By Anup P. Shah, Chartered Accountant
Laws and Business
1. Introduction :
1.1 Accounting frauds and scams, from being rare, are
becoming a norm. India has also had its share of frauds. Corporate India is yet
reeling from the recent case of Satyam Computers, an instance where the
promoters, CFO and auditors have been taken into ‘custody’. At a time like this,
it is relevant to consider penalties prescribed under the Indian laws for such
frauds.
1.2 Punishment for offences relating to accounting fraud,
forgery, etc., in case of companies are prescribed under two Statutes — the
Companies Act, 1956 and the Indian Penal Code, 1860 (‘the Code’).
Criminal Law in India is mainly governed by two major Acts : the Indian Penal
Code, 1860 and the Criminal Procedure Code, 1973. While the Indian Penal Code
deals with what can be considered as an offence and the punishment for various
offences, the Criminal Procedure Code, 1973 prescribes procedures and
formalities which must be followed in trying an offence.
1.3 As chartered accountants we rarely bother about criminal
law . . . However, Satyam’s case indicates that sometimes willingly or
unwillingly, we may become a party to criminal proceedings. Hence, it becomes
necessary to at least have a fair understanding about the basics of criminal
law. Further, even in cases of economic offences, criminal cases may be
initiated against companies, its officers and businessmen. In such an event it
would be of great assistance if we have some knowledge of criminal law. This
article examines some of the punishments prescribed under the Code for
accounting frauds. Some of the sections herein examined are those which form
part of the chargesheet filed by the Police in Satyam’s case.
2. Falsification of Accounts (S. 477-A) :
2.1 S. 477-A of the Code expressly deals with
Falsification of Accounts. It makes falsification of books and accounts
punishable. It also makes the act of making false entries or
omitting or altering any false entry punishable.
2.2 S. 477-A deals with the following two types of distinct
offences :
à
Falsification of accounts
à
Making of false entries
2.3
Falsification of Accounts :
à
The offender must be a clerk, officer or a servant.
à
He must have acted willfully and with an intent to defraud.
à
He must either destroy, alter, mutilate, falsify any book, electronic record,
paper, writing, valuable security, or account.
à
The above-mentioned documents must be of his employer.
2.4
Making False Entries :
à
The offender must be a clerk, officer or a servant.
à
He must have acted willfully and with an intent to defraud
à
He makes/abets any false entry or omits/ alters/abets the making of any
entry from any book, electronic record, paper, writing, valuable security, or
account.
2.5 The punishment for both the above-mentioned type of
offences is an imprisonment up to 7 years and/or a fine. The offence is a
non-cognisable offence under the Criminal Procedure Code. A non-cognisable
offence would mean one where the police can arrest only on the basis of a
warrant issued by a Magistrate. The police cannot arrest an accused merely on
the basis of a complaint, etc., like they can in the case of grievous crimes,
such as murder. The accused can get a bail against this offence.
2.6 For a charge u/s.477-A, it is not necessary to
show the following evidence that :
à
any particular person was defrauded. A general intent to defraud is enough.
à
any specific sum of money was involved.
à
the offence was committed on a particular date.
2.7 The person charged of the offence — the offender — must
be either a clerk, officer or a servant. Any other person is not covered by S.
477-A. The person must be employed by the employer in either of three
capacities. There must be an employer-employee relationship — Hari
Prasad v. State of UP, 1953 Cr. Lj 1496 (All). It has been held that
if a partner of a firm also has dual responsibilities to manage the business, or
write up the firm’s accounts, then he would be covered under this Section and
can be prosecuted for any such offence. A working director/managing director
would be a servant of his employer, i.e., the company.
2.8 Intention to defraud is essential to attract this
Section. Thus, something which is not true must be passed off as true with an
intention to cause some kind of injury to property. Two essential elements are,
deceit and injury. Hence, either there must be a suppression of the
truth or there must be a suggestion of a lie.
2.9 An important principle to note is that the sanction of the Company Court is not needed for prosecuting the managing director of a company in liquidation for an offence u/s.477-A of the Code. The Companies Act does not impact proceedings instituted by the Liquidator – C. Hanumantha Rao v. T. S. Rama Rao, AIR 1961 AP 493.
3. Forgery (S. 465) :
3.1 S. 465 punishes an act of forgery with a term of up to 2 years and/ or fine.
3.2 The term forgery is defined in S. 463 to mean:
- the act of making a false document or part I thereof
- cause damage or injury to a person or to the public
- support any claim or title
- cause any person to part with any property
- cause any person to enter into any contract
- commit fraud
3.3 Forgery takes place only when a false document is made with an intent of causing damage or injury to any person. A false document is one where the person making it does so with the intention that it appears to have been made by another person.
4. Forgery of a Valuable Security (S. 467) :
4.1 S. 467 of the Code deals with an offence of a forgery of a valuable security. The important facets of this Section are as follows:
- it must be in respect of a valuable security, or must give authority to a person to make or transfer a valuable security or to receive principal, interest or dividend thereon. A valuable security is a document whereby any legal rights are created, extended, transferred, extinguished, released, etc. In Hari Prasad v. State of UP, 1953 Cr. Lj 1496 (All), it was held that account books containing entries which are not signed by any party are not valuable security.
- it could also be in respect of a document acknowledging the payment or money or a receipt.
4.2 The punishment for the offence is imprisonment for life or with imprisonment for a term of up to 10 years. It also attracts a fine.
5. Forgery for Cheating (S. 468) :
5.1 S. 468 punishes a ‘forgery’ which is done for the purposes of cheating. It covers a forgery of a document or an electronic record which is done with the intention that such document/record shall be used for cheating. Falsification of books of accounts for the purposes of cheating are covered under this Section – Banessur Biswas (1872) 18 WR (Cr) 46.
5.2 S.415 definesthe term ‘cheating’ as follows:
There must be a deceit of a person by fraudulent or dishonest means.
As a result of such deceit, the other person must either:
- deliver property to another person; or
- consent to retention of property by another person; or
- do or omit to do anything which he would not do
The above act or omission must cause damage or harm to mind, body, reputation or property of the person.
In the above case, the offender who deceives is said to cheat the other person.
5.3 It is noteworthy that the Section states the of-fender must have an intention of cheating while committing the forgery. Actual cheating or the fact that someone has indeed been cheated is not material to attract this Section. It is required to prove that the document has been forged by the accused and the accused did so with an intention of cheating.
5.4 The punishment prescribed for such an offence u/s.417 is imprisonment of up to 7 years and also fine. This offence is also a non-cognisable offence punishable by a Magistrate.
6. Using a Forged Document as a Genuine Document (5. 471) :
6.1 According to the provisions of S. 471, if any person fraudulently or dishonestly uses any document or an electronic record as genuine when he knows or believes that the same is actually a forged document/record, then he is punishable as if he had actually forged the same.
6.2 This Section does not prescribe any penalty for the offence, but treats it as a case of a forgery. Thus, it is essential to first see whether the document is indeed a forged document. If yes, then S. 471 can be applied. The onus is on the prosecution to demonstrate that the document is forged and that the offender knew about the forgery and yet used the same as an original document in either a fraudulent or dishonest manner.
7. Cheating to cause wrongful loss (5. 418) :
7.1 S. 418 of the Code is attracted if the following conditions are satisfied:
- the offender was under an obligation imposed by law or legal contract to protect the interest of a person.
- the offender actually cheated a person.
- the offender cheated with the knowledge that he is likely to cause wrongful loss to the person cheated.
7.2 S. 418 applies to people who are entrusted with the responsibility of protecting other’s interest under a legal/contractual obligation. These include, bankers, trustees, advocates, etc. In one case the directors and accountant were accused of preparing a false balance sheet to mislead the public to induce them to deposit money with the bank. They were held to be liable of an offence under this Section. In the very old case of Giles Seddon v. S. J. Loane, (1910) 11 CrLj 624, the Madras High Court held that the mere fact that the balance sheet was false was not adequate to attract the provisions of this Section. The guilty knowledge of the director cannot be presumed from the mere fact that he authorised the issue of a balance sheet containing false entries but must be decided on a consideration of all the facts and circumstances, e.g., the nature of the false statements, the materiality of the amounts involved in the false entries, the ease or difficulty with which their truth or falsity could be ascertained, the course of business of the company, the position, individual standing of the directors, etc. The Court further held that mere mistakes in the classification of a debt as doubtful or bad is a matter on which experts might differ and that by itself does not warrant a case for cheating. There must exist some other corroborative evidence to show that all this was intended to be a part of a larger scheme of things conceived to deceive and cheat people. The same would even apply to a misrepresentation by way of an omission. In this case, debts due by directors were not dis-closed separately.
This is a very old judgment, almost 100 years old, and one wonders how the Courts of today would view the principles enunciated therein ?
8. Cheating to induce delivery of property (S. 420):
8.1 If cheating is done with an intention of dishonestly inducing the person deceived to deliver any property to any person, or to make alter or destroy a valuable security, then it is punishable u/s.420 of the Code. S. 420 of the Code is one of the more popular Sections of the IPC and one which is known even by laymen. What is necessary is that the act of cheating (as defined in S. 415) must be done to induce the person cheated to part with his property.
8.2 S. 420 is different in its application from S. 417 simple cheating. In the case of a simple cheating, there is no delivery of property, whereas it is an essential ingredient of S. 420.
8.3 An act of issuing a cheque when there are insufficient funds in the payer’s bank account would also constitute an offence punishable u/ s.420 if it can be demonstrated that the cheque caused deception from inception. In such a case, the act would be punishable under the Negotiable Instruments Act as well as S. 420 of the IPC.
8.4 This offence is punishable with an imprisonment of a term which extends up to 7 years and also fine.
9. Criminal Breach of Trust (5. 409) :
9.1 Certain categories of people are guilty of an offence u/ s.409 of criminal breach of trust if they being entrusted with any property have committed a criminal breach of trust in respect of the same. The categories covered includes 7 classes – public servants, bankers, brokers, factors, merchants, attorneys and agents. Such people are considered to be men of trust in whose control people entrust property. If they commit a criminal breach of trust, they are guilty u/s.409. A criminal breach of trust happens when a custodian of a property converts it to his own use or misappropriates the same for his use or dishonestly uses that property in violation of any law or contract. For example, an agent who is entrusted with his principal’s funds with instructions to only invest them in mutual funds, invests the funds in his family companies, he is guilty of criminal breach of trust. Similarly, if an advocate is an escrow account holder for a transaction and instead of investing the money in instruments instructed by the party, he invests them in his own firm, he would be guilty under this Section.
9.2 A question which arises is whether a director can be covered under this section, i.e., can he be treated as an agent of the company and covered by S. 409 if he misappropriates the property? In the case of R. K. Dalmia v. Delhi Administration, 32 Comp Cas 699 (SC), the Supreme Court held that funds which a company has in its bank account are property of the company within the meaning of the Code and persons having power to operate on that account will be guilty of criminal breach of trust if by operating on that account funds are misappropriated. Further, a director is an agent as well as a trustee of a company within the meaning of S. 409 of the Code and thus, if a director has misappropriated the company’s property, then he too can be covered by this Section.
10. Directors’ responsibilities:
10.1 The number of prosecution cases involving companies has increased recently. There is an increasing need for directors, including independent directors to be aware of the prosecution possible under Criminal Law.
10.2 Being aware of consequences under the law would make them more diligent and vigilant in the discharge of their duties.
