Instances when Section 447 of Companies Act, 2013 (Fraud) has to be invoked – A quick recap of important provisions.
The Companies Act of 2013, unlike its previous predecessor Act of 1956 have tried to list out various provisions or instances wherein Section 447, that exclusively deals with defining Fraud and its punishment, has to be referred to and they are as following:
a. Section 7:
Deals with documents to be file with concerned RoC for incorporating a company.
Sub-Section (5): If a person furnishes false information or incorrect particulars or suppresses material information then the person is liable for action under Section 447.
Sub-Section (6): The promoters, the first directors and the fiduciaries viz, the chartered accountant, the company secretary in practice or the cost accountant or the advocate, the managing director or the secretary of the company who have given such false declaration in the prescribed format shall also be liable for action under Section 447.
b. Section 8:
Deals with Charitable Companies
Sub-Section (11): Every officer in default shall be liable for action under Section 447 if it is proved that the affairs of the company were conducted fraudulently.
c. Section 34:
Deals with Criminal liability for mis-statement in Prospectus
Every person who has authorized the issue of a prospectus carrying misstatement shall be liable under this provision.
d. Section 36:
Deals with punishment for fraudulently inducing persons to invest money
Penal Consequences: Sec. 447 can be invoked
e. Section 38:
Deals with punishment for personation for acquisition of securities
Penal Consequences: Sec. 447 can be invoked; also court has the power to pass order for disgorgement of gains, and maximum punishment here can go upto 10 years in jail
f. Section 46:
Deals primarily with Certificate of Shares
Sub-Section (5): Cases of frauds with respect of issuance of share certificate attract a punishment with fine of not less than five times the face value of the shares involved in fraudulent duplicate issue with a maximum penalty of ten times the face value of such shares or Rs. 10 crores whichever is higher, whereas, the officers in default attract punishment under Section 447.
g. Section 56:
Deals with transfer and transmission of shares
Sub-Section (7): Punishment under Section 447 for intentional fraudulent transfer of shares by a depository or depository participant.
h. Section 66:
Deals with reduction of Share Capital
Sub-Section (10): Provides for punishment u/s 447, if- knowingly conceals the name of any creditor entitled to object to the reduction; knowingly misrepresents the nature of amount of the debt or claim of any creditor; bets or is privy to any such concealment or misrepresentation as aforesaid
i. Section 75:
Deals with damage involved in fraud
Penal Consequences: “When 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, without prejudice to the provisions contained in sub-section (3) of that section and liability under section 447, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.”
j. Section 76A:
Deals with punishment for contravene of Section 73/76
Penal Consequences: “When it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.”
k. Section 86:
Deals with punishment for furnishing incorrect or suppressing material information
Penal Consequences: To be liable u/s 447, if despite aware of the same, a person wilfully provides for false information or suppress material information.
l. Section 90:
Deals with punishment for wilful suppression w.r.t register of significant beneficial owners of the company
Penal Consequences: Same as there in Section 86.
m. Section 140:
Deals with removal, resignation of Auditor and giving of special notice
Sub-Section (5): Punishment for auditor of a company who 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. Apart from debarring the auditor from appointment as auditor of any company for a period of five years of passing of order by the NCLT, the auditor shall also be liable under Section 447.
n. Section 206:
Deals with power of RoC to call for information, inspect books and conduct inquiries
Penal Consequences: If the information collected by the registrar or the inspection reveals that the business of the company has been conducted for a fraudulent or unlawful purpose, then every officer of the company who is in default shall be punishable for fraud as per Section 447.
o. Section 212:
Deals with investigation powers by SFIO into affairs of the company
Penal Consequences: Notwithstanding anything contained in the Code of Criminal Procedure, 1973, 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 – 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 he is not guilty of such offence and that he is not likely to commit any offence while on bail.
p. Section 213:
Deals with investigation in affairs in other cases
Clause (b): If the investigation reveals that the business of the company was being conducted with an intent to defraud its credits, members or any other person or otherwise for a fraudulent or unlawful purpose, or that the company was formed for such purposes or any person involved in the formation of the company was fond to be guilty of fraud, then every officer in default or other concerned person shall be liable for punishment under Section 447.
q. Section 229:
Deals with penalty for furnishing false statement or destruction of documents
Penal Consequences: This Section deals with falsification or mutilation of records or destroying of documents etc. by any officer of the company who is required to furnish certain information during the course of inspection, inquiry or investigation. Such acts attract punishment under Section 447.
r. Section 251:
Deals with fraudulent application for removal of name
Penal Consequences: “If an application has been made by the company with a fraudulent intent to evade the liabilities of the company or to defraud its creditors or other persons then the person in charge of the management of the company shall be liable for action under Section 447.”
s. Section 339:
Deals with liability for fraudulent conduct of business
Sub-Section (3): Punishment can be invoked u/s 447.
t. Section 448:
Deals with punishment for false statement
Penal Consequences: “The Section calls for punishment under Section 447 for making false statement related to returns, statement, prospectus or any other document, that is false in respect of any material particulars or omits any material fact by a person.”
Note: Above-mentioned provisions are some instances where Section 447 can be invoked for deciding the amount of liability and / term of imprisonment. The same have been identified and cited Ad Verbatim as per the same given under Companies Act of 2013
Extract of Section 447 of Companies Act, 2013
Notified Date of Section: 12/09/2013
Punishment for Fraud.
447. 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 1[involving an amount of at least ten lakh rupees or one per cent. of the turnover of the company, whichever is lower] 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.
Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to fifty lakh rupees or with both.
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.
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