The Companies Act 2013 (CA) was enacted by the Parliament of India to replace the outdated Companies Act, 1956. Section 36 of Companies Act deals with criminal liability of companies for fraudulently inducing persons to invest money, while Section 447 relates to punishment for fraud. Pursuant to a combined reading of these two sections, Indian courts have time and again held companies liable for fraud. This article will consider the scope of the criminal liability of companies u/s 36 and the punitive action taken in case of fraud u/s 447 in corporate cases.
Applicability of Section 36 of Companies Act 2013- Punishment for fraudulently inducing persons to invest money
As per Section 36 of the CA, any company which is registered shall be liable for any offence committed by its directors or officers in the course of managing company affairs. It outlines the principle of vicarious liability that is applicable when a company is guilty of any offence under the CA or other legislations. The liability of the company for the criminal offenses committed by its directors or officers falls on the company itself and not on either the manager or the concerned officer. The company, however, cannot be held liable if the offence committed by its officers occurred without its knowledge, consent or connivance, and except in certain cases where the acts committed were in the course of managing its affairs.
Implication of Section 447 of Companies Act 2013- Punishment for fraud
Section 447 sets out the penalties for any fraud done by a company and its directors u/s 447. It is worth noting that the provisions under Section 447 apply to ‘every person’ and hence, even the company itself can be held liable for fraud. As per this section, any person found guilty of fraud shall be punishable with imprisonment which may extend up to 10 years and shall also be liable to fine which may extend up to Rs. 10,00,000 or three times the amount of fraud, whichever may be higher.
Further, the section makes it mandatory for the court, while convicting an offender, to also pass an order for the disgorgement of all the profits made through fraudulent means. In certain cases, even if the offender has not benefited from the fraud, the court may still issue an order requiring them to deposit an amount as compensation to defrauded investors.
Case Laws on Section 36 & 447 of Companies Act 2013
The Supreme Court in the case of RBI v. G. Jagan Mohan Rao, (1979) 2 SCC 286 had held the bank to be vicariously liable under Section 36 for fraudulent acts of its branch managers. Further, the Court also noted that if a company is involved in any fraud, both the company and the persons responsible shall be liable to punishment under Section 447 of the CA.
In the case of Rajneesh Bajaj v. Satish Bajaj (1993) 1 SCC 192, Rajneesh Bajaj, a senior partner of a firm, had transferred funds from a current account to an overdraft account, without the knowledge of other partners. The court held that since it was done with the intention of deceiving and misrepresenting the partners, it was illegal and held the firm liable under Section 36 of the CA. Further, the court held that since the act of the partner was fraudulent and done with the knowledge that it would cause wrongful gain to himself or any other person, the partners were liable for punitive action under Section 447 of the CA as well.
Conclusion
It is clear from the above that Section 36 of Companies Act and Section 447 hold the companies and its officers liable for criminal offences committed by them with knowledge or connivance or of which the company has benefited through its acts conniving or approving of them. Therefore, companies must exercise due care and caution while conducting their business and must take steps to ensure that none of its officers commit any offence or fraud. Furthermore, they should also make sure that they abide by the provisions of the Companies Act and not act in contravention of any of its provisions.
(Author can be reached at email address casharma.sharad2000@gmail.com or on Mobile No. 9990365673)
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