Mr. Virender Ganda*

The Insolvency and Bankruptcy Code, 2016 (Code) was introduced with an objective to consolidate and amend the laws relating to reorganisation of the insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and to balance the interests of all stakeholders. Although the provisions of the Code assume a civil nature, it is significant not to overlook provisions that identify certain actions of persons viz. corporate debtor (CD), resolution professionals etc. as criminal offences. Chapter VII of Part II of the Code enumerates such criminal offences and calls for initiation of criminal actions by the Adjudicating Authority (AA), once they come to light.

SECTIONS FOR PUNISHMENT

Chapter VII provides for offences that otherwise adversely affect the corporate insolvency resolution process (CIRP), when it is initiated against a CD. Sections 68 to 77 explicitly layout punishments for certain actions like concealment of property of CD (section 68), transactions defrauding creditors (section 69), for any misconduct in course of CIRP (section 70) as well as for falsification of books of CD (section 71). Nevertheless, any wilful and material omission from statements related to affairs of CD (section 72) and false representation to creditors (section 73) are also treated as offence sunder this Chapter. Besides, a contravention of moratorium or the resolution plan would constitute an offence (section 74) as in the case of furnishing false information in an application (section 75 and 77). Also, any non-disclosure of dispute or payment of debt by operational creditors (OC) is also considered as an offence (section 76) under the Code. To strengthen the restraints mentioned above, the Code provides for punishment with fine (section 235A) if any contravention escapes the clutches of express provisions for penalty/punishment. Such offences mentioned under this Code are to be tried by a Special Court (section 236), notwithstanding anything in the Code of Criminal Procedure, 1973, established under Chapter XXVIII of the Companies Act, 2013 (the Act of 2013).

The offences (in brief) and their respective punishments under Chapter VII of the Code are tabulated below:

Section of the Code Offence Imprisonment Fine
68 Concealment of property of the CD Not less than three years and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
69 Transactions

defrauding creditors

Not less than one year and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
70 Misconduct in
course of CIRP
Not less than three years and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
71 Falsification of
books of the CD
Not less than three years and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
72 Wilful and material omissions from statements relating to affairs Of the CD Not less than three years and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
73 False representation to
creditors
Not less than three years and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
74 Contravention of moratorium or the resolution plan Not less than one year or three years [as the case may be, under sub-section (1), (2) or (3)] and may extend up to five years Not less than one lakh rupees but may extend to three lakh rupees or one crore rupees, as the case may be, under sub-section (1), (2) or (3)
75 False information furnished in application No imprisonment Not less than one lakh rupees but may extend to one crore rupees
76 Non-disclosure of dispute or payment of debt by operational creditor Not less than one year and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees
77 Providing false information in

application made

by the CD

Not less than three years and may extend up to five years Not less than one lakh rupees but may extend to one crore rupees

In 2001, the Report of Dr. N. L. Mitra Committee on Legal Aspects of Bank Frauds expressed concerns over the growing corporate offences of criminal nature. It emphasised upon the procedural complexities and confusion arising out of it. An excerpt of the report in this regard is as follows:

It is true that modern Criminal law in advanced countries has made corporate entities also subject to criminal liabilities. In India we are experimenting in the same line but not through classical Criminal law that is, through amendment to Indian Penal Code and Criminal Procedure Code. In some cases, criminalizing through business law, say, Companies Act or by Negotiable Instrument Act has backfired creating confusion in the administration of Criminal law. Criminal law as a matter of fact, has to attain definitional perfection and at the same time delimit the area of offence with proper care. Police, prosecution, criminal courts and the prison are the ones to act in unison to maximise the effect of criminal justice.’

However, the scenario changed in a decade with more corporate actions being brought under the ambit of criminal offences. A cue regarding the same can be drawn from Report of the Committee to review offences under the Act of 2013, where, while discussing the classification of offences under this Act, it has been stated that certain act/defaults are of serious nature which require the rigours of criminal trial. Such act may affect larger public interest, shareholder’s interest, creditor’s interest or it may affect the going concern nature of the company itself. There may also be an element of deceit, an intent to siphon out funds etc. Thus, it can be understood that the aforesaid offences were drawn on similar lines, even though no detailed explanation was given for such classification either in the Code or in the report of the Parliamentary Joint Committee on the Insolvency and Bankruptcy Code, 2015.2

SPECIAL COURTS

Historically, the establishment of Special Courts under the Act of 2013 was along step overdue, in dealing with the corporate offences. The foremost recommendations in this regard was made by Dr. J. J. Irani in its Committee Report on Company Law.3These recommendations were approved by the Ministry of Corporate Affairs and found its way to the Fifty-Seventh Report of the Standing Committee on Finance. Finally, the provision for establishment of Special Courts was introduced into the Companies Bill, 2009. The major objective behind creation of Special Courts, under the Act of 2013 was to ensure speedy disposal of cases, so that the usual long-time gap between the commission of fraudulent activities and final hearing of the cases is done away with. This idea was rightly imported for dealing with the aforesaid offences in the Code as well.

While the procedural aspects of the Code maintain that the AA is empowered to arrive at a finding or observation and that certain action comes under the purview of Chapter VII of Part II of the Code, once such finding or observation is made, the power to initiate a trial shifts to a Special Court. The Special Court shall be deemed to be a Court of Session and the person conducting the prosecution shall be deemed to be a public prosecutor (section 236 of the Code). Section 236 of the Code thus lays down that the offences shall be tried by a Special Court established under Chapter XXVIII of the Act of 2013 as mentioned above. Under section 435 of the said Act, it is the Central Government which must establish or designate a Special Court for the purpose of speedy trial of offences. Accordingly, Ministry of Corporate Affairs, Government of India has issued several notifications from time to time thereby vesting jurisdiction of Special Courts in Courts of Session.

However, the corporate offenders in the above-mentioned cases undergo a trial only when prescribed authorities approach the Court of law with a complaint. This has been underlined in the Act of 2013 as well. For example, under section 58AAA of the Companies Act, 1956 (the Act of 1956), it was only the Central Government, or any person authorised by it, who could make complaint for any offence committed under section 58A or section 58AA of the Act of 1956. The intention behind vesting the power to make a complaint only upon the Central Government or the regulatory authority may have been to prevent the abuse of power or process. The same is also evident from perusal of the Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, wherein it has been stated that the powers of making a complaint was given to the Insolvency and Bankruptcy Board of India (IBBI) or Central Government to do away with any issues relating to recording of statement and filing of police report. A parallel to section 58AAA of the Act of 1956 can be drawn in the Bankruptcy laws vide section 236 of the Code. The Special Court may proceed to try the offence made out in the complaint as a summons case or a warrant case as stipulated under the Code of Criminal Procedure, 1973.

The Special Courts, thus, can take cognisance of the offences only when a complaint is made by the Central Government, the IBBI or an authorised person as the case may be, as laid down by section 236 (2) of the Code.

Section 236 (2) is as follows:

‘(2) No Court shall take cognisance of any offence punishable under this Act, save on a complaint made by the Board or the Central Government or any person authorised by the Central Government in this behalf.’

Thus, cognisance of offences can be made only upon a complaint made by the IBBI, the Central Government or by any person authorised by the Central Government. The said parties can make a complaint only when there is an information dissemination in this regard. This necessitates impleadment of the IBBI and/or the Central Government or any other person authorised by the Central Government, in such applications moved before the AA. In the absence of the IBBI or Central Government as parties to the proceedings, the observation/finding of the AA may remain confined to the files of the AA only. Only after the IBBI or the Central Government are impleaded as parties, the AA may direct the IBBI or Central Government to investigate into any alleged commission of offence and thereafter make a complaint before the Special Court. This in turn ensures that the complainant or the prosecutor is the ‘State’ thereby upholding the prosecuting responsibilities of the State. The idea of State being a prosecutor sprouts from the responsibility of a welfare state to prevent crimes against its subjects. However, the Code remains silent on whether AA can direct the Central Government or the IBBI to make a complaint in this regard and whether such directions are mandatory or directory in nature.

COGNISANCE OF OFFENCES

As mentioned above, the cognisance can be taken only by the Special Court pursuant to a complaint made by the designated entities. The Code although makes implied reference to finding or observation made by the AA to form a basis of the said complaint, it does not clarify as to whether it constitutes a cognisance. At this point, it would be helpful to investigate a few case laws where the Hon’ble Supreme Court (SC) explained the meaning of the term cognisance.

In Subramanian Swamy v. Manmohan Singh and Anr.,4 the SC explained the meaning of the word ‘cognisance’ holding that:

‘…In legal parlance cognizance is taking judicial notice by the court of law, possessing jurisdiction, on a cause or matter presented before it so as to decide whether there is any basis for initiating proceedings and determination of the cause or matter judicially.’

In CREF Finance Ltd. v. Shree Shanthi Homes (P) Ltd. and Anr.,5 the SC has laid out the meaning of taking cognisance. The Court held as follows:

‘…Once the court on perusal of the complaint is satisfied that the complaint discloses the commission of an offence and there is no reason to reject the complaint at that stage, and proceeds further in the matter, it must be held to have taken cognizance of the offence. One should not confuse taking of cognizance with issuance of process. Cognizance is taken at the initial stage when the Magistrate peruses the complaint with a view to ascertain whether the commission of any offence is disclosed.

The issuance of process is at a later stage when after considering the material placed before it, the court decides to proceed against the offenders against whom a prima facie case is made out…’.

The SC further in S.R. Sukumar v. S. Sunaad Raghuram emphasised upon the satisfaction of the Court to the commission of offence as a condition precedent for taking cognizance of offence. The SC held:

‘…”Cognizance” therefore has a reference to the application of judicial mind by the Magistrate in connection with the commission of an offence and not merely to a Magistrate learning that some offence had been committed. Only upon examination of the complainant, the Magistrate will proceed to apply the judicial mind whether to take cognizance of the offence or not. Under Section 200 Code of Criminal Procedure, when the complainant is examined, the Magistrate cannot be said to have ipso facto taken the cognizance, when the Magistrate was merely gathering the material on the basis of which he will decide whether a prima facie case is made out for taking cognizance of the offence or not. “Cognizance of offence” means taking notice of the accusations and applying the judicial mind to the contents of the complaint and the material filed therewith. It is neither practicable nor desirable to define as to what is meant by taking cognizance. Whether the Magistrate has taken cognizance of the offence or not will depend upon facts and circumstances of the particular case.’

In the light of the mentioned cases it becomes clear that cognisance of an offence is established by way of application of judicial mind. Therefore, when a magistrate takes cognisance of an offence it is implied that a prima facie case has been made out. The scheme of the Code, thus, has been so drafted that the opinion formed by the AA forms the basis of a prima facie case being made out in the complaint made by the IBBI or Central Government. Under section 236 (3) of the Code, the provisions of the Code of Criminal Procedure, 1973 are made applicable to the proceedings before a Special Court.

AMBIGUITY IN ROLE OF ADJUDICATING AUTHORITY

Notwithstanding anything mentioned above, the Code leaves grey areas while ascertaining the role of the AA in respect of the aforesaid offences and subsequent proceedings. This can be explained with reference to section 33 (3) of the Code.

According to Section 33 (3) of the Code:

‘(3) Where the resolution plan approved by the AA is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the AA for a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1)

Sub-section 1 (b) of section 33 states:

1) Where the AA, —

(a) …

(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein,it shall –

i. pass an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter;

ii. issue a public announcement stating that the corporate debtor is in liquidation; and

iii. require such order to be sent to the authority with which the corporate debtor is registered.’

Section 33 (3) also talks about the contravention of approved resolution plan by the concerned CD. While this section by itself, provides an opportunity for affected persons to move an application for liquidation, when read with section 74 (3) constitutes an offence, the cognisance of which shall be taken by a Special Court upon a complaint made either by the IBBI, the Central Government or any person authorised by the Central Government in this behalf. It is pertinent to mention that the power for arriving at a finding that the action of the CD is punishable is vested in the AA. However, once its finding is done/observation is made on a prima facie reading, the AA will have to issue notice to the Central Government or the IBBI as the case maybe, thereby impleading them as parties to the proceedings. As already explained, the Code remains silent as to whether the AA can direct the Central Government or the IBBI as the case maybe, to make a complaint, although section 236 (2) rightly upholds the role of State in Criminal Jurisprudence. In the event of AA being powerless to direct the parties to make a complaint, its role confines to making observation or finding in this regard.

It could be understood that in the absence of a complaint made by the IBBI or the Central Government as the case maybe, the AA and its findings remains dormant with respect to the offence committed. Further, it is relevant to mention that the said complaint is to be made by the Central Government or the IBBI as the case may be, to the Court which can take cognizance in the matter. Even in this case, the finding/observation made by the AA remains relevant only to the extent that the information dissemination to the complainant is ensured.

In a situation where a complaint is registered by the IBBI or the Central Government, the procedure of preparation of charge sheet and a subsequent fair trial based on the principles of natural justice appreciating available evidence is not detailed in the Code. In such a scenario, the general law, i.e., provisions of Code of Criminal Procedure, 1973 is presumed to be followed. A basic understanding of the Code of Criminal Procedure, 1973 suggests that such a complaint made by the IBBI or the Central Government as the case may be, triggers the proceeding right from issue of summons to investigation and report, charge and subsequently a trial, appreciation of evidence and judgment.

The National Company Law Appellate Tribunal (NCLAT) has considerably clarified the role of the AA and the procedure to be followed before initiating any criminal procedure under the Code, in its very recent consolidated judgment dated August 16, 2019, in the matters of Committee of Creditors of Amtek Auto Ltd. through Corporation Bank v. Mr. Dinkar 9. Venkatasubramian and Others, Liberty House Group Pte Ltd. v. Mr. Dinkar 9. Venkatasubramanian and Others, Liberty House Group Pte Ltd. v. the Committee of Creditors of Amtek Auto Ltd. and Another.

The NCLAT has set aside an order passed by the AA, which had granted liberty to the resolution professional and the committee of creditors to move before the IBBI or the Central Government. After discussing in detail the procedure which ought to be followed to enable the IBBI or Central Government to initiate a criminal proceeding, the NCLAT has concluded that the resolution professional or the committee of creditors or any creditor should make an application under section 213 of the Act of 2013 read with the relevant provision of the Code, before the AA. In disposing the said application, the AA has to decide if the matter ought to be referred to the IBBI or the Central Government for taking any action under section 213 of the Act of 2013 and the relevant provision of the Code. Upon satisfaction, the AA may request the Central Government to investigate the matter and the basis of opinion formed after the investigation, the Central Government may decide whether to make a complaint under the provisions of the Code or not. From the judgment it appears that the NCLAT has prevented any party from approaching the IBBI or Central Government, directly, to prevent possible violations of the principles of natural justice before the executive and regulatory authorities such as IBBI or Central Government.

CRIMINAL JURISPRUDENCE UNDER THE CODE AND THE ACT OF 2013

Nonetheless, the lack of clarity with respect to the role of AA does not confine to the provisions of the Code. This becomes evident on a plain reading of section 74(3) of the Act of 2013. Section 74 (3) states:

‘If a company fails to repay the deposit or part thereof or any interest thereon within the time specified in sub-section (1) or such further time as may be allowed by the Tribunal under sub-section (2), the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees and every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.’

Similarly, section 76A of the Act of 2013 deals with punishment of contravention of section 73 or section 76. Section 76A says that:

‘Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made there under or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made there under or such further time as may be allowed by the Tribunal under section 73,-

(a) the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than 2[one crore rupees or twice the amount of deposit accepted by the company, whichever is lower] rupees but which may extend to ten crore rupees; and

(b) every officer of the company who is in default shall be punishable with imprisonment which may extend to 3[seven years and with fine] which shall not be less than twenty-five lakh rupees, but which may extend to two crore rupees.

Provided that if 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.’

As mentioned earlier, the role of AA is not explicitly delineated in the Act. Alienation of Civil Courts with respect to the jurisdiction when coupled with establishment of Special Courts for the offences so laid out implies that the role of AA cannot be extended to trial of criminal offences. In a case where offences committed by the stakeholders in corporate cases increasingly knock the doors of AA, such lacunas and grey areas need to be removed and clarified so as to achieve the objectives of Corporate Laws in the country.

CONCLUSION

While the AA can be recognised as a judicial body essentially vested with civil jurisdiction, the Special courts are vested with criminal jurisdiction arising out of offences as laid out in Chapter VII of the Code. It is pertinent to note that there may arise numerous situations where there can be an overlap between the findings of the two distinct legal forums. Reliance can be placed on the judgement of the apex court in Kishan Singh (D) through LRs. v. Gurpal Singh and Others.8 In this judgement, the SC considered a catena of judgements on the issue of civil and criminal proceedings arising out of same cause of action. It has been concluded that the proof being different in civil and criminal proceedings, findings of fact recorded by Civil Court do not have any bearing so far as the criminal case is concerned and vice versa. However, based on factual and contextual circumstances, provisions of section 41 to 43 of the Indian Evidence Act, 1872 dealing with the relevance of provisions of judgements in subsequent cases may be taken into consideration.

The AA under the provisions of the Code makes its own finding or observation while, the Special Court must form its independent opinion after trial. The opinion or finding of the Special Court, which has all the trappings of a Court of Session/criminal court, is based on the principles of criminal jurisprudence. One major tenet of criminal jurisprudence being presumption of innocence until proved guilty posits that the finding of the AA shall have no bearing on the entire procedure of trial. As such, it renders the role of AA irrelevant.

The Code, in its present form, clearly envisages the complaint to be made to the special court, by the IBBI or the Central Government. Even though the NCLAT in the judgment referred to as above,9 has resolved issues and doubts to some extent, the procedure to be followed by any person having knowledge/apprehension is far from clear, particularly as to whether such person should directly move the Central Government or IBBI or it has to necessarily approach the AA to procure the prima facie finding with respect to commission of an offence.

Since, the Code came into force in December, 2016 and most proceedings before the AA are now reaching stage of invoking the provisions of the Code inviting criminal prosecution, it is hoped that things would be clearer in times to come.

Notes:-

1The author would like to thank Ms. Chandreyee Maitra and Mr. Rahul Menon, for their invaluable assistance during the drafting of this article.

2 Report of the Parliamentary Joint Committee on the Insolvency and Bankruptcy Code, 2015, Lok Sabha, April 2016.

3 Report on Company Law, Dr. J. J. Irani Expert Committee on Company Law, (May 31, 2005).

4 (2012) 3 SCC 64

5 (2005) 7 SCC 467

6(2015) 9 SCC 609

7Company Appeal (AT) (Insolvency) No. 219 of 2019 with Company Appeal (AT) (Insolvency)No. 442 of 2019, Company Appeal (AT) (Insolvency)No. 443 of 201

8AIR 2010 SC 3624

9 Committee of Creditors of Amtek Auto Ltd. through Corporation Bank v. Mr. Dinkar T. Venkatasubramian and Others, Liberty House Group Pte Ltd. v. Mr. Dinkar T. Venkatasubramanian and Others, Liberty House Group Pte Ltd. v. The Committee of Creditors of Amtek Auto Ltd. and Another.

Source- https://ibbi.gov.in/uploads/whatsnew/2456194a119394217a926e595b537437.pdf

*(Mr. Virender Ganda is a Senior Advocate and President of NCLT & AT Bar Association.)

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