ZAIBA REHMAN
LLB (III SEM)
GU16RO272

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 TABLE OF CONTENT
S.NO. TOPIC PAGE NO.
1. INTRODUCTION 4
2. COMPANYS LIABILITY WHEN GUILTY OF 5
COMMISSION OF OFFENCE THROUGH THE
AGES
3. COMPANYS LIABILITY WHERE 6
IMPRISONMENT IS MANDATORY, SITUATION
AROUND THE WORLD
(i) SITUATION IN UNITED STATES OF
AMERICA
(ii) SITUATION IN UNITED KINGDOM
(iii) SITUATION IN INDIA
4. SECTION 372A(9)- INTER CORPORATE LOANS 9
AND INVESTMENTS
5. DOCTRINE OF ATTRIBUTION 10
6. RECOMMENDATIONS AND CONCLUSION 12

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 TABLE OF CASE LAWS

New York Central & Hudson River Railroad V.U.S

Tesco Supermarkets ltd v. Nathass
The Assistant Commissioner v. Velliappa textiles
Standard Chartered Bank & others etc V. directorate of
enforcement and Ors. etc.
Kusum product ltd. V. S.K. Sinha
Indian Telecom Ltd. v. Motorola
State of Maharashtra V. Syndicate Transport co. ltd.
Esso Standard Inc V. Udharan Bhagwandas Japanwalla
Sunil Chandra Bannerjee v. Krishna Chandra nath
M.V. Javali v. Mahajan Borewell

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 INTRODUCTION
It has been a long controversy as to whether a company which is defined as an artificial person
can be imprisoned or not. A company is a separate legal entity that means it is has different
entity from its shareholders or we can say that owners and shareholders have the separate legal
existence and it can be said that company have different rights whereas shareholders have
different rights. So a company cannot be held responsible for the act of its shareholders or
owners and in the same way owner or shareholders cannot be held responsible for the act of the
company but in some cases the situation is different.

Now, coming up to the important part of my project which is can company be made
liable for imprisonment or it can be said as what is companys liability where imprisonment is
mandatory part of sentence. It was not so much complicated when the punishment for an offence
is fine only because it is not possible to imprison a company because it is an artificial person but
the biggest controversy arises when the statute prescribes mandatory imprisonment as
punishment for an offence.

If we talk about the penal laws than we will come to know that they only aiming at
punishing those persons who are guilty of commission of offence. The prohibition is only against
the person who commits any prohibited act. The term person is defined in section 11 of the
Indian Penal Code as The word person includes any Company o Association or body of
persons, whether incorporated or not1 and it is also defined in section 2(42) of the General
Clause Act, 1872 includes clearly within its fold a company, which is juristic person. There are
various enactments like the Prevention of Food Adulteration Act, 1954 (section17), the Essential
Commodities Act, 1955 (Section 10), the NDPS Act, 1985 (section 38), the Trade Marks Act,
1999 (Section 114), all these sections explained the Offences by Companies and The Income Tax
Act, 1961(section 276-C explains the Willful attempt to evade tax, etc. and 278-B states the
offences by the companies) and the Cable Television Network ( Registration) Act, 1955 (Section
17) provide for penal liability.

It was also said by the law Commission report that whenever a company will be guilty of
commission of offence which is punishable with imprisonment, the court instead of sentencing
the company to imprisonment may sentence it to fine only.

So, in my project I will evaluate whether a company can be punishable with

imprisonment or not and what will be the liability of the company where imprisonment is
mandatory part of sentence with the help of different case laws and different reports around the
world and what all are my recommendations will be evaluated here.

1
Indian Penal Code,1860, Section 11

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 COMPANYS LIABILITY WHEN GUILTY OF COMMISSION OF
OFFENCE THROUGH THE AGES
It was all sorted when the offence committed by a company needs to pay the fine for the offence
committed but when the question arises that what will happen if the company has committed an
offence and the punishment for that offence is imprisonment only. Then, when this question
arises, there were many major issues which have arisen there. Some of them are as follows:-

If we talk about Indian Penal Code, the main element to prove the offence is criminal
intent or guilty mind or mens rea. There should be a guilty intention before the
commission of that offence which is punishable under Indian Penal Code but it became
the problem to prove the criminal intent of a corporate legal entity as it is an artificial
person as it is necessary for the commission of a criminal act that there should be mens
rea present but it became huge problem to prove the guilty intention of the artificial
person.
It is very understandable for all of us that a company or a corporation cannot be
imprisoned and capital punishment that is death cannot be given to a company because
threat to imprisonment plays a very important role and this threat does not apply in case
of the company because it is a juristic person.
When the proceedings takes place, it is compulsory for the accused to be present in the
court but if the accused is a company which is an artificial person as said above than this
could not be possible to bring the company before the court of law, so again it became a
huge problem.

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 COMPANYS LIABILITY WHERE IMPRISONMENT IS MANDATORY:
SITUATION AROUND THE WORLD
SITUATION IN THE UNITED STATES OF AMERICA:

In USA, a company is not held liable

for the imprisonment after the commission of an offence as it was considered that the company is
not the natural person rather it is an artificial person or juristic person which is incapable to form
guilty intention or mens rea which is the essential element to constitute a crime. But the Supreme
Court ultimately rejected this notion in the following case-
New York Central & Hudson River Railroad v. U.S- A railroad company employee paid rebates
to shippers in violation of federal law. The court upheld the corporations criminal conviction,
finding no reason that corporations could not be held responsible for and charged with the
knowledge and purposes of their agents, acting within the authority conferred upon them. The
Supreme Court concluded that criminal liability could be imputed to the corporation based on the
benefit it received as a result of the criminal acts of its agents. This case essentially imported the
doctrine of respondent superior from tort law into criminal law. A company can be punished by
fine or seizure of its property which can be levied by an execution order issued by the court.2

SITUATION IN THE UNITED KINGDOM:

In U.K, if the court has ordered prosecution of a

company than it will not be substituted for the prosecution of individuals such as the directors,
officers, employees or shareholders. Prosecuting such individuals provides a strong deterrent
against future corporate wrongdoing. Equally, when prosecuting individuals, due consideration is
given to the possible liability of a company where the criminal conduct is for corporate gain. In
the case of Tesco Supermarkets Limited v. Nattrass, Tesco relied on the defence of the act or
omission of another person who in this case was a store employee, to show that they had taken
all reasonable precautions and due diligence necessary to not be criminally liable. Lord Reid held
that, in order for liability to attach to the actions of a person, it must be case that 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. If it is a guilty mind than that guilt is the guilt
of the company.3

SITUATION IN INDIA:

The controversy of whether a company or a juristic person or an

artificial person can be prosecuted for an offence for which the imprisonment and fine are
mandatory part of sentence has come up with different case laws such as-

2
New York Central & Hudson River Railroad v. U.S- 212U.S. 481,29S.CT. 304, 53 L. Ed. 613 (1909)
3
Tesco Supermarkets Limited v. Nattrass UKHL 1, AC153

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 The Assistant Commissioner v. Velliappa textiles- A ruling was given stating that the
court cannot impose only a fine where the mandatory punishment laid down by the
appropriate statute is both imprisonment and fine. The majority view is that the court
should not deviate from the minimum prescribed punitive sanctions. If the court did
prosecute for such offences and found the defendants guilty, it ran a massive risk of
stultifying itself by not being able to impose an effective order by way of sentence.4
Standard Chartered Bank and ors. etc. v. Directorate of enforcement and ors. Etc.-
This case overruled all the previous views. This case was related to the Foreign Exchange
Regulation Act (1973) which is also known as FERA. In this case the majority held that
there is no immunity to the companies from imprisonment merely because the
imprisonment is in respect of offences for which the punishment prescribed is mandatory
imprisonment. As we know that the company cannot be punished by imprisonment, the
court cannot impose the punishment of imprisonment, but when imprisonment and fine is
the prescribed punishment the court can impose the punishment of fine which could be
enforced against the company. Such a discretion is to be read into the section viz.,
Section 56 of Foreign Exchange Regulation Act (1973) (FERA) and Section 276-C of
Income-tax (1961) which talks about Willful attempt to evade tax, etc. and Section 278-B
of Income- tax Act (1961) which talks about offences by the companies, so far as the
juristic person is concerned. The court cannot exercise the same discretion as regards a
natural person. As regards company, the court can always impose a sentence of fine and
the sentence of imprisonment can be ignored as it is impossible to be carried out in
respect of a company. It cannot be said that, there is blanket immunity for any company
from any prosecution for serious offences merely because the prosecution would
ultimately entail a sentence of mandatory imprisonment. The bench by a majority of
3:2held that a corporation can be punished and is criminally liable for offences for which
the mandatory punishment is both imprisonment and fine. In case the company is found
guilty, the sentence of imprisonment cannot be imposed on the company and then the
sentence of fine is to be imposed and the court has got the judicial discretion to do so.
This course is open only in the case where the company is found guilty but if a natural
person is so guilty, both sentence of imprisonment and fine is to be imposed on such
person. This particular judgment in has further crystallized the courts interpretative
power with regards to a penal statue, by departing from the traditional view and
endorsing that for the punishment of the crime the court should go beyond the strict word,
and not let offences go unpunished due to application of too technical an interpretation
that is restrictive, strict and constricting to the very intent of the statue.5
Kusum Product Limited v. S.K. Sinha- It was clearly stated that as we know that a
company is an artificial person cannot possibly be sent for imprisonment and it is not

4
The Assistant Commissioner v. Velliappa textiles ltd. & Anr on 16 September, 2003
5
Standard Chartered Bank and ors. etc. v. Directorate of enforcement and ors on 24 February, 2006, case no. 1748
of 1999

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 open to court to impose a sentence of fine or allow to award any punishment if the court
of law finds the company in fault. The legal difficulty arising out of the above situation
was noticed by the Law Commission and in its 41st Report, the Law Commission
suggested amendment to Section 62 of the Indian Penal Code by adding the following
lines:
In every case in which the offence is only punishable with imprisonment or with
imprisonment and fine and the offender is a company or other body corporate or an
association of individuals, it shall be competent to the court to sentence such offender to
fine only.
This recommendation got no response from the parliament and again in its 47th Report,
the Law Commission in paragraph 8(3) made the following recommendations:

In many of the acts relating to economic offences, imprisonment is mandatory. Where the
convicted person is corporation, this provision becomes unworkable, and it is desirable to
provide that in such cases, it shall be competent to the court to impose a fine. This
difficulty can arise under the penal code also, but it is likely to arise more frequently in
the case of economic laws. We, therefore, recommend that the following provision
should be inserted in the Penal Code as, say, Section 62:

1. In every case in which the offence is punishable with imprisonment only or with
imprisonment and fine, and the offender is a corporation, it shall be competent to
the court to sentence such offender to fine only.
2. In every case in which the offence is punishable with imprisonment and any other
punishment not being fine and the off ender is a corporation, it shall be competent
to the court to sentence such offender to fine.
3. In this section, corporation means an incorporated company or other body
corporate, and includes a firm and other association of individuals.6

6
Kusum Product Limited v. S.K. Sinha, 1980 126 ITR 804 Cal

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SECTION 372A : Inter- corporate loans and investments-

CLAUSE 9- If default is made in complying with the provisions of this section, other than
sub- section 5, the company and every officer of the company who is in default shall be
punishable with imprisonment which may extend to 2 years or with fine which may extend to
50,000:

Provided that where any such to an or any loan in connection with which any such guarantee or
security has been given, or provided by the company, has been repaid in full, no punishment by
way of imprisonment shall be imposed under this sub-section, and where such loan has been
repaid in part, the maximum punishment which may be imposed under this sub-section by way
of imprisonment shall be appropriately reduced:

Provided further that all persons who are knowingly parties to any such contravention shall be
liable jointly and severally, to the company for the repayment of the loan or for making good the
same which the company may have been called upon to pay virtue of the guarantee given or the
securities provided by such company.7

7
Company act 1956, section 372A(9)

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 DOCTRINE OF ATTRIBUTION
When the criminal offence is committed by the directors, managers, officers and other
employees, than the question here arises is whether a company is liable for their act or not. In
simpler terms, if we say than the company wont be held liable for the crime of its directors,
managers, officers and employees because criminal guilt or guilty mind is required that is also
known as mens rea, which a company cannot have. Hence, a company cannot be imprisoned. It
is also necessary that in order to attribute criminal liability to a company, it must be proved that
there was a physical act that is actus reus and that there was an intention to commit the act that is
known as mens rea. Now, if we talk about the doctrine of attribution, according to this doctrine,
in the event of an act or omission leading to violation of criminal law, the mens rea that is
intention of committing an act is attributed to those who are the directing mind and will of the
company. Although this doctrine was developed in the United Kingdom and has been in India
since many years, the Supreme Courts recent judgment in Indian Telecom ltd v. Motorola8, has
finally resolved the debate whether company can be held liable for offences inextricably
possessing mens rea as one of the essential element.

Indian approach towards doctrine of attribution before Indian Telecom ltd v. Motorola: The
liability of company for offences with the guilty mind as an essential element of crime began
much before the decision of Supreme Court in case Indian telecom ltd v. Motorola. Indian High
Courts were not inclined to declare company as liable and rejected appeals for punishing
companies for criminal offences.

In 1964, in State of Maharashtra v. Syndicate Transport Co. (P) Ltd9., the Bombay High Court
developed a very forward looking approach in this regard and in deciding a case in which a
company was charged with cheating, criminal breach of trust and dishonest misappropriation, the
Court held: The question whether a corporate body should or should not be liable for criminal
action resulting from the acts of some individual must depend on the nature of the offence
disclosed by the allegations in the complaint or in the charge sheet, the relative position of the
officer or agent vis-a vis the corporate body and the other relevant facts and circumstances which
could show the corporate body, as such, meant or intended to commit that act.

In 1975, the Bombay High Court, In Esso Standard Inc v. Udharam Bhagwandas Japanwalla10,
further noted: The law attributes to the company intention of the officers of the company under
certain circumstances. The companys intention could be ascertained only when the company in
a general body or at the meeting of the board or in accordance with the memorandum or articles
of association has expressed that intention in the form in which it should be expressed, but ton
the other hand, the Calcutta High Court in a series of cases did not apply the attribution

8
Iridium India Telecom ltd. v. Motorola Incorporated & ors. on 20 oct, 2010, Appeal no. 688 of 2005
9
State of Maharashtra v. Syndicate Transport Co. (P) Ltd on 26 September 1963, AIR 1964 Bom 195, (1964) 66
BOMLR 197, 1964 CriLj 276
10
Esso Standard Inc v. Udharam Bhagwandas Japanwalla on 19 january, 1973, 1975 45 Compcas 16 Bom

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principles adopted by the Bombay High Court. In Sunil Chandra Bannerjee v. Krishna Chandra
Nath,11the Calcutta High Court acquitted a bank, on the basis that a company cannot be said to
possess mens rea to cheat. In Kusum Products v. S.K Sinha12, it held that a company being a
juristic person could not be punished. The Supreme Court in 1997 in MV Javali v. Mahajan
Borewell13 further held that mandatory sentence of imprisonment and fine is to be imposed
where it can be imposed, but where it cannot be imposed namely, on a company, fine will be the
only punishment. This approach was dismissed , in the case Asst. Commissioner v. Velliappa
Textiles14

11
Sunil Chandra Bannerjee v. Krishna Chandra Nath, 19 COMP. CAS.46 (CAL)
12
Kusum Products v. S.K Sinha 1980 126 ITR 804 Cal
13
MV Javali v. Mahajan Borewell on 26 September, 1997
14
Asst. Commissioner v. Velliappa Textiles on 16 september 2003

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 CONCLUSION
Whether company can be liable for imprisonment or not was very big controversy but the
general belief in the earlier sixteenth and seventeenth centuries was that company cannot be held
liable for imprisonment because it was only the common intention of the people that a company
does not have soul hence it cannot have mens rea. But when I have studied the condition in India,
I have found that the statutes in India does not agree with the development and analysis that they
do not make companies liable and even if they do so, the statutes and judicial interpretations
impose no other punishments except for fines. So, it is inevitable to take some serious measures
in relation to the criminal liability of company so that it could be stopped from the multiple
dimensions of the courts decision.

But as the time passes, Courts also have ruled that company can also have mens rea,
which is the essential element for the commission of the crime and this was delivered in case of
Iridium India telecom ltd v. Motorola Incorporated and ors. which is also mentioned before.

Thus, it has now become possible to make the company liable for the act or offence
committed through their agents or through their employees and attribute mens rea to them.
Hence, Company can be imprison.

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