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Corporate Fraud: guilty till innocent

Published: Nov 14, 2019

Kalyan Mahato

NOT too long ago, the Supreme Court of India in SFIO vs Nittin Johari - 2019-TIOLCORP-11-SC-CA-LB had refused to invest its wisdom to untangle the conundrum in which the corporate/economic offenders are. The conundrum is rooted in the vires of section 212 of the Companies Act, 2013 and the power that its provisions vest into the Central Government. Section 212 deals with investigation into affairs of Company by the Serious Fraud Investigation Office (SFIO) only on the reference of the Union of India.

Section 212 reads:-

Section 212 - Investigation into affairs of Company by Serious Fraud Investigation Office - (1) Without prejudice to the provisions of section 210, where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office -

(a) on receipt of a report of the Registrar or inspector under section 208;

(b) on intimation of a special resolution passed by a company that its affairs are required  to be investigated;

(c) in the public interest; or

(d) on request from any Department of the Central Government or a State Government, the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation.

(2) Where any case has been assigned by the Central Government to the Serious Fraud Investigation Office for investigation under this Act, no other investigating agency of Central Government or any State Government shall proceed with investigation in such case in respect of any offence under this Act and in case any such investigation has already been initiated, it shall not be proceeded further with and the concerned agency shall transfer the relevant documents and records in respect of such offences under this Act to Serious Fraud Investigation Office.

(3) Where the investigation into the affairs of a company has been assigned by the Central Government to Serious Fraud Investigation Office, it shall conduct the investigation in the manner and follow the procedure provided in this Chapter; and submit its report to the Central Government within such period as may be specified in the order.

(4) The Director, Serious Fraud Investigation Office shall cause the affairs of the company to be investigated by an Investigating Officer who shall have the power of the inspector under section 217.

(5) The company and its officers and employees, who are or have been in employment of the company shall be responsible to provide all information, explanation, documents and assistance to the Investigating Officer as he may require for conduct of the investigation.

(6) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences covered under sub-sections (5)  and (6) of section 7, section 34, section 36, sub- section (1) of section 38, sub-section  (5) of section 46, sub-section (7) of section 56, sub- section (10) of section 66, sub-section (5) of section 140, sub-section (4)   of section 206, section 213, section 229, sub-section (1) of section 251, sub-section (3) of section 339 and section 448 which attract the punishment for fraud provided in 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-

(i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and

(ii) 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:

Provided that a person, who, is under the age of sixteen years or is a woman or is sick or infirm, may be released on bail, if the Special Court so directs:

Provided further that the Special Court shall not take cognizance of any offence referred to this sub-section except upon a complaint in writing made by-

(i) the Director, Serious Fraud Investigation Office; or

(ii) any officer of the Central Government authorised, by a general or special order in writing in this behalf by that Government.

(7) The limitation on granting of bail specified in sub-section (6) is in addition to the limitations under the Code of Criminal Procedure, 1973 or any other law for the time being in force on granting of bail.

(8) If the Director, Additional Director or Assistant Director of Serious Fraud Investigation Office authorised in this behalf by the Central Government by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in sub-section (6),  he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest.

(9) The Director, Additional Director or Assistant Director of Serious Fraud Investigation Office shall, immediately after arrest of such person under sub-section (8), forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the Serious Fraud Investigation Office in a sealed envelope, in such manner as may be prescribed and the Serious Fraud Investigation Office shall keep such order and material for such period as may be prescribed.

(10) Every person arrested under sub-section (8) shall within twenty-four hours, be taken to a Judical Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction:

Provided that the period of twenty-four hours shall exclude the time necessary for the journey from the place of arrest to the Magistrate's court.

(11) The Central Government if so directs, the Serious Fraud Investigation Office shall submit an interim report to the Central Government.

(12) On completion of the investigation, the Serious Fraud Investigation Office shall submit the investigation report to the Central Government.

(13) Notwithstanding anything contained in this Act or in any other law for the time being in force, a copy of the investigation report may be obtained by any person concerned by making an application in this regard to the court.

(14) On receipt of the investigation report, the Central Government may, after examination of the report (and after taking such legal advice, as it may think fit), direct the Serious Fraud Investigation Office to initiate prosecution against the company and its officers or employees, who are or have been in employment of the company or any other person directly or indirectly connected with the affairs of the company.

(15) Notwithstanding anything contained in this Act or in any other law for the time being in force, the investigation report filed with the Special Court for framing of charges shall be deemed to be a report filed by a police officer under section 173 of the Code of Criminal Procedure, 1973.

(16) Notwithstanding anything contained in this Act, any investigation or other action taken or initiated by Serious Fraud Investigation Office under the provisions of the Companies Act, 1956 shall continue to be proceeded with under that Act as if this Act had not been passed.

(17) (a) In case Serious Fraud Investigation Office has been investigating any offence under this Act, any other investigating agency, State Government, police authority, income-tax authorities having any information or documents in respect of such offence shall provide all such information or documents available with it to the Serious Fraud Investigation Office;

(b) The Serious Fraud Investigation Office shall share any information or documents available with it, with any investigating agency, State Government, police authority or income- tax authorities, which may be relevant or useful for such investigating agency, State Government, police authority or income-tax authorities in respect of any offence or matter being investigated or examined by it under any other law.

In this article, the concerning clause is specifically clause (ii) of sub-section (6) and sub-section (7) of section 212 which are proving to be quite a wall for the defence lawyers opposing the judicial custody of the white collared clients. Apart from making the offence of fraud a cognizable offence, it bars bail to the accused unless two grounds are fulfilled. One easy, one hard.

First, the Public Prosecutor must be notified so that he/ she would able to be in a position to oppose the application. That's the easy one. Second condition is that before a bail can be granted, the Special Court must record its satisfaction that there exist reasonable grounds for believing that the accused is not guilty of the alleged offence and is not likely to commit any offence while on bail. This might be the only boat where the 'alleged' and the 'convicted' rows the same boat.

A very well-known principle of criminal jurisprudence is - a person is believed to innocent until found guilty. In bail cases, the courts of law have emphasised that t he freedom of an individual is of utmost importance and cannot be curtailed for indefinite period, especially when guilt, if any, is yet to be proved. This presumption of innocence, other than the factors of flight risk, influencing witness and tampering with the evidence, is elemental for grant of bail. However, clause (ii) of the sub-section (6) completely capsizes the presumption of innocence and creates a threshold so high that a court must, repeat must, be satisfied that the person is not guilty even before the nature of allegations is proven before the Trial Court.

It is not far-fetched at this time to conclude that burden of proof has been escalated so high that it practically requires the Court to record a finding of acquittal in order to grant bail. It may as well be bleak and nigh impossible for an applicant to obtain bail under section 212(6). And here lies the paradox.

Section 212 prescribes four scenarios under which only the Central Government may form an opinion that it is necessary to investigate into the affairs of a company by the 'Serious Fraud Investigation Office. These are: -

1. If the MCA receives a report in writing from the Registrar or the Inspector that upon an inspection of the books of account s it is necessary to investigate into the affairs of the company;

2. If the company itself passes a special resolution that its affairs needs to be investigated;

3. If the public interest involve d makes the investigation necessary;

4. If any Department of the Central Government or a State Government makes a request in this behalf.

All well codified and done. Three of the above needs a written complaint or receipt. One gives a broad sword - Public Interest. The Black's Law Dictionary defines public interest as "Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular localities, which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, state or national government." While the Shrouds Judicial Dictionary makes a precise attempt to define it as something that "does not mean that which is interesting as gratifying curiosity or a love of information or amusement but that in which a class of the community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected".

The earlier realm of Companies Act was criticised on the pivot that not enough was done to protect public interest from the bourgeoisie or industry chieftains. Fraud by major companies was never able to capture enough eye balls to lead something to imagination that big companies can do no wrong in the eyes of law. Changes were brought when the Legislative took their deliberation to a new angle and provide u s with the content of what corporate fraud means. The era beginning from 2013 strived to introduce an era of balanced corporate governance, definition of fraud under section 447, Establishment of SFIO under section 211 inter alia.

A conjoint reading of definition of fraud and provision of power of the Central Government to refer the cases of fraud in the Companies Act, 2013 and the general acceptance of the expression 'public interest' presents two interesting situations. One, recommendations of Naresh Chandra Committee for Corporate Governance for effective & credible enforcement and smooth functioning of investigation by SFIO would deter instances of serious corporate fraud. Second and the juicier one - that it might lead to a situation that one might be sane to be over-imaginative about the unbridled power of the Union to cherry pick its political target under the garb of community's pecuniary interest. Situations where public interest would easily convert into a camouflage to foster political disputes upon changing of realms!

It could be argued that conditions for grant of bail under section 212 do not imply that the bail applicant would be kept in custody indefinitely and that denial of bail must be substantiated by probable causes for believing that the accused is not guilty of the offence concerned. A reasonable satisfaction of not guilty is made necessary for grant of bail in a non-bailable offence even before the acquittal or conviction of the accused based on the presence or absence of probable cause.

On the contrary, it could also be said against the provision that section 212(6) had now managed to make inroads into the fundamental right of liberty without there being a compelling state interest which directly hits the protection afforded to every citizen under Articles 14 and 21 of the Constitution of India. Before, the standard of practice was that the nature of allegations were not a binding factor to decide if bail is to be granted or denied but instead the probability that that the applicant may abscond or tamper with evidence and whether the applicant is cooperating with the investigation process were the deciding factors.

While sub-section (7) of section 212 enhances the limitations for grant of bail by incorporating, in addition to the twin mandatory conditions in sub-section (6), conditions prescribed under the Code of Criminal Procedure, 1973 or any other law in force for granting of bail, the nature of accusations, the nature of supporting evidence, the severity of punishment which conviction will entail, the character of the accused, circumstances which are peculiar to the accused, reasonable possibility of securing the presence of the accused at the trial, reasonable apprehension of the witnesses being tampered with, the larger interests of the public/State, had also become the determining factors. The corollary is - even if the twin conditions of sub-section (6) are satisfied, bail might be denied on other grounds. Sub-section (7) also requires the accused to sign a statement after the Inspectors of the SFIO conclude their examination which can be later used as evidence against the accused.

It has been reiterated by the Courts and the Tribunals that economic offences constitute a class apart and need to be visited with a different approach in the matter of bail. It has been said that the presumptions of deep-rooted conspiracies and huge loss of public funds needs serious approach. Does that mean, that it needs a different procedural guideline to justify the discrimination so advocated in the cases of corporate offences or that we are just blowing it out of proportion to remove the presumption of innocence for corporate class when compared to murderers where even they are presumed to be innocent until proven guilty.

No doubt challenges to the vires of such provisions as violative of Articles 14, 21 and 20(3) have been filed before the Apex Court. Until the time more reasons come, the paradox of judicial tangle will continue to throw up more stories.