Non-bailable offences and penalties under the Companies Act, 2013 - A Critical analysis

The provisions of the Companies Act, 2013 (New Act) relating to Offences, Penalties and Prosecution are totally different than those of the provisions contained in the Companies Act, 1956. The New Act also includes the provisions of protection of 'public interest' and has re-codified the various provisions relating to offences. Serious offences under the New Act have been categorised as cognizable and termed as non-bailable. Hence, it is imperative on the part of the promoters, directors, key managerial personnel and officers-in-default to exercise greater care and caution in complying with these provisions, as any non-compliance will invite severe punishment.

INTRODUCTION

1. The penalty provisions under the Companies Act, 2013 (New Act) are altogether different than those of the provisions contained under the Companies Act, 1956 and provide stringent provisions relating to offences, penalties and prosecution. Further, in the background of various reported frauds and fraudulent activities amidst the officers in charges of the Company, the provisions have substantially enhanced the severity of punishment for such offences. Serious offences are now categorized as non-bailable with an objective to prevent and control such offences and also to serve as deterrents for those pronounced guilty. Further, in order to carry out the same in letter and spirit, the Statement of Objects and Reasons appended to the Companies Bill among other things has provided for minimum and maximum quantum of penalties for each offence with a suitable preclusion for the repeated offences. Also, a new category, namely, prosecution for fraudulent activities has been introduced wherein provisions for recovery as well as disgorgement of the assets have been provided. Since the offences, penalty and prosecution provisions are running into many pages in the New Act and cannot be captured in one article, for the sake of brevity this article only highlights the non-bailable offences and other important provisions relating to offences under the Companies Act and corresponding penalty provisions.

NON-BAILABLE OFFENCES UNDER THE COMPANIES ACT, 2013

2. The New Act has categorized certain offences at par with criminal offences under the Code of Criminal Procedure, 1972 (Cr. PC) thereby has identified the same as cognizable and non-bailable. In fact, with an intent to book the offenders for more serious offences, the New Act has re-codified several provisions for awarding punishment either by way of imprisonment for a definite term or fine or both so that the offenders may not escape from the clutches of law. Hence, it is absolutely necessary for the Promoters, Directors, Manager, Officers and other key managerial personnel to know the definitions, meaning of non-bailable offences, its provisions under the Cr PC and its consequences so that they can exercise greater degree of caution and precaution in compliance with these sections. It is also imperative on the Directors and other key managerial personnel to understand the various rights under the Cr PC in the eventuality of arrest to defend themselves properly.

2.1 Definitions

2.1.1 Offence: Section 2(n) of the Criminal Procedure Code [Code] defines offence as "any act or omission made punishable by any law for the time being in force". In other words, an offence connotes 'crime' or 'wrongdoing'. Further, Section 40 of the Indian Penal Code (IPC) defines offence as "to denote a thing made punishable under the Code". In order to constitute an offence, the particular 'act' should be specifically made punishable under law. Thus, it can be concluded that an act which has not been made punishable expressly under any law, is not termed as an offence.

2.1.2 Bailable and non-bailable offences : The Code does not contain provisions relating to determination of whether a particular offence can be categorized as bailable and non-bailable? It is only the First Schedule of the Code that contains provisions whether a particular offence can be categorized under bailable and non-bailable offence. More serious offences are always categorised under the non-bailable category.

2.1.3 Definition of Bailable Offence : As per Section 2(a) of the Code, a bailable offence means an offence which is shown as bailable in the First Schedule of the said Code or the offence is made bailable by any other law for the time being in force. Bailable offence means a bail can be claimed as a matter of right and constitutes less serious offence. If we peruse the First Schedule of the Code, one can infer that offences that are punishable with imprisonment of less than three years are usually considered as bailable.

2.1.4 Definition of Non-bailable offence : Any other offence, apart from those offences mentioned as bailable, is considered to be non-bailable. In other words, offences punishable with imprisonment for three years or more are usually considered as non-bailable.

2.1.5 Definition of Bail : The term 'Bail' has not been defined under the Criminal Procedure Code. However, Section 205 of the Indian Penal Code, 1880 defines bail as temporary release from imprisonment on furnishing requisite security/surety to appear for trial. In other words, it is treated as temporary release of an accused or an offender from legal custody upon his giving sufficient security for his appearance later on. It is based on the principle that law recognises that each individual has got freedom, which should be safeguarded and that every person including the accused is entitled to freedom, unless he is found guilty of committing a serious offence.

2.1.6 Grant of bail for non-bailable offence: Bail cannot be claimed as a matter of right in case of non-bailable offences. This, however, does not mean that there can be no bail for such offences. Grant of bail for such offences is purely at the discretion of the Court. The Court after recording reasons and being satisfied that there are reasonable grounds for believing that the accused is not guilty of such an offence and that he is not likely to commit any offence while on bail, may release an accused on bail. However, persons accused of offences punishable with death, life imprisonment or imprisonment for seven years or more can be released on bail only after giving an opportunity of hearing to the public prosecutor to oppose the application for such release.

VARIOUS NON-BAILABLE OFFENCES UNDER THE COMPANIES ACT, 2013

3. Section 212(6) of the New Act lists out and recognises offences which are cognizable in nature which attract the punishment for fraud provided in Section 447 of the New Act. Thus, a Police Officer may arrest without a warrant in case of non-bailable offences. This proviso also starts with the non obstante clause, i.e., notwithstanding anything contained in the Code of Criminal Procedure, 1973. A non obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause. In case there is any inconsistency between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non obstante clause which would prevail over the other clause. Thus, the limitation aforesaid on grant of bail is in addition to the limitation under the Criminal Procedure Code or under any other law for the time being in force.

This means that a bail for such offences can be granted only:

(i)		after the public prosecutor has been given an opportunity to oppose the same; and
(ii)		the Court has sufficient reason to believe that the person is not guilty of offence and is not likely to commit any offence when on bail.

This section, however, is not applicable to the following:

(i)		a person under the age of 16 years ; or
(ii)		a woman; or
(iii)		the sick; or
(iv)		an infirm person, who otherwise may be released on bail subject to discretion of the Court.

3.1 Various offences categorized as non-bailable

3.1.1 Under section 7(5): Furnishing any false or incorrect particulars of any information or suppressing any material information, with the Registrar of Companies in relation to the registration of a company. The person furnishing such information shall be liable.

3.1.2 Under section 7(6): 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 during incorporation of company, or by any fraudulent action-promoters, first directors of the company and/or an advocate, a chartered accountant, cost accountant or company secretary in practice, engaged in the formation of the company and a person named in the articles as a director, manager or secretary of the company shall be liable for this offence.

3.1.3 Under section 34: Untrue or misleading statements stated in prospectus 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.

3.1.4 Under section 36: Knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into any agreement: (i) with a view to acquiring, disposing of, subscribing for, or underwriting securities, or (ii) 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 (iii) with a view to obtain credit facilities from any bank or financial institution. Any person making such promise shall be liable.

3.1.5 Under section 38(1): Abetments: (i) of an application in a fictitious name to a company for acquiring, or subscribing for, its securities, or (ii) of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities, or (iii) inducing directly or indirectly a company to allot, or register any transfer of securities to him, or to any other person in a fictitious name - Any person making such abetments shall be liable.

3.1.6 Under section 46(5): Issue of duplicate share certificates with the intention to defraud company and every defaulting officer of the company shall be liable.

3.1.7 Under section 56(7): Transfer of shares with an intention to defraud- Depository or depository participant shall be liable.

3.1.8 Under section 66(10): Knowingly: (i) conceals the name of any creditor entitled to object to the reduction,(ii) misrepresents the nature or amount of the debt or claim of any creditor,(iii) abets or is privy to any such concealment or misrepresentation - A person who knowingly commits the same shall be liable.

3.1.9 Under section 140(5): Auditor against whom order passed by Tribunal confirms acting in a fraudulent manner or abetting or colluding in any fraud by, or in relation to the company—Auditor of the Company shall be liable.

3.1.10 Under section 206(4): Business of a company being carried for a fraudulent or unlawful purpose or not in compliance with the provisions of the Act or if the grievances of investors are not being addressed - Every officer of the company in default shall be liable.

3.1.11 Under section 213: (i) The business of the company is being conducted with an 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 (ii) any person concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud - 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 held liable for this offence.

3.1.12 Under section 229: (i) Any 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, (ii) false entry in any document concerning the company or body corporate, or (iii) explanation which is false or which is known to be false; during the course of any inspection, inquiry or investigation - Any person or an officer or other employee of a company or other body corporate required to make statement under investigation shall be liable.

3.1.13 Under section 251(1): Application by a company under section 248(2) with an intention of evading the liabilities of the company or with the intention to deceive the creditors or to defraud any other person - Persons in charge of the management of the company shall be held liable for this offence.

3.1.14 Under section 339(5): During winding up of a company, it appears that any business of the company has been carried on with an intent to defraud creditors of the company or any other persons or for any fraudulent purpose - Any person, who is or has been a director, manager, or officer of the company or any person who knowingly was party to the carrying on of the business in a fraudulent manner shall be held liable.

3.1.15 Under section 448: 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 the rules made thereunder: (i) which is false in any material particulars, knowing it to be false, or (ii) which omits any material fact, knowing it to be material - Any person making/providing such statement shall be liable.

OFFENCES BY THE OFFICERS WHO ARE IN DEFAULT

4. Section 2(59) of the New Act defines an officer as any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors are accustomed to act.

Section 2(60) of the New Act encompasses various classifications of managerial personnel who would be liable for penalty or punishment by way of imprisonment, fine or otherwise.

The broad categories of such personnel are: (a) Whole-time director, (b) Key managerial personnel, (c) where there is no key managerial personnel, such director or directors as has been specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification or all the directors, if no director is so specified. (d) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits or knowingly fails to take active steps to prevent any default. (e) any person whose advise is acted upon by the Board other than a person who gives advice to the Board in a professional capacity, (f) every director in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance, (g) In respect of issue or transfer of shares of a company, share transfer agents, registrars and merchant bankers to the issue or transfer.

CIRCUMSTANCES UNDER WHICH A DIRECTOR IS ACTUALLY LIABLE

5. If we analyse section 2(60)(f) then one can conclude that the above provisions merely do not make a director an 'officer-in-default' on receipt of proceedings of the Board meeting. These would apply when the concerned director was aware of any contravention, i.e., through receipt of board's proceedings and did not object to the same or if a contravention had taken place with his consent or connivance. Thus, a director would be exonerated from the liability if he did not consent to or connived for any such contravention. In the case of Om Parkash Khaitan v. Shree Keshariya Investment Ltd. [1978] 48 Comp. Cas. 85,  the Delhi High Court stated as follows:–

"having regard, therefore, to the fact that the petitioner has been a Director of the Company as indeed of a number of other companies, by virtue of being a solicitor and did not participate in the management of the Company and had no financial involvement in it, I would relieve the petitioner of the liability arising out of breaches and defaults on the basis of which the petitioner apprehends proceedings."

SERIOUS FRAUD INVESTIGATION OFFICE (SFIO)

6. Section 212 of the New Act provides for investigation in the serious offences by a company on the basis of: (i) a report by the Registrar of Companies or Inspector under section 208, (ii) special resolution passed by a company that its affairs are required to be investigated.(iii) in the public interest. (iv) on request from any Department of the Central Government or a State Government.

As per section 447 of the New Act, the offences mentioned in section 212(6) of the New Act are covered by the term 'fraud' in relation to a company, any act, omission, concealment of any fact or abuse of position committed by any person with the connivance in any manner 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 to. On the other hand, wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled to. Fraud is punishable with imprisonment for a term of not less than six months but it may extend to ten years. The liability towards fine is not less than the amount involved in the fraud but it may extend to three times the amount.

COGNIZANCE OF AN OFFENCE

7. The Special Court is prohibited from taking cognizance of the non-bailable offences mentioned in section 212, except upon a complaint in writing made by the Director of SFIO or any officer of the Central Government authorised by a general or special order in writing. The officers mentioned above should have in their possession material which makes them believe (the reason for such belief should be recorded) that any person has been guilty of the offence aforesaid. Such person should be arrested and he should be informed of the ground of such arrest. The person so arrested should be taken to the judicial or Metropolitan Magistrate within 24 hours of arrest, excluding the journey time from the place of arrest.

RIGHTS GIVEN UNDER THE CODE TO AN ARRESTED PERSON

8. In the event of arrest the persons who are arrested have the following specific rights conferred by the Code:-

(a)		Right to know the grounds of arrest, i.e., reason as guaranteed by Article 22 of the Constitution of India
(b)		Right to bail
(c)		Right to be produced before the Magistrate of Court
(d)		Right to inform a relative or friend.
(e)		Right to consult a lawyer.
(f)		Right to be examined by a Doctor.

ESTABLISHMENT OF SPECIAL COURT AND RELATED ISSUES

9.1 Special Court & Territorial Jurisdiction - Section 435 of the New Act provides that the Central Government may by notification establish as many Special Courts as may be necessary for the purpose of speedy trial. As per section 436(1) of the New Act, all the offences committed under this New Act can be tried only by the Special Court for the area in which the registered office of the company (in relation to which the offence is committed) is located. Further, as per section 436(2) of the New Act, when trying an offence a Special Court may also try an offence other than an offence under this Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at the same trial.

9.2 Detention - In case a person accused of an offence is produced before a Magistrate, then such Magistrate may authorise the detention of such person in such manner as he thinks fit for a period not exceeding 15 days in the whole, in the case of Magistrate being a Judicial Magistrate. In case the Magistrate is an Executive Magistrate, the period of detention shall not be of more than 7 days.

9.3 Summary Trial - Section 436(3), read with provisions thereof empowers the Special Court to order summary trial in cases of an offence (not involving imprisonment for a term exceeding three years) in which case no sentence of imprisonment for a term exceeding one year shall be passed. In all other cases regular trial will have to be conducted.

9.4 Application of Criminal Procedure Code - As per section 438 of the New Act, the provisions of the Criminal Procedure Code shall apply to the proceedings before a Special Court. The said Court is deemed to be a Court of Sessions and the person conducting the prosecution before such Court shall be deemed to be a Public Prosecutor.

9.5 Cognizance of an offence - The Court shall take cognizance of an offence alleged to have been conducted by any company or any officer thereof, unless the complaints are filed by shareholders, Registrar of Companies (ROC), or any officer authorised by the Central Government. However, the Court may take cognizance of offences relating to issue and transfer of securities and non-payment of dividend on a complaint in writing, by a person authorised by the Securities and Exchange Board of India (SEBI). Thus, every offence under this New Act, except the offences involving investigation by Serious Fraud Investigation Office [SFIO], shall be deemed to be non-cognizable within the meaning of the Criminal Procedure Code.

9.6 Appeal to High Court - As per section 437 the High Court has all the powers conferred by Chapters XXIX and XXX of the Criminal Procedure Code in relation to appeal and revision from the orders of the Special Court, as if the Special Court was a Court of Sessions trying cases within the local limits of jurisdiction of the High Court.

The New Act has brought in a structured mechanism for dealing with various offences - both bailable and non-bailable

9.7 Appointment of company prosecutors - Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Central Government may appoint generally or for any specified class of cases in any local area, one or more persons as company prosecutors for the conduct of prosecution arising out of this Act. Persons so appointed shall have all the powers and privileges conferred by the Code on Public Prosecutors appointed under section 24 of the Code.

9.8 Punishment for offences -

(a)		Punishment for making a false statement is the same as is applicable for a fraud. (Section 448)
(b)		If any person intentionally gives false evidence, he shall be punishable with imprisonment for a term which shall not be of less than three years but it may extend to seven years with fine which may extend to rupees ten lakh. (Section 449)
(c)		In case of contravention of provisions under the New Act or the Rules, for which no penalty or punishment is provided elsewhere, the Company and every officer thereof who is in default or such other person is punishable with a fine extending to rupees ten thousand. Where the contravention is a continuing offence, with a further fine extending to Rs. one thousand for every day during which the contravention continues. (Section 450)
(d)		In case of repeated default committed for the second or subsequent occasion within a period of three years, the company and every officer thereof who is in default is punishable with twice the amount of fine for such offence, in addition to any imprisonment for the same. (Section 451)
(e)		If any employee of a company wrongfully obtains possession of any property including cash or having such property wrongfully, withholding it or knowingly applies it for the purpose other than expressed or directed in the Articles of Association and authorised by this New Act, then he shall, on the complaint of the company or any member or creditor or contributory thereof, be punishable with a fine of not less than rupees one lakh but it may extend to rupees five lakh. Further, the Court trying an offence may also order restoration of property and in default thereof, the person is punishable with imprisonment for a period of two years. (Section 452)

CONCLUSION

10. The New Act imposes numerous statutory duties on the Promoters, Directors and Key managerial personnel under various sections of the Act. The Penalty provisions are altogether different from what was provided in the Companies Act, 1956. The New Act has brought in a structured mechanism for dealing with various offences - both bailable and non-bailable. Though section 441 provides for compounding of certain offences which may mitigate the absolute liabilities to certain extent, yet there is no compounding possible in case of non-bailable offences. Hence, the promoters and directors have to exercise greater care and caution in complying with these provisions, as severe punishment is prescribed for non-compliance.

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CA SANJAY DEWAN

B.COM (H),FCA

FCMA,LCS,MIMA