Why in News?

Recently the Punjab and Haryana High Court in the case of Serious Fraud Investigation Office v. Anil Jindal has overturned bail orders granted in serious fraud cases under the Companies Act, 2013.

What was the Background of Serious Fraud Investigation Office v. Anil Jindal Case?

• The case involves multiple petitions seeking a common verdict due to shared legal questions and relief sought.
• The crux of the matter lies in bail orders granted to respondents accused of a financial scam.
• Despite being alleged masterminds, they were granted regular bail by the trial court.
• The petitioner contended that the court overlooked important evidence of the respondents' involvement in the economic offense.
• The petitioner sought to cancel the bail granted on 19^th December 2023.
• Notably, the respondent previously failed three bail attempts, making the fourth, successful attempt, and subsequent bail order particularly distressing for the petitioner.

What were the Court’s Observations?

• The court noted that simply failing to comply with formalities outlined in the Companies Act Rules does not necessarily constitute a breach of the mandate outlined in Section 212(8) of the Act of 2013, especially when the accused person has not been formally arrested.
• Under Section 212(8) of the Act, if a Director, Additional Director, or Assistant Director of the SFIO, authorized by the Central Government, has reasonable belief, based on recorded grounds, that an individual has committed an offense punishable under the mentioned sections, they may arrest that person and must promptly inform them of the grounds for arrest.
• The Court observes that Mere non-compliance of the formality encapsulated in Rule 4 of the Rules of 2017 cannot be construed to be the breach of the mandate carried in Section 212(8) of the Act of 2013, as in the case at hand, since no formal arrest had taken place, therefore, there arose no occasion for the petitioner to make compliance of the said Rules, which could have only been done had a formal arrest of the respondent been made by the petitioner."
• Further the court emphasized that the main objective behind including these provisions is to limit the discretionary powers of the authorized arresting officer and to introduce fairness and accountability into the arrest process of the SFIO, especially considering that, following arrest, the accused must undergo the provisions of Section 212(6) of the 2013 Act.
• The Court also added Since the SFIO diligently followed all legislative safeguards by providing detailed materials in the applications for production warrants and judicial custody remand, the accused had no reason to request an "arrest order" per the 2017 Rules, especially considering no formal arrest had occurred.

What is Section 212 of the Companies Act, 2013?

• About:
  • Section 212 deals with Investigation into the affairs of Company by Serious Fraud Investigation Office.
  • It empowers the Central Government to order investigations into the affairs of a company by the Serious Fraud Investigation Office (SFIO) if it believes that the business is being conducted with fraudulent intent or in a manner prejudicial to the public interest.
  • This section outlines the powers, procedures, and authorities of the SFIO to conduct such investigations, including the power to arrest individuals suspected of committing offenses related to company fraud.
• Legal Provision:
  • Section 212(8) if the Director, Additional Director or Assistant Director of Serious Fraud Investigation Office authorised in this behalf by the Central Government by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in sub-section (6), he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest.
• Case Law
  • The Supreme Court Pankaj Bansal v. Union of India & Ors., it was emphasized that failure to comply with the provisions of Section 212(8) of the 2013 Act and Rule 4 of the 2017 Rules renders the arrest of a person invalid, entitling them to regular bail.

What are Corporate Frauds?

• India has been grappling with corporate frauds for decades, with notable incidents such as the LIC/Mundhra scam in the 1950s. However, the Companies Act of the time did not provide a distinct definition of 'fraud' as the Indian Penal Code already encompassed such offenses comprehensively.
• The Companies Bill of 2008, proposed to replace the 1956 Act, didn't include a provision akin to Section 447 addressing fraud, based on the Irani Report.
• The major corporate scandals of 2007-08 prompted the Parliamentary Standing Committee to recommend:
• Introducing a distinct definition of fraud under Section 447 of the Companies Act, 2013.
• Establishment of the Serious Fraud Investigation Office (SFIO) under Section 212 of the Act for investigating such frauds.

What are the Legal Provisions for Fraud in Companies Act, 2013?

• Section 447 deals with the punishment of fraud.
• It stipulates that anyone found guilty of fraud faces imprisonment for at least six months to a maximum of ten years. Additionally, they are subject to a fine not less than the amount involved in the fraud, up to three times that amount.

What are Offences Punishable for Corporate Fraud?

Pre-Fraud Offences

Post – Fraud Offences