Companies cannot be imprisoned; however courts may levy fine!

Recently Supreme Court held as follows in Iridium India Telecom Ltd. Vs. Motorola Incorporated and Ors. [2010] 160 Comp Cas 147 (SC)

“Mens rea is attributed to corporations on principle of “alter ego” of the company — company/corporation cannot escape liability for criminal offence, merely because punishment prescribed is that of imprisonment and fine.”Lawmakers have to be careful while drafting a legislation in relation to offences by companies. If the law intends to punish a company which is a legal person, the penal clause should be carefully drafted to provide fine rather than casually saying imprisonment and fine.

Background - first Velliappa and Then Standard Chartered Bank:

If such care had been taken there would not have been decisions such as The Assistant Commissioner, Assessment-II, Bangalore and Ors v Velliappa Textiles Ltd. and Ors. AIR 2004 SC 86 in which it was held that where the offence entails imprisonment and fine, a corporation cannot be punshed with fine only because a court cannot bifurcate the punishment when law intends both punsihments to be awarded. This decision was reversed by a Constitution Bench of SC dated 05/05/2005 in Standard Chartered Bank and Ors. v Directorate of Enforcement and Ors AIR 2005 SC 2622. In this case, the majority held that there could be no objection to a company being prosecuted for penal offences under the Foreign Exchange Regulation Act, 1973 and the fact that a sentence of imprisonment and fine has to be imposed and no imprisonment can be imposed on a company or an incorporated body, would not make Section 56 of the FERA inapplicable.

Before the Consitution Bench in the case of Standard Chartered Bank the argument of Iridium India Telecom Ltd.- (the petitioner in Special Leave Petition (Criminal) No. 4995 of 2003), was as follows:

"The statute mandates ('A + B'); if A is impossible, then A=0. Then, the statutory mandate would be only (Zero + B), which is really equal to 'B' (presumably 'A' = imprisonment and 'B' = fine). There is no warrant for the assumption 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. In that case, the mathematical logic would break down (Indeterminate + B) = Indeterminate, which is exactly what has been held by Velliappa, namely, that the statute would become unworkable in the case of a juristic person. Ergo, it cannot apply to a juristic person for all the reasons adumbrated by the majority in Velliappa. "