CA Kamal Garg

The Companies Act, 2013 has categorized certain offences at par with criminal offences under the Code of Criminal Procedure, 1972 (Cr. PC) thereby has identified the same as cognizable and non-bailable. Thus, it is quintessential for the Promoters, Directors, Manager, Officers and other key managerial personnel to understand various definitions under the Cr PC and its consequences thereunder so that they can exercise greater degree of caution and precaution in compliance with these sections.

1. Offence: Section 2(n) of the Criminal Procedure Code (Code) defines offence as “any act or omission made punishable by any law for the time being in force”. In other words, an offence connotes ‘crime’ or ‘wrongdoing’. Section 40 of the Indian Penal Code (IPC) defines offence as “to denote a thing made punishable under the Code”. In order to constitute an offence, the particular ‘act’ should be specifically made punishable under law. Thus, it can be concluded that an act which has not been made punishable expressly under any law, is not termed as an offence.

2. Bailable and non-bailable offences: The Code does not contain provisions relating to determination of whether a particular offence can be categorized as bailable and non-bailable. But as per Section 2(a) of the Code, a bailable offence means an offence which is shown as bailable in the First Schedule of the said Code or the offence is made bailable by any other law for the time being in force. Bailable offence means a bail can be claimed as a matter of right and constitutes less serious offence. The First Schedule of the Code infers that the offences that are punishable with imprisonment of less than three years are usually considered as bailable. Any other offence, apart from those offences mentioned as bailable, is considered to be non-bailable. In other words, offences punishable with imprisonment for three years or more are usually considered as non-bailable.

3. Bail – meaning thereof and public prosecutor: The term ‘Bail’ has not been defined under the Criminal Procedure Code. However, Section 205 of the Indian Penal Code, 1880 defines ‘bail’ as temporary release from imprisonment on furnishing requisite security/surety to appear for trial. In other words, it is treated as temporary release of an accused or an offender from legal custody upon his giving sufficient security for his appearance later on. It is based on the principle that law recognises that each individual has got freedom, which should be safeguarded and that every person including the accused is entitled to freedom, unless he is found guilty of committing a serious offence. Bail cannot be claimed as a matter of right in case of non-bailable offences. This, however, does not mean that there can be no bail for such offences. Grant of bail for such offences is solely at the discretion of the Court. The Court after recording reasons and being satisfied that there are reasonable grounds for believing that the accused is not guilty of such an offence and that he is not likely to commit any offence while on bail, may release an accused on bail. However, persons accused of offences punishable with death, life imprisonment or imprisonment for seven years or more can be released on bail only after giving an opportunity of hearing to the public prosecutor to oppose the application for such release.

Non-Bailable Offences Under The Companies Act, 2013

Section 212(6) of the Companies Act, 2013 state that notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), offence covered under section 447 of this Act shall be cognizable and no person accused of any offence under those sections shall be released on bail or on his own bond unless—

(i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and

(ii) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail:

Provided that a person, who, is under the age of sixteen years or is a woman or is sick or infirm, may be released on bail, if the Special Court so directs:

Provided further that the Special Court shall not take cognizance of any offence referred to in 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.

Thus, a Police Officer may arrest without a warrant in case of non-bailable offences. This proviso also starts with the non obstante clause, i.e., notwithstanding anything contained in the Code of Criminal Procedure, 1973. A non obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause. In case there is any inconsistency between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non obstante clause which would prevail over the other clause. Thus, the limitation aforesaid on grant of bail is in addition to the limitation under the Criminal Procedure Code or under any other law for the time being in force. This means that a bail for such offences can be granted only:

(i) after the public prosecutor has been given an opportunity to oppose the same; and

(ii) the Court has sufficient reason to believe that the person is not guilty of offence and is not likely to commit any offence when on bail.

This section, however, is not applicable to the following:

(i) a person under the age of 16 years ; or

(ii) a woman; or

(iii) the sick; or

(iv) an infirm person, who otherwise may be released on bail subject to discretion of the Court.

The words “offence covered under section 447” were substituted for “the offences covered under sub-sections (5) and (6) of section 7, section 34, section 36, sub-section (1) of section 38, sub-section (5) of section 46, sub-section (7) of section 56, sub-section (10) of section 66, sub-section (5) of section 140, sub-section (4) of section 206, section 213, section 229, sub-section (1) of section 251, sub-section (3) of section 339 and section 448 which attract the punishment for fraud provided in section 447” by the Companies (Amendment) Act, 2015, w.e.f. 29-5-2015. A look through at these sections can be made as follows:

  1. Section 7(5): Furnishing any false or incorrect particulars of any information or suppressing any material information, with the Registrar of Companies in relation to the registration of a company. The person furnishing such information shall be liable.
  2. Section 7(6): Furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made during incorporation of company, or by any fraudulent action-promoters, first directors of the company and/or an advocate, a chartered accountant, cost accountant or company secretary in practice, engaged in the formation of the company and a person named in the articles as a director, manager or secretary of the company shall be liable for this offence.
  3. Section 34: Untrue or misleading statements stated in prospectus or where any inclusion or omission of any matter is likely to mislead- Every person who authorizes the issue of such prospectus shall be liable.
  4. Section 36: Knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into any agreement: (i) with a view to acquiring, disposing of, subscribing for, or underwriting securities, or (ii) the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities, or (iii) with a view to obtain credit facilities from any bank or financial institution. Any person making such promise shall be liable.
  5. Section 38(1): Abetments: (i) of an application in a fictitious name to a company for acquiring, or subscribing for, its securities, or (ii) of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities, or (iii) inducing directly or indirectly a company to allot, or register any transfer of securities to him, or to any other person in a fictitious name – Any person making such abetments shall be liable.
  6. Section 46(5): Issue of duplicate share certificates with the intention to defraud company and every defaulting officer of the company shall be liable.
  7. Section 56(7): Transfer of shares with an intention to defraud- Depository or depository participant shall be liable.
  8. Section 66(10): Knowingly: (i) conceals the name of any creditor entitled to object to the reduction,(ii) misrepresents the nature or amount of the debt or claim of any creditor,(iii) abets or is privy to any such concealment or misrepresentation – A person who knowingly commits the same shall be liable.
  9. Section 140(5): Auditor against whom order passed by Tribunal confirms acting in a fraudulent manner or abetting or colluding in any fraud by, or in relation to the company—Auditor of the Company shall be liable.
  10. Section 206(4): Business of a company being carried for a fraudulent or unlawful purpose or not in compliance with the provisions of the Act or if the grievances of investors are not being addressed – Every officer of the company in default shall be liable.
  11. Section 213: (i) The business of the company is being conducted with an intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or that the company was formed for any fraudulent or unlawful purpose, or (ii) any person concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud – Every officer of the company who is in default and the person or persons concerned in the formation of the company or the management of its affairs shall be held liable for this offence.
  12. Section 229: (i) Any destruction, mutilation or falsification, or concealment or tampering or unauthorized removal of documents relating to the property, assets or affairs of the company or the body corporate, (ii) false entry in any document concerning the company or body corporate, or (iii) explanation which is false or which is known to be false; during the course of any inspection, inquiry or investigation – Any person or an officer or other employee of a company or other body corporate required to make statement under investigation shall be liable.
  13. Section 251(1): Application by a company under section 248(2) with an intention of evading the liabilities of the company or with the intention to deceive the creditors or to defraud any other person – Persons in charge of the management of the company shall be held liable for this offence.
  14. Section 339(5): During winding up of a company, it appears that any business of the company has been carried on with an intent to defraud creditors of the company or any other persons or for any fraudulent purpose – Any person, who is or has been a director, manager, or officer of the company or any person who knowingly was party to the carrying on of the business in a fraudulent manner shall be held liable.
  15. Section 448: Any return, report, certificate, financial statement, prospectus, statement or other document required by, or for the purposes of any of the provisions of this Act or the rules made thereunder: (i) which is false in any material particulars, knowing it to be false, or (ii) which omits any material fact, knowing it to be material – Any person making/providing such statement shall be liable.

Punishment for fraud

Section 447 of the Companies Act, 2013 provides that without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six 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 the fraud:

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Explanation.—For the purposes of this section—

(i) “fraud” in relation to affairs of a company or any body 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;

(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

Offences by the Officers and Officers Who Are In Default

Section 2(59) of the Companies Act, 2013 defines “officer” to include any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.

Section 2(60) of the Companies Act, 2013 defines “officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, to mean any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer

If we analyse section 2(60)(vi) then one can conclude that the above provisions merely do not make a director an ‘officer-in-default’ on receipt of proceedings of the Board meeting. These would apply when the concerned director was aware of any contravention, i.e., through receipt of board’s proceedings and did not object to the same or if a contravention had taken place with his consent or connivance. Thus, a director would be exonerated from the liability if he did not consent to or connived for any such contravention [Om Parkash Khaitan v. Shree Keshariya Investment Ltd. [1978] 48 Comp. Cas. 85]

Rights given under the Cr. Pc to an arrested person

In the event of arrest the persons who are arrested have the following specific rights conferred by the Code:-

(a) Right to know the grounds of arrest, i.e., reason as guaranteed by Article 22 of the Constitution of India

(b) Right to bail

(c) Right to be produced before the Magistrate of Court

(d) Right to inform a relative or friend.

(e) Right to consult a lawyer.

(f) Right to be examined by a Doctor.

Establishment of Special Court

  1. Special Court & Territorial Jurisdiction – Section 435 of the Companies Act, 2013 provides that the Central Government may by notification establish as many Special Courts as may be necessary for the purpose of speedy trial. As per section 436(1) of the Companies Act, 2013, all the offences committed under this Companies Act, 2013 can be tried only by the Special Court for the area in which the registered office of the company (in relation to which the offence is committed) is located. Further, as per section 436(2) of the Companies Act, 2013, when trying an offence a Special Court may also try an offence other than an offence under this Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at the same trial.
  2. Detention – In case a person accused of an offence is produced before a Magistrate, then such Magistrate may authorise the detention of such person in such manner as he thinks fit for a period not exceeding 15 days in the whole, in the case of Magistrate being a Judicial Magistrate. In case the Magistrate is an Executive Magistrate, the period of detention shall not be of more than 7 days.
  3. Summary Trial – Section 436(3), read with provisions thereof empowers the Special Court to order summary trial in cases of an offence (not involving imprisonment for a term exceeding three years) in which case no sentence of imprisonment for a term exceeding one year shall be passed. In all other cases regular trial will have to be conducted.
  4. Application of Criminal Procedure Code – As per section 438 of the Companies Act, 2013, the provisions of the Criminal Procedure Code shall apply to the proceedings before a Special Court. The said Court is deemed to be a Court of Sessions and the person conducting the prosecution before such Court shall be deemed to be a Public Prosecutor.
  5. Cognizance of an offence – Under Section 439 the Court shall take cognizance of an offence alleged to have been conducted by any company or any officer thereof, unless the complaints are filed by shareholders, Registrar of Companies, or any officer authorised by the Central Government. However, the Court may take cognizance of offences relating to issue and transfer of securities and non-payment of dividend on a complaint in writing, by a person authorised by the Securities and Exchange Board of India. Thus, every offence under this Companies Act, 2013, except the offences involving investigation by Serious Fraud Investigation Office, shall be deemed to be non-cognizable within the meaning of the Criminal Procedure Code.
  6. Appeal to High Court – As per section 437 the High Court has all the powers conferred by Chapters XXIX and XXX of the Criminal Procedure Code in relation to appeal and revision from the orders of the Special Court, as if the Special Court was a Court of Sessions trying cases within the local limits of jurisdiction of the High Court.
  7. Appointment of company prosecutors – Section 443 states that notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Central Government may appoint generally or for any specified class of cases in any local area, one or more persons as company prosecutors for the conduct of prosecution arising out of this Act. Persons so appointed shall have all the powers and privileges conferred by the Code on Public Prosecutors appointed under section 24 of the Code.

(The above article is contributed by CA Kamal Garg having professional and academic interests in IFRS, Accounts, Auditing and Corporate Laws arenas. He can be approached at cakamalgarg@gmail.com)

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