PROVISIONS RELATING TO ‘FRAUD’ UNDER COMPANIES ACT, 2013

[Mr. M. GOVINDARAJAN]

Definition

The explanation to Section 447 of the Companies Act, 2013 (‘Act’ for short) defines the term ‘fraud’ in relation to affairs of a company or any body corporate, includes –

• any act; or
• 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. The terms ‘wrongful gain’ is also defined as the gain by unlawful means of property to which the person gaining is not legally entitled.   The terms ‘wrongful loss’ is defined as the loss by unlawful means of property which the person losing it is legally entitled.

By the definition interpretation may at arrived at various angle to confirm any act or commission etc., amount to ‘fraud’ in relation to affairs of a company or any body corporate.   The Act specifically spelt out in various sections which activity amounting to fraud is liable for action under Section 447 of the Act.  

Incorporation of company

Section 7 of the Act describes the procedure for incorporating a company in accordance with the Act. Section 7(5) provides that if any person furnishes 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.

Section 7(6) provides that without prejudice to the provisions of Section 7(5) 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 direct directors of the company and the persons making declaration under Section 7(1)(b) shall each be liable for action under Section 447.

Formation of companies with charitable objects etc.,

Section 8 of the Act describes the procedure for formation of companies with charitable objects etc., Section 8(11) provides that if a company makes any default in complying with any of the requirements laid down in Section 8, the company shall, without prejudice to any other section under the provisions of Section 8, be punishable with fine which shall not be less than Rs.10 lakhs but which may extend to Rs. 1 crore and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall be less than Rs.25,000/- but which may extend to Rs.25 lakhs or with both.   The proviso to Section 8(11) provides that 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 mis-statements in prospectus

Section 34 of the Act provides that where a prospectus issued, circulated or distributed 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 authorizes the issue of such prospectus shall be liable for action under Section 447.

Punishment for fraudulently inducing persons to invest money

Section 36 of the Act provides that any person who, either knowingly or recklessly makes any statement, promise of forecast which is false, deceptive or misleading, or deliberatively conceals any material facts, to induce another person to enter into or to offer to enter into-

• any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or
• any agreement the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or
• any agreement for, or with a view to, obtaining credit facilities from any bank or financial institution,shall be liable for action under Section 447.

Punishment for personation for acquisition etc., of securities

Section 38(1) of the Act provides that any person who-

• makes or abets making of an application in a fictitious name to a company for acquiring or subscribing for, its securities; or
• makes of abets making of multiple applications to the company in different names or in different combinations of his name or surname for acquiring or subscribing for the securities; 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

Section 46(5) of the Act provides that if a company with intent to defraud issues a duplicate certificates of shares the company shall be punishable with fine which shall not be less than five times the face value of the shares involved in the issue of the duplicate certificate but which may extend to ten times the face value of such shares or rupees ten crore whichever is higher and every officer of the company who is in default shall be liable for action under Section 447.

Transfer and transmission of securities

Section 56 of the Act prescribes the procedure for transfer and transmission of securities. Section 56(7) of the Act provides that without prejudice to any liability under the Depositories Act, 1996 where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under Section 447.

Reduction of Share capital

Section 66 of the Act prescribes the procedure for reduction of share capital. Section 66(10) provides that if any officer of the company-

• knowingly conceals the name of any creditor entitled to object to the reduction;
• knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
• abets or is privy to any such concealment or misrepresentation as aforesaid he shall be liable for action under Section 447.

Damages for fraud

Section 75 (1) of the Act provides that where a company fails to repay the deposit or part thereof or any interest thereon referred to in Section 74 (dealing with repayment of deposits etc., accepted before the commencement of this Act) within the time stipulated under that section or such further time as may be allowed by the Tribunal and is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every office of the company who was responsible for the acceptance of such deposit shall, without prejudice to the provisions contained in Section 74(3)and liability under Section 447, be personally responsible, without any limitation of liability for all or for any of the losses or damages that may have been incurred by the depositors.

Removal, resignation of auditor and giving of special notice

The second proviso to Section 140 (5) provides that an auditor, whether individual or form, against whom final order has been passed by the Tribunal shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall be liable for action under Section 447.

Power to call for information, inspect books and conduct inquiries

The second proviso to Section 206 (4) of the Act provides that where business of a company has been or is carried on for a fraudulent or unlawful purpose, every officer of the company who is default shall be punishable for fraud in the manner as provided under Section 447.

Investigation into company’s affairs in other cases

The proviso to Section 213 of the Act provides that if after 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

Section 229 of the Act provides that 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, or is a party to the destruction, mutilation or falsification or concealment or tampering or unauthorized removal of, documents relating to the property, assets or affairs of the company or the body corporate;
• makes, or is a party to the making of, a false entry in any document concerning the company or body corporate; or
• provides 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

Section 251(1) provides that where it is found that an application by a company under Section 248 (2) has been made 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 company has been notified as dissolved-

• be jointly and severally liable to any person or persons who had incurred loss or damage as a result of the company being notified as dissolved; and
• be punishable for fraud in the manner as provided in Section 447.

Power of Tribunal to assess damages against delinquent directors etc.,

The proviso to Section 266(1) provides that the directions of the Tribunal under Section 266 (1) shall be without prejudice to any other legal action that may be taken against the person including any punishment for fraud in the manner as provided in Section 447.

Liability for fraudulent conduct of business

Section 339 (3) provides that where any business is carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purposes, every person who was knowingly a party to the carrying on the business in the manner aforesaid shall be liable for action under Section 447.

Punishment for false statements

Section 448 of the Act provides that if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or rules made there under any person makes a statement-

• which is false in any material particulars, knowing it to be false; or
• which omits any material fact, knowing it to be material be shall be liable for action under Section 447.

Punishment for fraud

Section 447 of the Act provides that without prejudice to any liability including for 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, 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. Where the fraud in question involves public interest the term of imprisonment shall not be less than three years.