ENFORCEMENT UNDER THE COMPANIES ACT 2013

 

 FOREWORD

The Companies Act 1956 contains more of general penalty provisions under Section 629A. Certain penal provisions provide for imposition of penalty of fine as well as penalty of imprisonment. As per Section 624 of the Companies Act 1956, all offences under the Act are almost bailable offences and generally punishments are imposed on Company and officers in default invariably where offences not involving mandatory imprisonment are compoundable. These are administered by Registrar of Companies under the supervision of Regional Director who carries out general enforcement, inspection, inquiry and investigations. Trial courts have been given powers to impose punishments under Companies Act 1956. Section 622 of the Act provides that any court of Magistrate or about have the jurisdiction to try said offences.

 

The stringent penalties prescribed for non-compliance under each section, providing statutory status to Serious Fraud Investigation Office and placing the report of SFIO on par with police report, giving it power to arrest, introduction of section 447 providing severe Punishment for Fraud etc. all drive at the point that the Companies Act 2013 is extremely serious on compliance and it has also provided for an effective and time bound enforcement machinery to inflict it.

ARCHITECTURE UNDER THE COMPANIES ACT, 1956

 

Provisions regarding inspection and investigation are there in the existing Companies Act of 1956 which empowers the Central Government and the Registrar to inspect the books of accounts and other books and papers of a company and to investigate into its affairs if they have cause to believe that the affairs are being conducted in a prejudicial or fraudulent manner and the Act also provides for penalty under Sections 627 and 628 for false statement and false evidence. But the Companies Act 2013 brings out the real essence of enforcement by giving statutory recognition to the Serious Fraud Investigation Office and giving them power to arrest under the Companies Act 2013 itself without having to invoke provisions of other legislations. Section 621 of the present Companies Act 1956 provides that only three classes of person can file a criminal complaint under the Companies Act 1956 namely (i) Registrar of Companies, 2. Shareholder(s), 3. Any other person authorized by Central Government.

 

Comparing the provisions and mechanism available under Companies Act 1956 it can be seen that Section 209A of the Act provides for inspection of books by the Registrar or other authorized official from Central Government. Such Inspection of books is majorly focused on finding out major lapses on part of the Company in recording the transactions and financial irregularities etc. and provisions violated by the Company and Officers in preparation of Financial Statements. Based on the report of the inspecting officer, Ministry may take up further investigation u/s 235 or 237 or file complaint at Magistrate court.  Sections 235, 237, 239 and 247 of the Act provides for a clear cut mechanism for inspection and investigation of affairs by the inspector appointed by Central Government.

NOW LET US ANALYSE THOSE RELEVANT PROVISIONS IN COMPANIES ACT 2013 TO HAVE A BETTER AND CLEAR UNDERSTANDING;

SECTION 447 - PUNISHMENT FOR FRAUD

Section 447 has been newly introduced in the Companies Act 2013, which provides for “Punishment for Fraud”. This section has far reaching consequences since the punishment prescribed under this section includes imprisonment up to a period of ten years.

The said section provides that any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than 6 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 fraud. The Section further provides that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Under the said section “fraud” has been defined as “fraud” in relation to affairs of a company or any body corporate, includes any act, 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.

“Wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled.

“Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

CASCADING EFFECT OF SECTION 447 -

Listed below are the sections under Companies Act 2013, where the penalty is expressly prescribed for non compliance as “action under section 447”.

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences covered under the below mentioned sections, which attract the punishment for fraud provided in section 447 shall be cognizable and no person accused of any offence under these sections shall be released on bail or on his own bond unless the Public Prosecutor has been given an opportunity to oppose the application for such release and where the public prosecutor opposes the application, the court may grant bail if it is satisfied that there are reasonable grounds for believing that the accused is not guilty of such offence and that he is not likely to commit any offence while on bail.

INCORPORATION OF A COMPANY

Section 7(5)

If any person furnishes any 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)

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 first directors of the company and the persons making declaration under section (b) of subsection (1) shall each be liable for action under section 447.

 

SOCIAL/CHARITABLE COMPANIES

Proviso to Section 8(11)

In relation to companies with charitable objects, etc. 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 MISSTATEMENT IN PROSPECTUS

Section 34

Where a prospectus 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 authorises the issue of such prospectus shall be liable under section 447.

 

PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY

Section 36

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to invest or lend money shall be liable for action under section 447.

 

PUNISHMENT FOR PERSONATION FOR ACQUISITION ETC. OF SHARES 

Section 38(1)

Any person who tries to acquire securities of a company under a fictitious name or makes multiple applications under different names 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)

Every officer of a company which with intent to defraud issues a duplicate certificate of shares shall be liable for action under section 447.

 

TRANSFER AND TRANSMISSION OF SECURITIES

Section 56(7)

Where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under section 447.

 

Section 66(10)

In relation to reduction of share capital, if any officer of the company knowingly conceals the name of any creditor entitled to object to the reduction or misrepresents the amount or nature of debt or abets in same, he shall be liable under section 447.

 

DAMAGES FOR FRAUD (DEPOSIT)

Section 75

Where a company fails to repay the deposit or part thereof or any interest thereon and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall be liable under section 447.

 

REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE

Proviso to Section 140(5)

If the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, auditor shall also be liable for action under section 447.

 

POWER TO CALL FOR INFORMATION INSPECT BOOKS AND CONDUCT INQUIRIES

Proviso to Section 206(4)

Where during an inspection it is found that business of a company has been or is being carried on for a fraudulent or unlawful purpose, every officer of the company who is in default shall be punishable for fraud in the manner as provided in section 447.

 

INVESTIGATION INTO COMPANY’S AFFAIRS IN OTHER CASES

Section 213

If after an 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

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, documents relating to the property, assets or affairs of the company or the body corporate or makes a false entry in any document provides or 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)

Where an application for removal of name of a company is made by the company 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 the company has been notified as dissolved be punishable for fraud in the manner as provided in section 447.

LIABILITY FOR FRAUDULENT CONDUCT OF BUSINESS

Section 339(3)

If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be liable for action under section 447.

PROFESSIONAL LIFE

 

ENDLESS

 

POSSIBILITIES

 

WITH

 

BORDERLESS

 

SUCCESSES
  Author

CS Dhanapal E-mail:csdhanapal@gmail.com