Supreme Court Rules Companies Can Be Prosecuted for Offences Mandating Imprisonment, Imposes Fine Instead

Larger Bench Overrules Earlier Judgment, Holds Corporate Bodies Liable for Serious Economic Offences Under FERA 1973 and Similar Statutes

In a landmark judgment delivered on May 5, 2005, the Supreme Court of India (Larger Bench) in the case of Standard Chartered Bank vs. Directorate of Enforcement decisively ruled that companies and other juristic persons can be prosecuted for offences under statutes like the Foreign Exchange Regulation Act, 1973 (FERA), even when the prescribed punishment includes a mandatory term of imprisonment. The court clarified that although companies cannot be sentenced to imprisonment, courts retain the discretion to impose fines as a punishment in such cases.

The judgment came as a reference to reconsider the three-judge bench decision in Assistant Commissioner, Assessment-II Bangalore & Ors v. Velliappa Textiles Ltd. & Anr. [(2003)11 SCC 405], which had held that companies could not be prosecuted for offences mandating imprisonment because the sentence could not be executed against them. This earlier ruling had created legal uncertainty, particularly in economic offences where companies are frequently implicated.

The Supreme Court bench consisting of Justices K.G. Balakrishnan, D.M. Dharmadhikari, Arun Kumar, B.N. Srikrishna, and N. Santosh Hegde analyzed the statutory provisions and legislative intent behind the criminal liability of companies. The majority held that the term “person” in penal statutes includes companies and corporations, as defined in Section 11 of the Indian Penal Code. Thus, companies are liable for offences, including serious economic crimes under FERA Section 56, which prescribes imprisonment and fine for violations involving amounts exceeding Rs. 1 lakh.

However, acknowledging the impossibility of imprisoning a company, the Court reasoned that the punishment of imprisonment must be ignored in the case of a juristic person, and only the fine component of the sentence should be imposed. This interpretation is rooted in the legal maxim “lex non cogit ad impossibilia” (law does not compel the impossible), which allows courts to adapt sentencing to feasible punishments without negating legislative intent.

The Court rejected the contention that companies should be exempt from prosecution simply because the mandatory punishment includes imprisonment. It emphasized that allowing companies to escape liability for serious offences would be contrary to legislative purpose and detrimental to the economy and society. The judgment also highlighted that the Law Commission of India had previously recommended legislative amendments to address the sentencing dilemma, but the absence of such amendments did not preclude courts from applying a practical construction of the law.

In dissent, Justices B.N. Srikrishna and N. Santosh Hegde expressed concern that the Court’s reinterpretation effectively rewrites statutory provisions, a task more appropriately left to the legislature. They argued that the mandatory sentencing provisions should be strictly applied and that prosecution of companies under such provisions should await legislative intervention.

This decision has far-reaching implications for corporate criminal liability in India. It affirms that corporations cannot evade prosecution for grave economic offences on technical grounds related to sentencing and that courts have the authority to impose fines where imprisonment is not feasible. The ruling also overrules the previous majority view in Velliappa Textiles, providing clarity on a contentious legal issue.

Legal experts anticipate that this judgment will bolster enforcement efforts against corporate wrongdoing and ensure that companies are held accountable for violations of economic laws. The judgment also underscores the judiciary’s role in interpreting statutes in a manner that advances legislative intent while respecting practical realities.

The Court has directed that the other issues raised in the appeals be heard by appropriate benches, signaling ongoing scrutiny of corporate criminal liability in India.

Statutory provisions:- Foreign Exchange Regulation Act, 1973 Section 11 (IPC), Section 50, Section 51, Section 56; Indian Penal Code Section 11; General Clauses Act Section 3(42)

Standard Chartered Bank v. Directorate of Enforcement, (SC) : Law Finder Doc Id # 82973