The innocuously titled Chapter XXIX — “Miscellaneous” – of the Companies Bill 2012 needs a close, detailed look. It provides stringent and perhaps uprecedented punishment in the form of mandatory minimum imprisonment for several newly defined offences. In addition, there are other provisions which also provide for fairly harsh consequences. These have wide-ranging applications and one wonders whether they are well thought out and adequately debated. These provisions apply not just to the company and its officers but also to its directors, auditors, advisors, experts, valuers, etc.
In the recent past, there have been several high profile scams where shareholders, creditors, etc. have suffered without remedy and where, at least under the Companies Act, 1956, it was felt that the culprits could not be adequately punished. This has called for the need to provide for severe punishment to wrongdoers who use the corporate form or who are in-charge of such corporate entity. Some of the punishments proposed in the Bill need to be considered in some detail.
This Chapter XXIX provides for imprisonment and fine for several types of situations. A minimum imprisonment (six months/three years) is also provided in certain cases.
Fraud
Clause 447 provides that any person found guilty of “fraud” shall be punishable with imprisonment of at least six months, which may extend to 10 years and a fine. The fine shall be at least equal to the amount involved but may extend to 3 times such amount. If the fraud involves ‘public interest’, the minimum imprisonment would be 3 years.
The term “public interest” is not defined. The term “fraud” is widely and inclusively defined. It has to be in relation to a company/body corporate, public or private, listed or unlisted.
There should be an intent to deceive, to gain undue advantage from or to injure the interests of specified persons. It includes any act or omission or concealment of any fact or abuse of any position.
The affected persons may be the company, shareholders, creditors or any other person. Thus, if a fraud is committed in relation to a company, the loss that may be caused to any of the specified persons is punishable. Further, the fraud may be committed by any person.
The wordings are so broad that many concerns come to mind. Would a wrongful supply of goods by the company to a customer or by a supplier to the company be deemed to be a ‘fraud’? Would a travel voucher of an employee where he includes certain fake or personal expenditure be treated as fraud?
The intentional act or omission, etc. has to be with an objective of gaining undue advantage from or injure interests of other persons. However, it is specifically provided that such person need not have actually gained any amount and the affected person need not have actually lost any amount.
There are no requirements of minimum amount, materiality, etc. for such act/omission, etc. to be treated as fraud. Thus, each of the acts or omissions that may fit within the fairly broad definition of fraud would, at least in theory, attract such stringent punishment, which, to reiterate, includes minimum mandatory imprisonment.
Other provisions treating certain acts/omissions as fraud
While this is the general and principal provision for “fraud”, there are other provisions in the Bill that refer to this clause and deem certain actions to be “fraud” punishable under Clause 447.
For example, Clause 7 states that furnishing of false information, incorrect particulars or suppression of material information in documents filed with the Registrar in relation to registration of a Company amounts to fraud and is punishable under clause 447.
Clause 8, that corresponds to the present section 25 covering certain non-profit companies, provides that if the affairs of the company were conducted in a fraudulent manner, every officer in default shall be liable for action u/s. 447.
Clause 34 refers to the prospectus issued by a company. If the 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 u/s. 447.”
A situation having more frequent application is provided for in clause 36. Essentially, it relates to fraudulent statements made either in connection with purchase, subscription, sale, etc. of securities or obtaining credit facilities from banks or financial institutions. Such person may “either knowingly or recklessly make any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceal any material facts, to induce another person to enter into, or to offer to enter into” such agreements relating to securities or credit. Such acts shall also be punishable under clause 447. For example, making of false statements for obtaining credit facilities from banks or financial institutions will attract such severe punishment. So will making of false statements to shareholders, prospective investors, underwriters, etc. to attract them to buy/sell/underwrite shares of the Company.
There are several more of such provisions in the Bill. Each of them will attract the punishment provided for in clause 447.
Making of materially false statements or omitting material facts
Clause 448 refers to intentional making of materially false statement or omitting material facts. These may be in documents such as report, certificate, financial statement, prospectus, or other document required by or for the purposes of the Act or rules. These too will be punishable as fraud under Clause 447.
False evidence on oath/solemn affirmation
Clause 449 states that intentional giving of false evidence while being examined on oath or solemn affirmation attracts minimum imprisonment of 3 years and which may extend to 7 years and with fine. So does giving of such evidence in any affidavit, deposition or solemn affirmation in connection with the winding up of the company or generally in connection with any matter arising under the Bill.
Other provisions providing for minimum mandatory imprisonment
Then there are other provisions in the Bill, which provide for mandatory minimum imprisonment, are also worth considering.
Clause 57 refers to deceitful impersonation of any owner of security or interest in a company to make specified economic gains. Such act is punishable with miniumum one year imprisonment which may extend to three years and with a fine.
Clause 58 refers to refusal of transfer or transmission of shares. The affected party may appeal to the Tribunal which may grant an order in favour of such person. If any person contravenes such order of the Tribunal, it is punishable with miniumum one year imprisonment which may extend to three years and with a fine.
Clause 67 refers to buyback of shares by a company (other than in permitted manner) and grant of finance, security, etc. for purchase of its own shares to any person. Violation of such provision is punishable with miniumum one year imprisonment which may extend to three years and with a fine.
Interestingly, clause 68 which refers to buyback of shares through a specified manner (other than reduction of capital) also provides for such stringent punishment in a broader manner. Minimum manadatory imprisonment is provided not only for violation of the provisions of clause 68 but even for violation of the Regulations relating to buyback of shares that SEBI has prescribed.
There are several other similar provisions.
These offences are not compoundable
Generally stated, compoundable offences allow a person to pay compounding charges and escape prosecution or further action by coming forward. However, offences which provide with imprisonment only or with imprisonment and fine cannot be compounded. Thus, the aforesaid offences as provided for in clause 447, or under other provisions where acts are punishable under clause 447 or provided in clause 448 and other clauses are not compoundable.
Special Court
A new authority to try offences under the Bill named Special Court has been proposed. It shall consist of a single judge appointed by the Central Government with the concurrence of the Chief Justice of the jurisdictional High Court.
It will have jurisdiction over all offences under the Bill. The Special Court for the area in which the registered office of the concerned company is situated will have jurisdiction for the offence committed in relation to such company.
There is a provision for a summary trial where the offence carries a maximum imprisonment term of three years. Under a summary trial, maximum imprisonment of one year can be given.
The objective of this new body seems to be to speed up the prosecution process.
Limited exemption for Independent Directors
A concern may be expressed particularly about the role and liability of independent directors in the context of such penal provisions. The general principle of course is that as a rule, independent directors are not liable for such acts. There is a specific and non obstante provision in the Bill in Clause 149 that is worth noting and which reads as under:-
(12) Notwithstanding anything contained in this Act,—?(i) an independent director;?(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
The above provision generally helps independent directors and other non-promoter non-executive directors, unless the specified conditions are attracted. The provision is a non obstante one and appears, on first impression, to limit the liability of such persons. However, it is submitted that this may not amount to blanket exemption to such persons particularly from provisions relating to fraud etc. where the conditions of those provisions are satisfied. SEBI has often imposed various types of restrictions, times etc. on independent directors in appropriate cases particularly where through due diligence they (the independent directors) could have become aware of wrong doings in the company.
Conclusion
Frauds, misstatements, etc. have undoubtedly been of serious concern recently. The existing Companies Act is felt to be lacking in penalising frauds and misstatements etc. Even the SEBI Act that governs listed companies does not have strong provisions that can create a strong deterrent. Nevertheless, one wonders whether such stringent, minimum and mandatory punishment for such a broad group of cases is justified and whether these provisions have been adequately debated. I would conclude by saying: Be aware and question.
