INVESTIGATIONS AND DISPUTES
UNDER THE COMPANIES ACT,
2013
ADITYA BHAT
February 14, 2014
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CONCEPT OF “FRAUD”
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
The new Act enacts a standalone offence: commission of “fraud” in relation
to the affairs of a company or a body corporate; the old Act did not have a
comparable provision

Every “person” who commits any “act, omission, concealment of any fact or
abuse of position” in relation to the affairs of a company or a body
corporate, including conniving in any manner with another person, “with
intent to deceive, to gain undue advantage from, or to injure the interest of,
the company or its shareholders or its creditors or any other person,
whether or not there is any wrongful gain or wrongful loss” commits
“fraud”

Offence punishable with imprisonment for a term not < 6 months and not >
10 years, with fine which shall not be less than the amount involved in the
fraud, and may extend to 3x; where public interest is involved, the minimum
term of imprisonment to be at least 3 years
CONCEPT OF “FRAUD” (contd.)
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
This provision is wide enough to include directors, KMP, officers, auditors,
registered valuers, legal advisors and consultants

Duty owed is wide – to “any other person”, which could potentially include
prospective investors in a company

This is an overarching provision, which is in addition to other offences
enacted by the Companies Act, 2013

Provision is to be read in addition to other sections which enact a
substantively similar offence for particular instances of fraud – such as
misstatements in financials
CONTRAST AGAINST IPC PROVISIONS
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
Most provisions in the IPC as regards criminal breach of trust and cheating
contain a maximum 3 to 7 year jail term; “fraud” under the new Act carries
a maximum 10 year jail term

Intent v. effects test: it is not a requirement that “wrongful” loss or again as
a result of the fraud be established; commission or omission of an act with
intent to defraud is sufficient. Provisions of the IPC in connection with
cheating require as an ingredient that the person committing the offence
“causes” or “is likely to cause” “wrongful loss”, “damage” or “harm”

Provisions as regards fraud and certain provisions of cheating under the
IPC are non-cognizable and bailable; certain provisions in relation to
“fraud” under the new Act are cognizable and non-bailable

It may be increasingly difficult to obtain bail in corporate fraud cases since
burden of proof in the case of bail is on the accused to satisfy the court as
to no guilt or likelihood of commission of any other offence while on bail
CORPORATE CRIMINAL LIABILITY
Directors

The definition of “officer in default” has been widened to include directors
including independent directors

The New Act requires that for a non-executive director to be held
responsible, knowledge of contravention of the Act ought to have come
through the Board process and the director failed to object to it, or that the
contravention took place with his consent and connivance. Therefore an
independent director need not go out of the way to ascertain compliance

This however seems to be largely negated by the requirement that follows
on later in the section that the independent director should have acted
“diligently”
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CORPORATE CRIMINAL LIABILITY (contd.)
Auditors
 Auditors to directly report “material” fraud detected to the Central
Government; materiality depends on frequency or the amount likely to
be involved
 Intentional contravention of auditing requirements to deceive company
/ stakeholders / IT / creditors is punishable with imprisonment for a
term which may extend to 1 year
 Conviction results in return of remuneration to company and damages
arising to company / statutory bodies / other persons for loss arising
out of incorrect or misleading statements; auditors thus potentially owe
liabilities to third parties such as lenders and shareholders; National
Financial Reporting Authority (“NFRA”) could also impose penalties of
5 times the fees received (for individual CAs) and 10 times the fees
received (for firms) and bar on practicing of up to 10 years
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WHISTLEBLOWING

The new Act provides for protection to whistle blowers within companies
who bring up “concerns”; it is unclear what the nature of the concerns
covered are

A “vigil mechanism” for reporting concerns is to be provided for, under
current proposals, by listed companies and companies which have
borrowings from banks and public financial institutions in excess of Rs. 50
crores

Vigil mechanism to be implemented through audit committee where the
company is required to constitute one; conflicted members on the audit
committee on a given matter to recuse themselves

In respect of companies without audit committees, the board would appoint
a director to carry out the role of the audit committee for the purpose of
implementing the vigil mechanism
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NCLT AND NCLAT

The New Act provides for constitution of the NCLT and the NCLAT to
replace the Company Law Board. Consequently, the jurisdiction of the High
Courts and a number of other adjudicatory bodies with regard to company
law matters shall be transferred to the tribunals

Aim is to provide more efficient and speedy relief in corporate cases
without having to approach the high courts which already have a huge
backlog of cases

The aim of the tribunals is to dispose the proceedings within 3 months
from the date of commencement of the proceedings before it

Pending disputes of CLB will be re-heard by NCLT. NCLAT is not
empowered to entertain an appeal against the order of CLB. Powers of the
high courts under S.10F of the 1956 Act have been saved
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SFIO AND SPECIAL COURTS

The Serious Fraud Investigation Office (SFIO) has now been given statutory
status under the new Act

Once SFIO has taken up investigation in a matter, all other authorities not
to proceed with their investigation in the matter

National Company Law Tribunal (“NCLT”) and the National Company Law
Appellate Tribunal (“NCLAT”) are entitled to order disgorgement of benefits
derived as a result of fraud

NCLT and NCLAT may also order freezing of assets of a company for a
period not exceeding 3 years

Provisions relating to investigation and enquiries also to apply to foreign
companies
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SPECIAL COURTS

Central government has been empowered to establish special courts for
the speedy trial of certain offences under the 2013 Act

The special courts shall also have the power to try summary proceedings
for offences punishable with imprisonment for a term up to 3 years

The central government is also required to maintain a mediation and
conciliation panel, comprising a panel of experts, for the purpose of
facilitating mediation between parties during the pendency of any
proceedings before the NCLT or the NCLAT
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CLASS ACTION

The concept of class action suits have been introduced for the first time
under the Companies Act, 2013. Provision introduced as a fallout of the
2011 Satyam scam.

Satyam and its auditor PwC agreed to pay USD 125 million and USD 25.5
million to settle claims filed by shareholders by way of a class action in the
US. However due to absence of any statutory provision for class action
under the Companies Act, 1956, no similar proceedings could be initiated
by the affected shareholders of Satyam in India

Members and depositors of a company are entitled to file an application
before the tribunal if the management or conduct of the affairs of the
company is being conducted in a manner prejudicial to their interests or
that of the company
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CLASS ACTION

Members or depositors may file an application before the tribunal to claim
damages from:
– the company or its directors for any fraudulent, unlawful or wrongful
act or omission
– the auditor for any misleading statement in his audit report. In case of
an audit firm the liability will extend to the firm as well as each partner
responsible for making the misleading statement
– any expert or consultant for any misleading statement made to the
company or for any fraudulent, unlawful or wrongful act or omission

An application can be filed by not less than 100 members or a certain
percentage of its total number of members (Draft Rules: 10%) whichever is
lesser

Banking companies have been exempted from the applicability of
provisions relating to class actions
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CLOSING COMMENTS

The intent to deal with fraud with a heavy hand is unmistakable

The approach appears to be to enact onerous consequences for auditors
and independent directors such that they do not connive with promoters
and KMP to permit any fraud under their watch

Without doubt, nominee directors of financial investors and independent
directors can no longer remain passive observers – many financial
investors already do not appoint directors on the board

Where non-executive directors earlier had recourse to Section 482, CRPC
to seek quashing of criminal proceedings on the ground of absence of
involvement in the affairs of a company may now have to endure a trial to
come out clean

Setting up of the NCLT, NCLAT and the special courts will ensure speedy
resolution of disputes
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THANK YOU
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DISCLAIMER
This presentation is academic in nature and is not intended as legal advice. No
client attorney relationship is created by the circulation of this presentation.
Readers are requested to take legal advice relating to their specific situations.
The Companies Act, 2013 is a new legislation that is not entirely in force as on
the date of the presentation. The Ministry of Company Affairs and / or courts in
India may not agree with our interpretation of its provisions.
For any queries please contact:
Aditya Vikram Bhat, aditya.bhat@azbpartners.com
Anind Thomas, anind.thomas@azbpartners.com
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