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Case Law Details

Case Name : Sanjay Sreesha Vs Serious fraud Investigation Office (Karnataka High Court)
Appeal Number : Criminal Petition No. 2136 of 2016
Date of Judgement/Order : 19/05/2022
Related Assessment Year :

Sanjay Sreesha Vs Serious fraud Investigation Office (Karnataka High Court)

Held that if an offence committed by the firm, is also an offence committed by the partners, it cannot be bifurcated as partners and the firm

Facts-

This petition is filed by the petitioner/accused u/s. 482 of Cr.P.C for quashing criminal proceedings in CC No.34/2012 pending on the file of Special Court for economic offences Bangalore to set aside the order of the trial court dated 23.02.2012 for the offence punishable under section 209A and 240(3) of the Companies Act, 1956.

The case of the petitioner is that the respondent is Serious Fraud Investigation (officer herein referred as SFIO) filed complaint u/s. 200 of Cr.P.C against the petitioner for violation of Section 240 (3) of Companies Act, alleging that they issued summons to the petitioner on 16.06.2011 and he has not replied to the notice. Again, one more summons issued on 20.06.2011 to be appeared on 28.06.2011 and it is also alleged the final summons was issued on 01.07.2011 to appear before them on 07.07.2011 and he has not appeared and he has sent a reply that he was not employed as Auditor of the Company. Therefore, private complaint came to be filed and the trial court took the cognizance of the offence against the petitioner, which is under challenge.

Conclusion-

In my considered opinion a partnership firm is not a corporate entity, it does not have a separate legal persona and this has several important legal consequences in the relationship between the parties all rights and duties only exist between the parties, inter se the right and duties of the partnership are the rights and duties of the partners for as per the partnership deed. Therefore, a partner cannot be bifurcated from a firm A partnership firm is not a separate legal entity distinct from its partner it is merely a collective name given to the individuals composing it.

Therefore if an offence committed by the firm, is also an offence committed by the partners, it cannot be bifurcated as partners and the firm.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

This petition is filed by the petitioner/accused accused under Section 482 of Cr.P.C for quashing criminal proceedings in CC No.34/2012 pending on the file of Special Court for economic offences Bangalore to set aside the order of the trial court dated 23.02.2012 for the offence punishable under section 209A and 240(3) of the Companies Act, 1956.

2. The case of the petitioner is that the respondent is Serious Fraud Investigation (officer herein referred as SFIO) filed complaint under section 200 of Cr.P.C against the petitioner for violation of Section 240 (3) of Companies Act, alleging that they issued summons to the petitioner on 16.06.2011 and he has not replied to the notice. Again one more summons issued on 20.06.2011 to be appeared on 28.06.2011 and it is also alleged the final summons was issued on 01.07.2011 to appear before them on 07.07.2011 and he has not appeared and he has sent a reply that he was not employed as Auditor of the Company. Therefore private complaint came to be filed and the trial court took the cognizance of the offence against the petitioner, which is under challenge.

3. Learned senior counsel appearing for the petitioner has mainly argued on the ground, the petitioner was not employed by the Company as per Section 240 of Companies Act. The petitioner was the partner in the firm in which the petition was appointed as Auditor. Such being the case, without making the firm as an accused the petitioner cannot be prosecuted and he cannot be vicariously be held liable for the penal provisions. Therefore, prayed for quashing the proceedings.

4. Per Contra learned counsel for the respondent has objected the petition and contended that the petitioner is the Auditor. The eligibility criteria for appointing the Auditor is that he must be a Chartered Accountant as per Section 226 of the Companies Act and the partner who is practicing in India and if the firm is appointed as Auditor then he has to sign as an Auditor of the Company. Therefore, the petitioner being a Accountant was appointed as an Auditor and he is running the firm, therefore even without making firm as party he is liable for the responsibility of answering the questions, as he was appointed by the resolution of the Company. Further contended that the petitioner himself signed the Audit Report as per Section 229 of Companies Act and as per 240 of Companies Act, it is the duty of all the Officers, employees and Agents of the Company and where the affairs of any other body corporate are investigated by the virtue of Section 239 of Companies Act, they have to furnish the details requested by the investigating agency, in view of the powers of this Section 239 of Companies Act. Therefore, the petitioner has been appointed as Auditor with eligibility criteria of Chartered Accountant, he is responsible person to submit the information to the investigating agency, failure to furnish the information, he has to be prosecuted. Therefore, the petitioner is liable to be prosecuted for the offence punishable under Section 240 (3) of Companies Act, 1956. Therefore the special counsel prayed for dismissal.

5. The learned counsel for the petitioner, in support of his arguments relied upon the following judgments:

1. Central Bureau of Investigation, Hyderabad Vs K. Narayana Rao reported in (2012) 9 SCC 512.

2. Sunil Bharti Mittal Vs. Central Bureau of Investigation reported in (2015) 4 SCC 609.

3. Rafel Del Riyo Vs The State of Karnatak through Agricultural Officer and Seeds Inspector, Haveri reported in 2022(2) KCCR 1071.

4. Aneeta Hada Vs Godfather Travels and Tours Pvt. Ltd. reported in (2012) 3 SCC (Cri) 241.

6. Learned counsel for the respondent also relied upon the judgment of the co-ordinate bench in the case of K.Janardhan Reddy Vs State by CBI/ACB in Crl.P.No.7847/2018 dated 03.06.2019.

7. Having heard the arguments and perused the records. On perusal of the same, it reveals that the respondent SFIO filed private complaint against the petitioner for the offence punishable under section 240 (3) of Companies Act alleging that the petitioner was appointed as an Auditor of the company and notice was issued by the respondent for furnishing some details of the Company and he has filed to furnish. Therefore the offence was committed by the petitioner, hence liable for punishment and penal action.

8. Per contra learned senior counsel has contended that without making the firm as an accused this petitioner cannot be vicariously made liable to face the penal provisions under Section 240 (3) of Companies Act. Based upon the reliable contention and on perusal of record, which reveals admittedly for the purpose of appointing an Auditor as per Section 226 of Companies Act, where the Companies Act regarding qualification and disqualification of auditors which is read as under:

“226. Qualifications and disqualifications of auditors.

A person shall not be qualified for appointment as Auditor of the Company unless he is Chartered Accountant within the meaning of Chartered Accountant Act 1949 (38 of 1949) provided that a firm, all of their partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name, to be auditor of the company in which case any partner so practicing may act in the name of the firm. “

9. Admittedly the petitioner is a Chartered Accountant and he is running firm in the name of N.D.S & Co., as Chartered Accountant. The resolution of the Company where the petitioner was appointed as an auditor in respect of Mega City (Bangalore), Developers and Builders Ltd., and there is no dispute that the petitioner firm was appointed as an auditor as per Section 226 of Companies Act. The petitioner is Chartered Accountant which is the required eligibility qualification to be appointed as an Auditor. The appointment of Auditor is statutory appointment under the Companies Act, some rights and duties also prescribed under the Companies Act and as per section 239 of Companies Act, the investigating authority requires some information and the auditor is bound to submit the information as per Section 240 of Companies Act. Admittedly the respondent issued notice to the petitioner three times and he has not answered and submitted any information sought by the respondent and petitioner also failed to appear in respect of the notice issued by the respondent. On the other hand the petitioner has given reply on 06.07.2011 stating that since he is not employed in Mega City (Bangalore), Developers and Builders Ltd., as auditor therefore the reply to the notice as per Section 242 of Companies Act will not be attracted.

Offence committed by firm is also an offence committed by partners

10. The learned senior counsel relied upon judgment of Hon’ble Supreme Court Aneeta Hada’s case stated supra where the Hon’ble Supreme Court while considering Section 141 of the Negotiable Instruments Act, where he has held that without making Company as accused the Director or the Managing Directors or authorized signatories, the penal provisions will not attract. The judgment of the Hon’ble Supreme Court has been followed by the various High Courts and Supreme Court in many cases and it is well settled that without making Company as accused the Directors or the Managing Directors are not vicariously held liable for the offence committed by the company.

11. In CBI Vs K.Narayana Rao case, the Hon’ble Supreme Court has held, the advocate who gave an advice as legal advice or opinion he cannot be prosecuted. In this regard the respondent counsel has contended the advocate who has given opinion based upon the document cannot be considered as employee of the Company as per Section 240 of Companies Act. Therefore on that context Supreme Court quashed the criminal proceedings. But here in this case the petitioner was statutorily appointed under the Companies Act, therefore it is contended the said judgment is not applicable to the case on hand.

12. In my considerate opinion there is substance in the argument addressed by the respondent counsel, that auditor appointed under the Companies Act as per section 226 of Companies Act and there are some duties cast upon the Auditor of the company and they are responsible to be answered or liable to give information to the authority under section 239. As per Section 240 of Companies Act, the employees and other persons also are required to give the information. Therefore, the said judgment relied upon by the petitioner counsel is not acceptable to the case on hand. The judgment of the co-ordinate bench Panduranga’s case stated supra in respect of the Company and by relying upon the judgment of the Supreme Court in Sunil Bharti Mittal’s case quashed the criminal proceedings. The Hon’ble Supreme Court already covered the said decision in Aneeta Hada’s case.

13. In Sunil Bharti Mittal’s case stated supra the Hon’ble Supreme Court has taken the similar view that without making Company as accused the Court cannot proceed to issue summons against the Directors of the company. The judgment relied by the counsel for the petitioner are all related to Companies and it’s Directors where no criminal prosecution can be lodged against the Directors or Managing Directors without making company as accused as the company has vicarious liability. But here in this case, petitioner who is Chartered Accountant is running a firm in the name of N.D.S. & Co., but in literal meaning N.D.S. & Co., is not a company registered under the company’s act, where the company is a legal entity having its Managing Director, Director and others shareholders but the petitioner- N.D.S. & Co., is a firm. Admittedly the Mega City (Bangalore), Developers by their resolution have appointed the firm of the petitioner as it’s Auditor and admittedly for appointing an Auditor the eligibility criteria is Chartered Accountant. The firm though appointed as a Chartered Accountant the proviso of Section 226 revealsthe person who is in charge in India as a partners have signed the audit reports. Therefore, for all practical purpose, the petitioner is the partner of the firm and admittedly he has signed the audit reports as partner of the firm. It is well settled that the literal meaning of the firm and the partner is that, collectively it is a ‘firm’ and individually called as a partner. Therefore a partner and a firm cannot be bifurcated separately. It is not like a legal entity under the Companies Act. It is like a proprietorship business where the proprietor and proprietorship are one and the same. Likewise the petitioner is a Chartered Accountant who is eligible for the appointment of Auditor and because of the fact that he is running a firm, his firm was appointed as Auditor and for all practical purposes, a partner of the firm individually called the partner and collectively called as ‘firm’. Therefore, the firm and the partner cannot be divided into two separate entities or the partner cannot be considered as employee of the company but he is appointed as Auditor under the Company’s Act and it is a statutory appointment under the Companies Act. Therefore he is required to answer the queries or information sought by the respondent. Therefore he cannot state that he is appointed as employees and he is not a firm. A firm and partners are one and the same person and as per proviso to the Section 226 of Companies Act.

13. In my considered opinion a partnership firm is not a corporate entity, it does not have a separate legal persona and this has several important legal consequences in the relationship between the parties all rights and duties only exist between the parties, inter se the right and duties of the partnership are the rights and duties of the partners for as per the partnership deed. Therefore, a partner cannot be bifurcated from a firm, for example for a firm minimum two partners are required, if one partner is retired either by resignation or by death, the firm becomes a proprietorship. Therefore, merely the petitioner running a firm in the name of N.D.S & CO., but it is not a legal entity and it cannot be placed on par with the companies which is registered under the Companies Act. A partnership firm is not a separate legal entity distinct from its partner it is merely a collective name given to the individuals composing it and even as per the definition of the Indian Partnership Act, as person who have entered into partnership with one another called individually “partners” and collectively “a firm” and the name under which their business is. The definition of Section 2 (a) of the Indian Partnership Act provides as below,

“an “act of a firm” means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm”

Sections 5, 18, 25 and 26 of The Indian Partnership Act provides as below:

Section 5 the “Partnership not created by status.” The relationship of the partnership arises from the contract and not from the status.

Section 18 the “partner is an agent of the firm for the purpose of business of the firm.”

Section 25 “Liability of a partner for acts of the firm.Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner”.

Section 26 “Liability of the firm for wrongful acts of a partner.Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.”

Therefore if an offence committed by the firm, is also an offence committed by the partners, it cannot be bifurcated as partners and the firm.

Therefore, in my considered opinion, the judgment relied by the counsel for the petitioner is not applicable to the case on hand and therefore the criminal proceeding cannot be quashed against him.

Therefore, the Trial Court, rightly took the cognizance against the petitioner for the offence punishable under section 240(3) of Companies Act.

Accordingly, the criminal petition filed by the petitioner is hereby dismissed.

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