A company is the creation of the law. It is not a human being but is an artificial person. On incorporation, the company acquires a separate legal entity distinct from and independent of its members. Unlike a partnership firm, which has no separate legal entity, a company has a separate corporate existence. When a company is incorporated, all dealings are with the company and all persons behind the company are disregarded, however important they may be. Thus, a veil is drawn between the company and its members. Normally, the principle of corporate personality of a company is respected in most cases. The separate personality of the company is, however, a statutory privilege; it must be used for legal and legitimate business purposes only. Where a fraudulent, dishonest or improper use is made of the legal entity, the concerned individual will not be allowed to take shelter behind the corporate personality. The court will break through the corporate shell and apply the principle of “Lifting of the corporate veil”. The court will look behind the corporate entity and take action as though no entity separate from the members existed. In other words, the benefit of separate legal entity will not be available and the court will presume the absence of such separate existence. This will make the persons concerned vulnerable to the judicial scrutiny and they will be personally liable for their acts. The protection of separate legal existence of the company will not save them from various civil as well as criminal sanctions.
II. CORPORATE SOCIAL RESPONSIBILITY
The law have conferred and assigned a special status to the companies, which is not available to other forms of associations. It expects the companies to contribute for the growth and development of the nation. The companies are expected to perform their “Social responsibilities” so that people can enjoy a qualitative life. The role of the companies is so important that we can see provisions touching and regulating their functioning in almost all the spheres of life. This is particularly so in a country like India which is a “Welfare State” by nature. The State formulates various laws and regulations keeping in mind its welfare state role. Thus, a balance has been maintained between social responsibilities of the company on the one hand and conferment of absolute autonomy and freedom from interference upon the company on the other. In the present scenario companies play a very important role in the growth and development of the nation. Thus, they should be encouraged and motivated to contribute more. This can be achieved by providing them additional benefits, concessions and privileges. Their functioning and operations should not be made complicated by forcing them to comply with unnecessary and technical formalities. In fact, the various technical and procedural formalities governing them should be made more liberal and simplified so that the “corporate governance” can become a real and effective governing force .
III. CRIMINAL LIABILITY OF COMPANIES
It is interesting to note that the separate entity of a company can provide an absolute immunity to a company from a criminal prosecution, which necessarily requires the imposition of a term of imprisonment. This is so because a company, being a juristic person, cannot be imprisoned. This does not mean that the persons through whom the company was operating at the time of commission of the offence are also exempted from being imprisoned. It is submitted, with due respect to the judgment of the apex court, that this exemption from criminal liability may create a disastrous effect on the smooth functioning of the present legal system. If the reasoning and logic given by the court is accepted, then a company can neither be imprisoned nor be fined in case the concerned statute provides a punishment of both imprisonment and fine. The courts have the power to exercise their discretion in the most suitable way to do complete justice. This exercise of discretion must, of course, be based on sound and judicious principles as formulated by the apex court from time to time. In the interest of justice and to prevent the abuse of the process of law, the courts can exercise their discretion in such a manner as to advance the substantial justice. Thus, when faced with a situation where a statute provides mandatory imposition of both fine and imprisonment, the courts should ignore the imprisonment part, as far as a company is concerned, and impose fine upon it. The officers, who were responsible for the conduct of the business of the company, at the time of commission of the offence, must be held liable for the offence and the punishment of imprisonment with fine can be imposed upon them. It must be noted that the liability of the company is both joint and severe. This makes the task of separation of the mode of punishment (fine and imprisonment) easier and converts this mode into two separate modes of imprisonment (fine or imprisonment). The fine or compensation may be imposed upon the company and the guilty officer may be saddled with the criminal liability. This theory of “alternative punishment” will prove very handy to deal with companies who are guilty of the commission of various offences. The theory of “alternative punishment” is also important from the point of view of environment protection. The environmental law recognizes certain internationally accepted principles, chief among them are “polluter pays principle” and “strict liability principle”. The Indian judiciary has not only recognized these principles but it has extended the scope of the strict liability by making it absolute in nature with no exceptions attached to it. It must be noted that the quantum of compensation is directly related to the paying capacity of the company. If the company is “acquitted” on a technical ground only, then it will go scot- free without even being prosecuted. It is difficult to understand how a law like this can meet the requirements of Article 14 of the Constitution. It cannot be said that there is a reasonable classification while making such a law, much less intelligent differentia. There cannot be a nexus between the law made and the object sought to be achieved. In fact, a law like this will defeat the very purpose of the law for which it has been formulated. It cannot be considered as just, fair and reasonable. It is very difficult to appreciate how an act of the company, which affects the right to life and liberty of the citizens, as conferred U/A 21 of the Constitution, can go unnoticed and unpunished.
The court may alternatively lift the veil of the corporate entity and find the person who was in fact responsible for the commission of the offence. This process becomes important because if the concerned officers prove their innocence, then neither the company nor the officers would be liable for the offence committed. It must be remembered that the first duty of the court is to do justice. There would be a failure of justice not only by an unjust conviction but also by acquittal of the guilty for technical reasons only. It must also be remembered that Criminal Procedure Code, from which strength to this theory can be obtained, is an ongoing statute. The interpreter has to presume that the Legislature intended the Act to be applied at any future time in such a way as to give effect to the changed circumstances. The law cannot stand still but it must change with the changing social concepts and values. If the law fails to respond to the needs of changing society, then either it will stifle the growth of the society and choke its progress or if the society is vigorous enough, it will cast away the law, which stands in the way of its growth .
IV. CONCLUSION
The recent decision of the Supreme Court overruling its earlier decision, that exempted the companies from fine’s liability as well, is a good step in a right direction. It is a disingenuous notion to claim that this decision will open the flood gates for more litigation. It must be appreciated that the companies will not be fined for nothing but they will be fined only if found guilty of commission or omission of the contravention, wrong or the offence. It seems that the persons doubting the rationale of this judgment do not believe that the Courts in India will do justice to companies. It is submitted that the Courts in India are sensible and judicious enough to differentiate between the innocent and guilty and creating a doubt upon their capability is a futile exercise.
© Praveen Dalal. All rights reserved with the author.
* Consultant and Advocate, Delhi High Court
Phone No: 9899169611.
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