Report No. 47
Corporations and Their Officers
An important type of white-collar crime is that committed by corporations. Since a corporation has no physical body on which the pain of punishment could be inflicted, nor a mind which can be guilty of a criminal intent, traditional punishments prove ineffective, and new and different punishments have to be devised. The real penalty of a corporation is the diminution of respectability, that is, the stigma. It is now usual to insert provisions to the effect that the Director or Manager who has acted for the corporation should be punished.1 But it is appropriate that the corporation itself, should be punished.
In the public mind, the offence should be linked with the name of the corporation, and not merely with the name of the Director or Manager, who may be a non-entity. Punishment of " fine in substitution of imprisonment in the case of a corporation could solve the problem in one aspect2; but, at the same, it is necessary that there should be some procedure, like a judgment of condemnation, available in the case of an anti-social or economic offence committed by a corporation. This will be analogous to the punishment of public censure proposed for individuals3.
1. Para. 8.4, infra.
2. Para. 8.3, infra.
3. Taxation laws are proposed to be excluded from this amendment.
8.2. Attachment of Illegal Profits.-
Of course, confiscation and similar penalties will continue. Acquisitive corporate crime, like acquisitive personal crime, will persist if the criminal permitted to retain the fruits of his illegal activity. The criminal law, therefore, generally does not tolerate such retention. If acquisitive corporate crime is to be deterred, the corporation, like any other acquisitive criminal should be deprived of all the fruits of its illegal activity.
8.3. Punishment of Corporations.-
In many of the Acts relating to economic offences, imprisonment is mandatory. Where the convicted person is a 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 also1, 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 offender 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."
1. See discussion in 41st Report of the Law Commission, (Code of Criminal Procedure), Vol. 1, para. 24.7.
8.4. Liability of principal officers.-
The question of corporate liability has two aspects; the liability of the corporation itself and the liability of the principal officers, such as Managing Directors. The latter aspect will now be dealt with.
8.5. In England, two formulae have been adopted in this respect. According to the first formula, any Director, Manager, Secretary or other officer of the company with whose consent or connivance the offence is committed, is declared to be implicated in the offence. The burden of proof in this case lies on the prosecution. In most cases, the officer is also made responsible where the offence is attributable to, or facilitated by his "neglect" or "negligence" or "culpable neglect" "of duty" or "reckless neglect of duty"1.
1. The wording varies.
8.6. While, in the above formula, the burden lies with the prosecution, the second formula shifts the burden to the officer, to disprove his complicity. There has been some criticism of English formula. For example, the Borrowing etc. Act1 has the following provision:-
"(1) No proceedings for an offence under this Act shall be instituted in England except by or with the consent of the Director of Public
(4) Where an offence under this Act has been committed by a body corporate (other than a local authority), every person who at the time of the commission of the offence was a director, general manager, secretary or other similar officer of the body corporate, or was purporting to act in any such capacity shall be deemed to be guilty of that offence, unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised having regard to the nature of his functions in that capacity and to all the circumstances."
This provision came in for the following judicial comment2:-
"First of all, I have to bear in mind that this is a penal statute. It indeed, I suppose represents the high-water mark of the Parliamentary invasion of the traditional rights of the subjects of this realm. Not only does it impose upon offenders substantial penalties-no objection could be taken to that-but what is so serious from the point of view of the subject is, that where a body corporate has been found to be an offender, then every director, general manager, secretary or other similar officer of the body corporate, including a person who was purporting to actin those capacities, is deemed to be guilty unless he proves that the offence was committed without his consent or connivance, thereby reversing the usual and traditional rule of English law that a man is innocent until he is proved guilty.
But not only that; for proof that he is innocent will not avail an accused person, because he must further show that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised, having regard to the nature of his functions in that capacity and in all the circumstance. However, that is what Parliament had thought fit to enact, and I abide, of course, by it. Nevertheless it is what Mr. Lindon described as a highly penal statute."
1. The Borrowing (Control and Guarantees) Act, 1946, Schedule, para. 3.
2. London and Country Commercial Properties Investment Ltd. v. Attorney-General, (1953) 1 WLR 312 (318), (Chancery Division) (Upjohn J.).
8.7. In the Model Penal Code of the American Law Institute1, the wording employed covers (i) persons who "perform or cause to be performed", in the name of the corporation, any conduct, as also (ii) "any agent" of the corporation having "'primary responsibility for the discharge of the duty imposed by law upon a corporation". In the former case, positive conduct would be required, while in the latter case, it must be a "reckless" omission to perform the required act. The relevant provisions are as follows:-
"(4) As used in this section:
(a) "corporation" does not include an entity organised as or by a governmental agency for the execution of a governmental programme;
(b) "agent" means any director, officer, servant, employee or other person authorised to act in behalf of the corporation or association and, in the case of an unincorporated association, a member of such association;
(c) "high managerial agent" means an officer of a corporation or an corporation association or in the case of a partnership, a partner, or any other agent of a corporation or association having duties or such responsibility that his conduct may fairly be assumed to represent the policy of the corporation or association.
(6) (a) A person is legally accountable for any conduct he performs or causes to be performed in the name of the corporation or an unincorporated association or in its behalf to the same extent as if it were performed in his own name or behalf.
(b) Whenever a duty to act is imposed by law upon a corporation or an unincorporated association, any agent of the corporation or association having primary responsibility for the discharge of the duty is legally accountable for a reckless omission to perform the required act to the same extent as if the duty were imposed by law directly upon himself.
(c) When a person is convicted of an offence by reason of his legal accountability for the conduct of a corporation or an unincorporated association, he is subject to the sentence authorised by law when a natural person is convicted of an offence of the grade and the degree involved."
1. Section 2.07, sub-sections (4) and (6), Model Penal Code, which are relevant to Corporations.
8.8. The legislative precedent currently adopted in India, combines two different kinds of formulae. A recent example is furnished by the provision in the Gold Control Act2 quoted below:-
1. Gold Control Act, 1968, section 93.
"93. Offences by companies.-(1) Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the, conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation-For the purpose of this section:-
(a) "company" means any body corporate and includes a firm or other association of individuals; and
(b) "director" in relation to a firm, means a partner in the firm."
8.9. At present, the position as to such provisions in the major Acts with which this Report is concerned is as follows:-
|(1) Central Excises Act, 1944.||- No such provision.|
|(2) Foreign Exchange Regulation Act, 1947.||- Section 23C.|
|(3) Prevention of Adulteration Act.||- Section 17.|
|(4) Essential Commodities Act, 1955.||- Section 10.|
|(5) Wealth Tax Act, 1957.||- No such provision.|
|(6) Income-Tax Act, 1961.||- No such provision.|
|(7) Customs Act, 1962.||- Section 140.|
|(8) Gold Control Act, 1968.||- Section 931|
1. See para. 8.8, supra.