CS S. Dhanapal
Prosecution and Enforcement Architecture Under the Companies Act, 2013
The Companies Act 1956 contains more of general penalty provisions under Section 629A. Certain penal provisions provide for imposition of penalty of fine as well as penalty of imprisonment. As per Section 624 of the Companies Act 1956, all offences under the Act are almost bailable offences and generally punishments are imposed on Company and officers in default invariably where offences not involving mandatory imprisonment are compoundable. These are administered by Registrar of Companies under the supervision of Regional Director who carries out general enforcement, inspection, inquiry and investigations. Trial courts have been given powers to impose punishments under Companies Act 1956. Section 622 of the Act provides that any court of Magistrate or about have the jurisdiction to try said offences.
The stringent penalties prescribed for non-compliance under each section, providing statutory status to Serious Fraud Investigation Office and placing the report of SFIO on par with police report, giving it power to arrest, introduction of section 447 providing severe Punishment for Fraud etc. all drive at the point that the Companies Act 2013 is extremely serious on compliance and it has also provided for an effective and time bound enforcement machinery to inflict it.
ARCHITECTURE UNDER THE COMPANIES ACT, 1956
Provisions regarding inspection and investigation are there in the existing Companies Act of 1956 which empowers the Central Government and the Registrar to inspect the books of accounts and other books and papers of a company and to investigate into its affairs if they have cause to believe that the affairs are being conducted in a prejudicial or fraudulent manner and the Act also provides for penalty under Sections 627 and 628 for false statement and false evidence. But the Companies Act 2013 brings out the real essence of enforcement by giving statutory recognition to the Serious Fraud Investigation Office and giving them power to arrest under the Companies Act 2013 itself without having to invoke provisions of other legislations. Section 621 of the present Companies Act 1956 provides that only three classes of person can file a criminal complaint under the Companies Act 1956 namely (i) Registrar of Companies, 2. Shareholder(s), 3. Any other person authorized by Central Government.
Comparing the provisions and mechanism available under Companies Act 1956 it can be seen that Section 209A of the Act provides for inspection of books by the Registrar or other authorized official from Central Government. Such Inspection of books is majorly focused on finding out major lapses on part of the Company in recording the transactions and financial irregularities etc. and provisions violated by the Company and Officers in preparation of Financial Statements. Based on the report of the inspecting officer, Ministry may take up further investigation u/s 235 or 237 or file complaint at Magistrate court. Sections 235, 237, 239 and 247 of the Act provides for a clear cut mechanism for inspection and investigation of affairs by the inspector appointed by Central Government.
MECHANISM FOR CRIMINAL PROCEEDINGS UNDER THE PRESENT COMPANIES ACT 1956
Generally at the time of scrutinizing the Balance Sheet and Other Financial Statements of the Company, if Registrar of Companies come across any lapses on part of the Company in recording the transactions and financial irregularities etc. and observed provisions of Companies Act 1956 has been violated by the Company and Officers in preparation of Financial Statements, the Registrar of Companies issues show cause notice to the company / officers in default. On such Show cause notice is being served upon to the company, it is the responsibility of the Company to make sure all details sought by the Registrar of Companies is properly provided to the satisfaction of the Registrar of Companies. If Registrar of Companies is convinced with the explanation given by the company and upon getting proper documents and back papers, he may drop the proceedings.
In case, the company is not in a position to prove its genuineness in providing the details sought for by the Registrar of Companies, then the Registrar of Companies will serve show cause notice to the directors as officers in default and company stating that why action shall not be taken by the Registrar of Companies against the company for the lapse in compliance as observed by Registrar of Companies. In which case the company have a option of either satisfying the Registrar of Companies by providing required documents and details sought for or if it is not in a position to prove that the company genuinely recorded the financial transactions and maintain books of accounts in compliance with the provisions of the Act, approach Company Law Board to compound the offences committed by the company accepting that there are lapses on part of the Company as well as directors in complying the provisions of the Act.
In case, the company is failed to compound the offences with Company Law Board, then the Registrar of Companies will proceed further to file a complaint against the company and its directors with Magistrate Court who has jurisdiction to try the said offences after obtaining permission from the Ministry.
On such complaint being filed with Magistrate, the procedure prescribed under Code of Criminal Procedure will be followed by the Magistrate Court to dispose the matter.
NOW LET US ANALYSE THOSE RELEVANT PROVISIONS IN COMPANIES ACT 2013 TO HAVE A BETTER AND CLEAR UNDERSTANDING;
SECTION 447 – PUNISHMENT FOR FRAUD
Section 447 has been newly introduced in the Companies Act 2013, which provides for “Punishment for Fraud”. This section has far reaching consequences since the punishment prescribed under this section includes imprisonment up to a period of ten years.
The said section provides 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 provides that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
Under the said section “fraud” has been defined as “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.
“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.
CASCADING EFFECT OF SECTION 447 –
Listed below are the sections under Companies Act 2013, where the penalty is expressly prescribed for non compliance as “action under section 447”. Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences covered under the below mentioned sections, which attract the punishment for fraud provided in section 447 shall be cognizable and no person accused of any offence under these sections shall be released on bail or on his own bond 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 may grant bail if it 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.
INCORPORATION OF A COMPANY
If any person furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action under section 447
Where, at any time after the incorporation of a company, it is proved that the company has been got incorporated by 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 for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first directors of the company and the persons making declaration under section (b) of subsection (1) shall each be liable for action under section 447.
Proviso to Section 8(11)
In relation to companies with charitable objects, etc. when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.
CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS
Where a prospectus includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under section 447.
PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY
Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to invest or lend money shall be liable for action under section 447.
PUNISHMENT FOR PERSONATION FOR ACQUISITION ETC. OF SHARES
Any person who tries to acquire securities of a company under a fictitious name or makes multiple applications under different names or otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name, shall be liable for action under section 447.
CERTIFICATE OF SHARES
Every officer of a company which with intent to defraud issues a duplicate certificate of shares shall be liable for action under section 447.
TRANSFER AND TRANSMISSION OF SECURITIES
Where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under section 447.
In relation to reduction of share capital, if any officer of the company knowingly conceals the name of any creditor entitled to object to the reduction or misrepresents the amount or nature of debt or abets in same, he shall be liable under section 447.
DAMAGES FOR FRAUD (DEPOSIT)
Where a company fails to repay the deposit or part thereof or any interest thereon and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall be liable under section 447.
REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE
Proviso to Section 140(5)
If the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, auditor shall also be liable for action under section 447.
POWER TO CALL FOR INFORMATION INSPECT BOOKS AND CONDUCT INQUIRIES
Proviso to Section 206(4)
Where during an inspection it is found that business of a company has been or is being carried on for a fraudulent or unlawful purpose, every officer of the company who is in default shall be punishable for fraud in the manner as provided in section 447.
INVESTIGATION INTO COMPANY’S AFFAIRS IN OTHER CASES
If after an investigation it is proved that the business of the company is being conducted with 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 any person concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, then, 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 punishable for fraud in the manner as provided in section 447.
PENALTY FOR FURNISHING FALSE STATEMENT, MUTILATION, DESTRUCTION OF DOCUMENTS.
Where a person who is required to provide an explanation or make a statement during the course of inspection, inquiry or investigation, or an officer or other employee of a company or other body corporate which is also under investigation destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly removes, documents relating to the property, assets or affairs of the company or the body corporate or makes a false entry in any document provides or an explanation which is false or which he knows to be false, he shall be punishable for fraud in the manner as provided in section 447.
FRAUDULENT APPLICATION FOR REMOVAL OF NAME
Where an application for removal of name of a company is made by the company with the object of evading the liabilities of the company or with the intention to deceive the creditors or to defraud any other persons, the persons in charge of the management of the company shall, notwithstanding that the company has been notified as dissolved be punishable for fraud in the manner as provided in section 447.
LIABILITY FOR FRAUDULENT CONDUCT OF BUSINESS
If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be liable for action under section 447.
PROSECUTION UNDER COMPANIES ACT 2013
SERIOUS FRAUD INVESTIGATION OFFICE (SFIO)
Companies Act 2013 provides for establishment of a Serious Fraud Investigation Office to investigate into the affairs of the Company on an order by the Central Government and 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.
If the Director, Additional Director or Assistant Director of Serious Frauds Investigation Office authorised in this behalf by the Central Government has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred earlier in this write up as “cascading effect of Section 447, he may arrest such person present him before the Judicial Magistrate or a Metropolitan Magistrate within 24 hours.
For this purpose the Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a Company.
Therefore under the provisions of Companies Act 2013, SFIO has got statutory status as proposed therein. Investigation report of SFIO filed with the Court for framing of charges shall be treated as a report filed by a Police Officer. SFIO shall have power to arrest in respect of certain offences of the Act which attract the punishment for fraud. Those offences shall be cognizable and the person accused of any such offence shall be released on bail subject to certain conditions provided in the relevant section of the Act. Stringent penalty is provided for fraud related offences.
However 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.
It is provided 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.
It is also provided that where any case has been assigned by the Central Government to the Serious Fraud Investigation Office for investigation under this Act, no other investigating agency of Central Government or any State Government shall proceed with investigation in such case in respect of any offence under this Act and in case any such investigation has already been initiated, it shall not be proceeded further with and the concerned agency shall transfer the relevant documents and records in respect of such offences under this Act to Serious Fraud Investigation Office.
It has also been prescribed in the Companies act that where the investigation into the affairs of a company has been assigned by the Central Government to Serious Fraud Investigation Office, it shall conduct the investigation in the manner and follow the procedure provided in Chapter XIV and submit its report to the Central Government within such period as may be specified in the order. In such case the Director, Serious Fraud Investigation Office shall cause the affairs of the company to be investigated by an Investigating Officer who shall have the power of the inspector under section 217.
It is also mandated not only on part of the company but also its officers and employees, who are or have been in employment of the company to take responsibility to provide all information, explanation, documents and assistance to the Investigating Officer as he may require for conduct of the investigation.
The provisions of the Companies Act 2013 provide for establishment of Special Courts. Offences under the Companies Act 2013 shall be tried only at Special Courts. Complaints can be filed by Shareholder, ROC or any officer authorized by 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 authorized by the Securities and Exchange Board of India.
One of the most important and serious provision that is going to be made applicable on Companies act 2013 becoming effective is that irrespective of anything contained in the Code of Criminal Procedure, 1973, the offences covered under sub-sections (5) and (6) of section 7, section 34, section 36, subsection (1) of section 38, sub-sections (5) of section 46, sub-section (7) of section 56, subsection (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 of companies Act 2013 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:
However if any 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.
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 introducing in-depth criminal provisions into the provisions of Companies Act 2013 goes to prove that law makers have decided to bring a thought process into the mind of corporates and other stake holders that Companies Act shall no longer be looked into as civil and regulatory kind of law and It looks that they wanted corporate and other stake holders to treat and understand it as more of a criminal nature of law , when they fail to follow and comply with the provisions of the Companies Act 2013 in its real and true spirits.
(Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries, Chennai.)