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STRINGENT PUNISHMENT FOR FRAUD UNDER COMPANIES BILL 2012

The Objective of any Company law is to help the development of Companies on healthy lines so at to attain the ultimate ends of the social and economic policy of the Government and also to equip the Government with adequate powers to intervene in the affairs of a company in the public interest and as per the procedure prescribed by law so that the interest of the stake-holders may be protected from unscrupulous management.

Companies Bill, when introduced in 2009, was aimed at achieving the following objectives:

(a) to revise and modify the Companies Act, 1956 in consonance with the changes in the national and international economy;

(b) to bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects;

(c) to re-write various provisions of the Act to enable easy interpretation; and

(d) to delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and technical environment.

Though the bill has had a long journey and has undergone a number of changes on the way, the basic underlying objectives and spirit has remained intact.

An indulgent study of the Companies Bill 2012 reveals that the robust bill not only plugs the loop-holes by prescribing stricter compliances and disclosure norms but ensures the implementation of those compliances by introducing strong enforcement machinery and stringent penal provisions. The Bill gives more teeth to the stakeholders by providing an avenue to them to take legal action against fraud under the Companies Act itself without having to invoke provisions of other legislations. The Bill provides statutory status to the Serious Fraud Investigation Office and gives them the power to arrest.

In the current write up, we have made an attempt to analyze the fraud related provisions prescribed in the Companies Bill 2012.

WHAT IS FRAUD?

As the Clause 447 of the Bill, “fraud” has been defined as “fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

“Wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled.

“Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

The above given definition of fraud is very wide in its connotation as it includes any act, omission, concealment of fact or abuse of position committed by any person belonging to the company or by any person with the connivance of a person belonging to the company. The definition leaves ample scope for interpretation and needs to be settled by judicial pronouncements with the passage of time.

PUNISHMENT FOR FRAUD

Clause 447 not only provides the definition of fraud but also provides for severe penalty where fraud is proved.

Clause 447 contains that any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in fraud. The Section further contains that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Such a rigorous punishment of imprisonment up to ten years has been introduced for the first time in the periphery of company law. In the present Companies Act, Sections 628 and 629 provide for penalty for false statements and penalty for false evidence where the maximum penalty prescribed is up to seven years. Companies Bill has retained both these provisions in Clauses 448 and 449 (with increased penalty) and has additionally introduced new clause 447 which provides “Punishment for Fraud”.

Numerous other Clauses in the Bill are linked to Clause 447 by prescribing the penalty under those clauses as “Action under Section 447”.

A list of all those clauses which attract the punishment for fraud provided in clause 447 is given below:

· Clause 7(5) & 7(6) - Incorporation of a company

· Proviso to Clause 8(11) - Social/Charitable companies

· Clause 34 - Criminal liability for misstatement in prospectus

· Clause 36 - Punishment for fraudulently inducing persons to invest money

· Clause 38(1) - Punishment for personation for acquisition etc. of shares

· Clause 46(5) – Certificate of Shares

· Clause 56(7) – Transfer and Transmission of Securities

· Clause 66(10) – Reduction of Capital

· Clause 75 – Deposit

· Proviso to Clause 140(5) - Removal, resignation of auditor and giving of special notice

· Proviso to Clause 206(4) - Power to call for information inspect books and conduct inquiries

· Clause 213 - Investigation into company's affairs in other cases

· Clause 229 - Penalty for furnishing false statement, mutilation, destruction of documents

· Clause 251(1) - Fraudulent application for removal of name

· Clause 339(3) - Liability for fraudulent conduct of business

The importance of Clause 447 stems from the fact that in the Bill it has been prescribed that unless the Public Prosecutor has been given an opportunity to oppose the application for such release and where the public prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that the accused is not guilty of such offence and that he is not likely to commit any offence while on bail.

Section 468 of the Code of Criminal Procedure, 1973 (CRPC) provides the period of limitation for taking action cognizance of any offence. As per the said section -

We can see from the above that no period of limitation is prescribed for taking cognizance of offences where the punishment is for a term exceeding three years. In others words, period of limitation for taking cognizance of an offence is not applicable where the imprisonment is for a term exceeding three years. Also, in the bill it has been specifically provided that offences which attract the punishment for fraud as provided in clause 447 shall be cognizable notwithstanding anything contained in the Code of Criminal Procedure, 1973.

Thus, such offences can be opened up and dealt in the court of law any time regardless of any period of limitation. This is the major repercussion of the punishment prescribed for Fraud. notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences covered under the clauses (listed above), which attract the punishment for fraud as provided in clause 447 shall be cognizable and no person accused of any offence under these clauses shall be released on bail or on his own bond

“(1) Except as otherwise provided elsewhere in this Code, no Court shall take cognizance of an offence of the category specified in sub-section (2), after the expiry of the period of limitation.

(2) The period of limitation shall be-

(a) six months, if the offence is punishable with fine only

(b) one year, if the offence is punishable with imprisonment for a term not exceeding one year;

(c) three years, if the offence is punishable with imprisonment f or term exceeding one year but not exceeding three years.

SERIOUS FRAUD INVESTIGATION OFFICE (SFIO)

Companies Bill 2012 provides for establishment of a Serious Fraud Investigation Office to investigate into the affairs of the Company and it is also provided that until the Serious Fraud Investigation Office is established under subsection (1), the Serious Fraud Investigation Office set-up by the Central Government in terms of the Government of India Resolution No. 45011/16/2003-Adm-I, dated the 2nd July, 2003 shall be deemed to be the Serious Fraud Investigation Office for the purpose of this section.

The Bill contains that when the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office-

(a) on receipt of a report of the Registrar or inspector under section 208;

(b) on intimation of a special resolution passed by a company that its affairs are required to be investigated;

(c) in the public interest; or

(d) on request from any Department of the Central Government or a State Government, the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation.

Under the provisions of Companies Bill 2012, SFIO has got statutory status. SFIO shall have power to arrest in respect of offences under the Bill which attract the punishment for fraud. If the Director, Additional Director or Assistant Director of Serious Frauds Investigation Office has reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of fraud, he may arrest such person and present him before the Judicial Magistrate or a Metropolitan Magistrate within 24 hours.

Where any case has been assigned to the SFIO, no other investigating agency shall proceed with investigation in such case. The Investigating Officer of SFIO shall have all the powers of a civil court while trying a suit.

It is also provided that the Special Court shall not take cognizance of any offence referred to this sub-section except upon a complaint in writing made by-

(i) the Director, Serious Fraud Investigation Office; or

(ii) any officer of the Central Government authorised, by a general or special order in writing in this behalf by that Government.

The limitation on granting of bail specified above is in addition to the limitations under the Code of Criminal Procedure, 1973 or any other law for the time being in force on granting of bail. Therefore seriousness and intention of introduction of in-depth criminal provisions into these provisions of Companies Bill 2012 go to prove that law makers decides to bring thought process into the mind of corporates and other stake holders that Companies Act will no longer be looked into as civil and regulatory kind of law rather they wanted corporate and stake holders to treat and understand it as more of criminal nature of law when corporate, professionals and stake holders fails to follow and comply the provisions of the Companies Bill 2012 in its real and true spirits.

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