The Hindu Business Line : A punishing exercise on penalties

A COMPANY, being a mere legal entity, has always been known to be as good or as bad as those who run it, either as members elected as its office-bearers or as its employees. It is obvious that the Ministry of Company Affairs, which has the responsibility for regulating corporate activities and protecting the interests of all stakeholders in companies, including investors, creditors, consumers and employees, has necessarily to depend not merely on its field officers but also on the professional assistance of experts such as accountants and lawyers for remedial action wherever any inaction or breach in the discharge of corporate duties comes to notice.

The committee headed by Dr J. J. Irani has something to say on this as on most other subjects relating to the Companies Act.

Some of its recommendations are indubitably conducive to better enforcement of the law and a few are rather vague and general or contradictory.

There is, however, a feature of the company law in India which could have been highlighted and the reasons for which could have been gone into, namely, the way in which it is riddled with statutory penalties and these penalties have also been subjected to enhancement across the board in recent years. The UK, the US and the European countries offer interesting contrasts in this respect.

Offences and penalties

Some of the recommendations of the Irani Committee are not consistent with the legal usage of terms such as fees, as distinct from penalties and fines. A fee is a charge fixed by law for services of public officers or for use of a privilege under control of the government. A `penalty' is a more elastic expression for a pecuniary punishment imposed by a statute. A fine is also a pecuniary punishment but it is imposed by a lawful tribunal upon a person convicted of crime or misdemeanour. A fine is imposed sometimes in addition to imprisonment by courts in criminal convictions. Provision of an opportunity to the offender before actual punishment will undoubtedly be essential whether what is levied is a fine or even penalty.

There may be genuine grounds for delay in compliance with some of the routine statutory requirements. As long as there are unmistakable guidelines for exoneration or condonation of delays and defaults and also schedules for determination of the quantum of penalty in the light of the relevant factors, there cannot be two views on the need for provision of an opportunity to explain or the right to be heard to the delinquent. There should be either comprehensive administrative instructions or rules governing these matters and not statutory provisions.

It is one thing to moderate and rationalise penalties and fines, and quite another to subject levy of penalties and fines to the law of limitation, by prescribing a period within which penalty proceedings can be initiated and/or completed. Since there is no certainty about the time it may take a case of levy of penalty to come up for hearing by the courts and fines are mostly imposed by courts, it will be farcical if the law of limitation is extended to court sentences which may include imprisonment and/or fine. Fines are not compounded after they are levied since compounding will, in that event, imply the scaling down of any amounts that have been already decided/determined. Section 621A, as it emerged in the Companies (Amendment) Act, 2002 appears satisfactory from every point of view, to cope with `composition cases'.

The Committee is of the view that the Act should have a suitable mechanism for transfer of proceeding pending in the court to the proposed in-house structure for dealing with the first Schedule offences. Since the courts (the National Company Law Tribunal in future) have not been/will not be troubled with routine penalties for technical defaults and procedural delays, there is no need for the proposed `mechanism'. Once a criminal case is filed in the court, it cannot be withdrawn without the court's permission under the law as it exists.

If a company wants to have the fine for which it is liable compounded by the court, it has to move the court accordingly and the Government will also have to agree to it. If the administration is inclined to compound a case, the compounding will have to be done on the Government's own authority or under it own powers before the criminal proceedings are launched in the court. But the question that arises for consideration is whether the initiative for such action should not be required to be taken by the concerned delinquent company before prosecution proceedings are initiated by the regulatory authorities.

It may be advisable to prescribe a period within which the company to which notice of intention to prosecute is issued should move the prescribed authority for `composition'. An application for compounding an offence should not be taken as valid unless the alleged offence is unequivocally admitted and it is recognised that the terms of `composition' are within the exclusion discretion of the designated administrative authority, whose decision in the matter cannot be disputed in appeal before the courts. The law cannot, of course, preclude or prohibit the writ jurisdiction of the High Court or any special leave that may be granted by the Supreme Court.

The Committee's recommendation that the Central Government's prior approval should be obtained for prosecuting any company is surprising in view of the existing provisions of Section 621. It is not clear whether the Committee expects the minister concerned or any senior officer of the ministry to look into each application for composition. Even if it were practicable, such approval will entail enormous waste of time. There is, however, need for issue of exhaustive guidelines laying down the Government's policy in this connection. Such a course will obviate corruption and delays.

Committee's view on whistleblowers

The Committee's observations on `whistleblowers' are neither clear nor realistic. A whistleblower is not an `approver' as the word is commonly understood — somebody who has had a hand in the commission of an offence but later gives evidence against the other partners-in-crime on the understanding that he will not be punished himself. A whistleblower is a bystander, an employee who has had occasion to see the law being broken and who passes on the information to the regulatory authorities (or the top management if it is not itself implicated in the offence).

While all possible protection should be given to anyone who provides useful information, it will be oversimplification of a complex problem if provisions are required to be made in the Rules or in the Act which lend themselves to a construction that may encourage disgruntled employees to turn into `informers' or agents of the State engaged in surveillance on its behalf, where the impugned offence has been committed by the employer.

It is all right in a government company or a department of the Government where everyone is a public servant guilty of a betrayal of public trust if he commits or is mixed up with any offence. The issues that arise in a non-government organisation do not lend themselves to any facile solution as in government service. The subject needs wider discussion and caution

(By arrangement with Corporate Law Adviser, New Delhi.)

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