“Fraud” Implications under Companies Act 2013

Section 447 of the Companies Act, 2013 prescribes a separate punishment for fraud, in relation to affairs of any company which is, imprisonment for a term which shall not be less than six months but which may extend to 10 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 explanation to section 447 defines ‘fraud’ as under:

“Explanation.- For the purposes of this section-

(i) “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;

(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled.

(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.”

It is clear from the above provisions that any act or omission, concealment of any fact or abuse of position committed by any person with intent to deceive, to gain undue advantage from or injure the interest of any company or its shareholders or its creditors or any other person, is guilty of fraud. Various provisions of the Companies Act, 2013, list out different acts, omissions or other conduct which shall amount to fraud punishable u/s. 447 of the Act and the same are as under:

U/s. 212(6) all the above offences are cognisable offences and no person accused of any offence under above sections can be released on bail without giving opportunity to be heard to the Public Prosecutor.

The Companies Act 2013, provides for establishment of Special Courts to try the offences under the Act and pending such establishment the offences are to be tried by a Court of Session exercising jurisdiction over the area (section 440 of the Companies Act, 2013).

Serious Fraud Investigation Office
The Act also provides for establishment of Serious Fraud Investigation Office (SFIO) and till it is established u/s. 211(1), the present SFIO established under administrative orders, referred to in the Proviso to section 211(1) shall be deemed to be SFIO for the purpose of section 211. The Central Government can assign investigation into affairs of any company to SFIO and if there is any offence under investigation by SFIO no other investigation authority including the State Police, can continue or commence investigation under the Companies Act, 2013. Under the provision of the new law the SFIO has been given a statutory status and powers of investigation under the Code of Criminal Procedure, 1973 have been vested in SFIO. S/s. (17) of section 212 makes a specific provision for sharing of any information or documents available with any other investigating authority or income-tax authorities with SFIO and likewise SFIO can share information or documents available with it with any other investigating authority or income-tax authorities.

It is seen from the definition of fraud contained in the explanation to section 447 that a person will be guilty of offence of fraud under the Act if committed with intent to deceive or gain undue advantage from or injure the interests of –

• the company;
• its shareholders;
• its creditors; or
• any other person

Since offence of fraud under the Companies Act, 2013 is in relation to affairs of a company, fraudulent acts committed by “any other person” amount to fraud under the Act if such acts are in relation to the affairs of the company.

Fraud as a civil wrong
Fraud is defined in the Indian Contract Act, 1872. Section 14 of the Contract Act defines free consent inter alia as consent not caused by fraud as defined in section 17 of the Contract Act. Section 17 provides that:

“17. “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:-

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other fact fitted to deceive;
(5) any such actor omission as the law specially declares to be fraudulent.

Explanation.- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.”

Section 19 further provides that when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is avoidable at the option of the party whose consent was so caused. The Indian Contract Act therefore provides that a victim of fraud can avoid the agreement entered into acting on fraudulent acts but there are no provisions making fraud an offence punishable with imprisonment or fine.

CHEATING IS CRIME UDNER IPC:
The Indian Penal Code, 1860 is the law of crimes applicable in India and section 415 of the said Code defines the offence of cheating, as under:

“415. Cheating.- Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to “cheat”.

Explanation.- A dishonest concealment of facts is a deception within the meaning of this section.”

Fraud is not an offence under the law of crimes.

Offence of cheating under the IPC requires:
“(1) deception of any person; (2)(a) fraudulently or dishonestly inducing that person; (i) to deliver any property to any person; or (ii) to consent that any person shall retain any property; or (b) intentionally inducing that person to do or omit to do anything which he would not do or do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property (Hridaya Ranjan Prasad Verma vs. State of Bihar AIR 2000 SC 2341: (2000) 4 SCC 168: 2000 SCC (Cri) 786: 2000 Cr LJ 298).”

Fraud is a deception deliberately practiced in order to secure unfair or unlawful gain and is a civil wrong. fraud in criminal form is cheating or theft by false pretence, intentional deception of victim by  false  representation or pretense. it needs to be noted that abuse of position with intent to deceive or gain undue advantage does not amount to cheating u/s. 415 iPC. if one compares the words of section 447 of the Companies act, 2013 with the provisions in section 17 of the Contract act and section 415 of iPC, it is clear that offence of fraud under   the Companies act is based on the Contract act, which treats fraud as a civil wrong. it is therefore possible that a person guilty of fraud under the Company Law may not necessarily be guilty of cheating under the indian Penal Code. new provisions contained the Companies act, 2013 defining fraud and establishing the Serious Fraud Investigation Office conferring powers of investigation under the Code of Criminal Procedure are intended to ensure that the directors and other persons managing the affairs of a Company act honestly and diligently to protect the interest of the company they represent and the interests of shareholders and creditors of the Company. any act or omission or concealment or abuse of position to gain advantage for themselves or other persons, on the part of persons managing the company will amount to a fraud punishable u/s. 447. it is an accepted fact that there are successful businessmen in the corporate world who possess positive qualities and survive and prosper by doing business honestly in accordance with the rules and regulations and do not derive any benefits for themselves or others except those which are legitimately due to them. But there are many who achieve success and appear to be playing according to rules but are experts in adopting various tactics to deceive and gain undue advantage for themselves and others. it is for dealing with such unscrupulous persons that the law has been amended and the new provisions are intended to ensure compliance and observance of principles of corporate governance by all companies.

Fraud Under The Companies act, 2013 and English law
new provisions in the Companies act, 2013, are comparable to the definition of fraud under English law. In Eng- land, the provisions contained in the theft act, 1968 were replaced by the fraud act, 2006 which provides that any person by making a false representation or failing to disclose information or by abuse of his position makes any gain for himself or anyone else or inflicting a loss on another shall be guilty of fraud. Provisions in english law are more comprehensive defining false representations, concealment or non-disclosure of information and abuse of position. the other major difference between section 447  of the Companies act 2013 and the fraud act, 2006 in england is that the english law is criminal law applicable to any victim of fraud unlike indian law which restrict the law to the victims who are companies or their shareholders or creditors or other persons like investors who are victims of fraudulent acts. Considering the wide ramifications of frauds in the capital market, insurance & banking sector, non-banking entities like chit funds, ponzi schemes for marketing goods and other money circulation schemes, there is a need to amend our criminal law on the lines of the fraud act, 2006 enacted in england. in other words the provisions relating to fraud in the Com- panies act, 2013 need to be converted into general law having universal application like the indian Penal Code.

Widening The Ambit of Fraud
One other significant provision in the definition of fraud is treatment of abuse of position with intent to gain undue advantage from any person as fraud. such a provision in effect amounts to providing punishment for bribery and corruption in the private sector. to illustrate, if a Purchase Officer of a company takes a kickback from a supplier of raw-material to the company, or a director sells his personal property to the Company at inflated price, such persons will be guilty of abusing their position as Purchase Officer or Director for undue advantage for themselves. The general law of Prevention of Corruption act, 1988, is applicable to Public Servants as defined in the said Act which is not applicable to Directors and Officers of Companies in the private sector because they are not public servants. now with enactment of section 447 in the Companies Act, 2013, Directors and Officers of private sector companies abusing their position for personal gain or to give advantage to any other person can be prosecuted and punished for fraud.

The efficacy of the new provisions creating offence of fraud  ultimately  depends  on  establishment  of  special Courts as contemplated under chapter XXViii of the new act for the purpose of trial of offence under the Companies act, 2013, and expeditious trial and punishment of persons guilty of fraud. speedy trial of fraudsters is the key for improved levels of protection of interests of investors and other stakeholders of corporates, as well as observance of principles of corporate governance by the corporates.

Considering the wide spread incidence of frauds in all sectors of the economy there is a need to examine whether indian Penal Code needs to be amended on the lines of the fraud act, 2006 enacted in england.

Fraud and the Auditor
In terms of section 143(12), an obligation has been cast on the auditor of a company to report to the Central government of fraud which has been committed, or is being committed against the company by officers or employees of the company. the manner of reporting has been prescribed in the rule 13, of the Companies (audit and auditors ) rules 2014 .

The responsibility cast on the auditor, is onerous. To what extent auditors are able to discharge this onus remains to be seen.

Conclusion
the  enactment  of  section  447  in  the  Companies  act 2013, is an indicator of the thinking of the authorities. economic frauds have increased a great deal of the recent past. on account of a lacuna in the law and the lengthy legal process, persons committing such frauds have been able to avoid punishment. one hopes that the provisions in the Companies act 2013, will help to bring to book such fraudsters.