Fraud under Companies Act, 2013 and Indian Penal Code, 1860 – Resolution of Corporate Disputes, Non-Compliances & Remedies Important Questions

Question 1.
“Breach of any trust may be held to be a civil wrong but when men’s rea is involved, it gives rise to criminal ability also.” Comment on this statement while supporting judicial pronouncements.
Answer:
The essential elements of the offence of criminal breach of trust are:
1. The person handing over the property must have confidence in the person taking the property so as to create a fiduciary relationship between them or to put him in position of trustee.

2. The accused must be in such a position where he could exercise his control over the property Le.; dominion over the property.

3. The term property includes both movable as well as immovable property within its ambit.

4. It has to be established that the accused has dishonestly put the property to his own use or to some unauthorized use. Dishonest intention to misappropriate is a crucial fact to be proved to bring home the charge of criminal breach of trust. The offence of criminal breach of trust has been upheld in many of the cases, some of which are reproduced below:

In V.R. Dalai v. Yugendra Naranji Thakkar, 2008, the Supreme Court has held that the first ingredient of criminal breach of trust is entrustment and where it is missing, the same would not constitute a criminal breach of trust. Breach of trust may be held to be a civil wrong but when men’s rea is involved it gives rise to criminal liability also.

In another landmark case of Pratibha Rani v. Suraj Kumar, 1985, the appellant alleged that her stridhan property was entrusted to her in-laws which they dishonestly misappropriated for their own use. The accused were held guilty of this offence since the appellant made out a clear, specific and unambiguous case against in-laws.

Question 2.
The Board of Directors of BIJI Private Limited made an application to the Registrar of Companies under section 248(2) of the Companies Act, 2013 for removal of name of the Company. The Board submitted an affidavit that Company has no pending liabilities. However, it was later found that few amounts were still payable to creditors. What penalties can be levied under the Companies Act, 2013 for such an application?
Answer:
As per section 251(1) of the Companies Act, 2013 where it is found that an application by a company under section 248(2) has been made with the object of evading the liabilities of the company or with the intention to deceive the creditors or to defraud any other persons, the persons in charge of the management of the company shall, notwithstanding that the company has been notified as dissolved:
(a) be jointly and severally liable to any person or persons who had incurred loss or damage as a result of the company being notified as dissolved; and

(b) be punishable for fraud in the manner as provided in section 447 of the Companies Act, 2013.
Further, section 251(2) of the Companies Act, 2013 states that, the Registrar may also recommend prosecution of the

persons responsible for the filing of an application under section 248(2) of the Companies Act, 2013.
Based on above provisions, the Board of Directors of BUI Private Limited will be liable to penal provisions as per Section 251 of the Companies Act, 2013.

Question 3.
Mr. Ze, a Company Secretary has recently set up a Practice. Mr. Almo- ra a businessman reached out to Mr. Ze, to incorporate a Company. Mr. Ze assisted him with the list of information required and also extended his professional services for incorporation of the Company. When Mr. Ze was reviewing the documents provided to him, for uploading the forms, he noticed that the documents contained false information. Mr. Ze was apprehensive to go ahead with the incorporation of the Company. Advise Mr. Ze.
Answer:
Section 7 of the Companies Act, 2013 deals with the documents to be filed with the concerned Registrar of Companies (ROC) for incorporation of a company. While dealing with the requirements, under section 7(5) of the Companies Act, 2013 it has been stated that if a person furnishes false information or incorrect particulars or suppresses material information then the person is liable for action under Section 447 of the Companies Act, 2013.

Further, Section 7(6) also provides that the promoters, the first directors and the fiduciaries viz, the Chartered Accountant, the Company Secretary in practice or the Cost Accountant or the Advocate, the Managing Director or the Secretary of the Company who have given a declaration in the prescribed format shall also be liable for action under Section 447 of the Companies Act, 2013. Thus the penal provision extends to the professionals also apart from the officers of the company.

Hence, Mr. Ze should take note of the aforementioned provisions and shall go for incorporation of the company with the correct information only otherwise, he should not go ahead with the incorporation of the Company, knowing that the documents provided contains false information.

Question 4.
Mr. Krish, a resident of Mumbai is a friend of Mr. Parth, who stays in Manali. As Mr. Parth did not have much exposure and information about personal finance and investment options in Manali, he trusted his friend for his investments. As per their agreement, Mr. Parth remitted ₹ 1 Lakh to Mr. Krish to invest in mutual funds and stock market. Mr. Krish employs the money in his own business ignoring his understanding with Mr. Parth has Mr. Krish committed criminal breach of trust?
Answer:
According to Section 405 of the Indian Penal Code, 1860, the essential ingredients of the offence of criminal breach of trust are as under:

The accused must be entrusted with the property or with dominion over it,
The person so entrusted must use that property, or,
The accused must dishonestly use or dispose of that property or wilfully suffer any other person to do so in violation of any:
direction of law prescribing the mode in which such trust is to be discharged, or
legal contract made touching the discharge of such trust.

In the given case, there is an express or implied contract between Mr. Parth and Mr. Krish, that the money would be invested by Mr. Krish on behalf of Mr. Parth. But Mr. Krish invests the same in his own business which is violation of section 405 of the Indian Penal Code, 1860. Hence, he has committed criminal breach of trust.

Question 5.
Ms. Rekha was working as ‘Gram Sachiv’ for tengram panchayats. She was a trusted person of the local villagers and they respected her. Ms. Rekha, collected a sum of ₹ 5 Lakhs from fifty villagers in the gram panchayats saying she would pay their house tax and issued receipts to them. Later it was found that she did not deposit the money into Government treasury, but utilized it for her personal purposes.

The villagers wanted to file a case against Ms. Rekha, when they came to know of the misappropriation done by her. Will the villagers be successful in filing a case against Ms. Rekha?
Answer:
According to Section 409 of the Indian Penal Code, 1860, when a person in his capacity of a public servant, commits criminal breach of trust as specified under section 405 oF the Indian Penal Code, 1860, shall bc punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.

The facts mentioned are similar to Bachch u Singh y. State of Haryana case. The appellant was working as Gram Sachiv’ for eight-gram panchayats. He collected a sum of Rupees 648 from thirty villagers towards the house tax and executed receipts for the same.

As he was a public servant, and in that capacity, he had collected money as house tax but did not remit the same, he was charged under Section 409 of Indian Penal Code, 1860. It was held that the appellant dishonestly misappropriated or converted the said amount for his own use and his conviction under section 409 of Indian Penal Code, 1860 was upheld b the Supreme Court.

Ms. Rekha was working as a Gram Sachiv and collected money from the villagers. She misappropriated the funds for her personal benefits. In the background of the aforementioned case law, she can be charged under section 409 of Indian Penal Code, 1860 for breach of trust by public servant as she is a public servant.

Question 6.
Greenary Limited, a Public Limited Company was in the business of generation and supply of electricity and had its factory near Krishnapatan am Beach. Mr. Pond was the Vice-President (Operation) and was authorized by the Board of Directors of the Company to be in charge of the factory operations. As the factory was located on sea-shore, the Company was subject to the provisions of various Environmental Laws. The Company had not complied with the provisions relating to dumping/discharge of its production wastes, etc. Summons were issued against Mr. Pond by the adjudicating authority. Mr. Pond sent an email to you, the Company Secretary stating his designation would not tantamount to officer in default. Would you agree with Mr. Pond?
Answer:
According to section 47 of the Water (Prevention and Control of Pollution) Act, 1974, where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to the company for the conduct of, the business of the company, as well as the company, shall be deemed to the guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act if he proves that the offence was committed without his knowledge for that he exercised all due diligence to prevent the commission of such offence.

Where an offence under the Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officers of the company, such director, manager, secretary or other officers shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Mr. Pond, has been authorised by the Board of Directors to be the in-charge of factory operations. As per section 47 of Water Act, 1974 he is deemed to the guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Question 7.
A notice of investigation was sent to Maina Limited for alleged misappropriation of funds in the Company. As the Company Secretary of the Company, prepare a report touching upon various aspects of the activities of Company which would prove that the allegation in the instant case is not true.
Answer:
Date:
The Investigation Authority
ABC Building
B Block, New Delhi

Subject: Investigation notice on Misappropriation of Funds in Maina Limited. Ref: INVITE/19-20/520/dated 05-12-2019 We are in receipt of your letter vide No.- INVITE,/ 19-20/520/dated 05-12- 2019 regarding misappropriation of funds in of the Company under section 179/180/185/186/188 and other applicable provisions of the Companies Act, 2013.

In this connection, we would like to inform you that the Business operation of the company (Basic information about the company: like Name, date of incorporation, registered office, branches, factories and other offices, status of the company, objects, capital structure, voting rights and shareholding pattern of the company).

The present Board of the company comprise (Brief history of past management set up, existing management set up, composition of Board of Directors, terms and conditions of the appointment of managerial personnel, details regarding appointment of directors and their relatives to an office or place of profit).

The Business activities of the company comprises (Nature of existing business, licensed and installed capacities, sources of finance, name of other companies falling within the same group).

During the period referenced under the letter the company has complied with the all the procedure and compliance required under the Act read with rules made thereunder. A summary of the transaction and procedure followed by the company is provided as under for your reference please:
Details of loans taken and loans advanced to Directors, the firms in which they are partners or companies in which they are Directors are in accordance with the provisions of the Act and compliance made by the company in this regard.

Acquisition/disposal of substantial assets and compliances thereof the investments made by the company and limits approved by the company.

Details of utilisation of loans taken, funds raised by the Company. Maintenance of statutory registers including minute’s books are being maintained up to date.
Internal checks and internal control system followed by the company.
Working results and financial position of the company in the context of its working results for the last three years.
Compliance by the Company and its officers with the provisions of the Companies Act and other Acts, applicable to the Company.
A scrutiny of abnormal/heavy expenditure items.
Transactions with Related Parties

As mentioned above, we have complied with the due procedures and compliance requirement as provided in the law, therefore, request you kindly consider our submission and take on record the same to close the further investigation into the affairs of the company.

We shall however submit any further information/clarification as may be required by your good selves.
Thanking you.
For, Maina Limited
(Company Secretary)

Question 8.
Mr. Raj owned 50 acres of land. He agreed to sell the land to Mr. Shani for ₹ 5 crore and executed a conveyance for the same. Despite the execution of conveyance, Mr. Raj later mortgages the entire 50 acres to Mr. Rohit. He conceals the fact of previous sale to Mr. Sham and receives money from Mr. Rohit. In the background of decided case law, indicate whether Mr. Raj would be held liable for cheating.
Answer:
Section 415 of Indian Penal Code, 1860, provides that 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 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, is said to “cheat”.

In Chinthaman v. Dyaneshwar and Anr. [1973] case, the accused sold the property to the complainant. In fact, they said property was already mortgaged to some other person. The accused concealed the mortgage and registered it in favour of the complainant and received full consideration. The High Court held that it was a clear cheating offence. Yes, in the given case, Mr. Raj would be liable for offence of cheating as he dishonestly mortgaged the land to Mr. Rohit.

Question 9.
During the Statutory audit of MCP Limited, the auditors found that a fraud has been committed against the Company by its officers amounting to more than ₹ 10 crores. What are the duties of statutory auditors in the given case under the Companies Act, 2013?
Answer:
If an auditor of a company has a reason to believe, in the course of performance of his duties as statutory auditor, that an offence of fraud has been committed against the company by its officers or employees, which involves individually an amount of ₹ 1 crore or above, the auditor shall report the matter to the Central Government.

Section 143 of the Companies Act, 2013 confers certain powers on the auditors of the company as well it casts certain duties on them. The auditor shall report the matter to the Central Government as under:-
the auditor shall report the matter to the Board or the Audit Committee immediately but not later than two days of his knowledge of the fraud seeking their reply or observations within forty-five days.

on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments to the Central Government within fifteen days from the date of receipt of such reply or observations.

if no reply or observations are received from the Board or Audit Committee within the stipulated period of forty-five days, Auditor shall forward his report to the Central Government. the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same.

Question 10.
Intention is one of the essential ingredients to commit a fraud. Elaborate
Answer:
The Companies Act, 2013 enumerates that, intention is one of the essential ingredients to commit a fraud.
This was also held in a landmark judgment of Dr. Vimla v. Delhi Administration, where the SC observed that fraud has to satisfy two conditions viz.,

Deceit or injury to the person deceived; and
Intention to deceive.

In-State of Mysore v. Padmanabhacharya, the Supreme Court of India held a view that the intention can be assumed:

The case involved specific smuggling activities in contravention of the Sea Customs Act, 1887.
The SC held that considering the facts of the case, the intention to defraud continued even after the actual importation of goods and continued in the hands of the subsequent purchasers also.
The term intention has to be interpreted in a wider sense. An unintentional and mere accidental omission or commission generally will not stand the test of legal scrutiny in establishing a fraud.
Intention can be provided by looking into the associated factors relating to the challenged fraudulent act.

The Securities Appellate Tribunal, in Ketan Parekh v. SEBI, observed that,

It is the intention that will determine whether a transaction has been executed with the intention to manipulate the market or defeat its. mechanism. This could be understood from the circumstances because direct evidence may not be available in such cases.
Factors determining intention cannot be exhaustive, however, an illustrative list is given below of some factors which determine intention of the parties.

These include:

the frequency with which such transactions are undertaken,
the value of the transactions,
whether they involve circular trading and whether there is real change of beneficial ownership,
the conditions then prevailing in the market are Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.

Question 11.
What are the essential ingredients of the Offence of Criminal Breach of trust?
Answer:
The essential ingredients of the offence of criminal breach of trust are as under:
1. The accused must be entrusted with the property or with dominion over it.
2. The person so entrusted must use that property; or
3. The accused must dishonestly use or dispose of that property or wilfully suffer any other person to do so in violation:

of any direction of law prescribing the mode in which such trust is to be discharged, or
of any legal contract made touching the discharge of such trust.

Relevant case laws provided below:
In VR. Dalai v. Yugendra Naranji Thakkar, 2008, the Supreme Court has held that the first ingredient of criminal breach of trust is entrustment and where it is missing, the same would not constitute a criminal breach of trust. Breach of trust may be held to be a civil wrong but when men’s rea is involved it gives rise to criminal liability also.

The SC held in Onkar Nath Mishra v. State that the offence of criminal breach of trust involves two distinct parts. The first consists of creation of an obligation in relation to property over which control is acquired by accused and second is misappro-priation or dishonest dealings in property, contrary to the terms of obligation created.

In Suryalakshmi Cotton Mills Ltd. v. Rajvir Industries Ltd., it was held that cheque is a property and if it has been used for a purpose for which the same had not been handed over, it would constitute breach of trust.

In S.K. Alagh v. State of UP, it was highlighted that in the absence of any provision laid down under statute, a director of a company or an employer cannot be held vicariously liable for any offence committed by company itself.

After analysing all the cases we may conclude that for an offence to fall under this section all the four requirements are essential to be fulfilled.

The person handing over the property must have confidence in the person taking the property so as to create a fiduciary relationship between them or to put him in position of trustee. ig,
The accused must be in such a position where he could exercise his control over the property Le.; dominion over the property,
The term property includes both movable as well as immovable proper erty within its ambit.
It has to be established that the accused has dishonestly put the property to his own use or to some unauthorized use. Dishonest intention to misappropriate is a crucial fact to be proved to bring home the charge of criminal breach of trust.

Question 12.
What are the main ingredients of cheating under Indian Penal Code t860?
Answer:
Cheating has been defined under section 415 of the IPC as follows:
That 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 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, is said to “cheat”.

The constituents of cheating are provided below:
1. Deception of any person.
2.
(a) Fraudulently or dishonestly inducing that person

to deliver any property to any person or
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 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.

Relevant case laws provided below:
In Iridium India Telecom Ltd. v. Motorola Incorporated and Ors., it has been held by SC that deception is necessary ingredient under both parts of the section and complainant must prove that inducement has been caused by deception. It was further observed that non-disclosure of relevant information also amounts to deception.

In M.N. Ojha and others v. Alok Kumar Srivastav and Anr., the SC held that it was cheating where the intention on part of the accused was to wrongfully retain the excise duty which State is empowered under law.

In T.R. Arya v. State of Punjab, it was held that negligence in duty without any dishonest intention cannot amount to cheating. A bank employee when on comparison of signature of drawer passes a cheque there may be negligence resulting in loss to bank, but it cannot be held to be cheating.

Question 13.
An unintentional and mere accidental omission or- commission generally will not stand the test of legal scrutiny in establishing a fraud. Comment.
Answer:
The Securities Appellate Tribunal, in Ketan Parekh v. SEBI, observed that It is the intention that will determine whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism. This could be understood from the circumstances because direct evidence may not be available in such cases.

Factors determining intention cannot be exhaustive, however, an illustrative list is given below of some factors which determine intention of the parties. These include

the frequency with which such transactions are undertaken,
the value of the transactions,
whether they involve circular trading and whether there is real change of beneficial ownership,
the conditions then prevailing in the market tire

Any one factor may or may not be decisive and it is from the cumu¬lative effect of these that an inference will have to be drawn.

Question 14.
Brief Note on Fraud.
Answer:
A general meaning of fraud may be taken as wrongful or criminal deception practiced with an intention to secure financial or personal gain to oneself and a financial or personal loss to the other.
Business Dictionary states, ‘Fraud’ is an act or course of deception, an intentional concealment, omission, or perversion of truth, to:

Gain unlawful or unfair advantage,
Induce another to part with some valuable item or surrender a legal right, or ‘
Inflict injury in some manner

Fraud can also be:
a civil wrong (ie., a claim of monetary compensation against fraud perpetrator may be initiated in a civil court of competent jurisdiction),
a criminal wrong (ie., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities) or
it may cause no loss of money, property or legal right but still be an element of another civil or criminal wrong. The ultimate object of practising fraud may be some monetary gain or other benefits.

Black Law Dictionary states that ‘Fraud’ refers to ‘All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Indian Contract Act, 1872 –
Section 17 of the Contract Act defines Fraud as “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent or to induce him to enter into the contract.

Following are covered in fraud as per Contract Act:

Section 17(1) – outlines the concept of Suggestio Falsi or ‘Suggestion of falsehood.’ It implies suggestion of a fact by one who does not believe it to be true.
Section 17(2) – outlines the concept of Suppresio Veri or ‘Suppression of a fact.’ It means the active concealment or suppression of a fact by one having the knowledge or belief of the fact.
Section 17(3) – it mentions a promise made with without any intention of performing it.
Section 17(4) – any other Act fitted or designed to deceive.
Section 17(5) – any such act or omission as the law specially declares to be fraudulent

The Companies Act, 2013:
Section 447 of Companies Act, 2013 defines Fraud and related terms as below:
(i) ‘Fraud’ in relation to affairs of a company or anybody 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.

Brief reading of the Companies Act, 2013, specifies the following:

The definition of the term fraud is inclusive in nature.
A fraud may be in relation to a body corporate as well, not necessarily always in relation to a company.
Fraud includes any act, omission, concealment of facts or abuse of position by a person.
The definition also extends to those persons who connive with another in committing a fraud. The word ‘connive with’ can be understood as conspiring with a person to commit fraud.
Intention is important.
The fraud may not be targeted only at the company. Even if the fraud victims are shareholders, creditors or any other person, it will still constitute fraud.
Gain or loss arising out of fraud cannot be the basis of deciding quantum of punishment.

It is important to note that the term has a wide coverage of the acts and also of the fraudsters. The words ‘any person by this section states that the commission of the act, omission etc. is by someone other than a director or an employee and still falls within the purview of section 447.

Question 15.
Who is an Officer in default as per Companies Act, 2013?
Answer:
As per Section 2(60) of the Companies Act, 2013, “Officer who is in default” includes, for the purpose of the any provisions of the act, the whole time director, the KMP, or the persons who were providing directions to the company etc. Also, when it comes to issue or transfer of shares, the Registrar and Share Transfer Agent or the Merchant Banker is also classified as the officer who is in default.

Again, Section 2(51) when defining the term “Key Managerial Personnel” in relation to a company includes the CEO or the MD/WTD or the Manager or the Company Secretary or the CFO, such person who is one level below the Directors designated as KMP or such other officer.

Thus it becomes, even more important for directors and other professionals to act difigently in order to save themselves. As officers, they may attract the penal provisions for fraudulent acts.

An officer in default means any of the following officers of a company, namely:
1. Whole-time director

2. key managerial personnel

3. where there is no key managerial personnel, such director or directors as specified by the Board in this behalf.

4. any person who, under the immediate authority of the Board or any KMP, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default.

5. any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

6. every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention;

7. in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.

Question 16.
Which directors of a company can be considered as officers in default?
Answer:
Executive directors, by virtue of their involvement in day to day affairs of the company, can usually be accused of fraud as they are aware of the loopholes in the systems prevalent with the company. However, this does not imply immunity to non-executive directors and independent directors merely due to their position.

Any fraudulent act would have a significant impact on the directors and KMP of a company. The Companies Act, 2013 has revamped the definition of officer in default to bring under its ambit more personnel than before.

As per section 2(60) of the Companies Act, 2013, “Officer who is in default” includes, for the purpose of any provisions of the act, the whole time Director, the KMP, or the persons who were providing directions to the Company, etc. Also, when it comes to issue or transfer of shares, the Registrar and Share Transfer Agent or the Merchant Banker is also classified as the officer in default.

Again, section 2(51), when defining the term ‘Key Managerial Personnel’ in relation to a company includes the CEO of the MD/WTD or the manager or the Company Secretary or the CFO, such person who is one level below the Directors designated as KMP or such other officer.

Thus, it becomes even more important for Directors and other professionals to act diligently in order to save themselves. As officers, they may attract the Penal provisions for fraudulent acts.

Question 17.
Explain the term Whistleblowing?
Answer:

The importance of whistleblowing mechanism can be gauged from the fact that LODR require listed entities to devise effective whistleblower mechanism.
Section 177(9) of the Companies Act provides that every listed company or such class or classes of companies as may be prescribed shall establish a vigil mechanism for the directors and employees to report genuine concerns in a manner prescribed therein.
The Act expressly requires that whistleblowers be provided direct access to the Chairman of the Audit Committee and for adequate safeguards to avoid victimisation of the whistleblowers.
If the protection provided to whistle-blowers is ineffective, it might result in an atmosphere of fear for the whistle-blowers wherein they would not be comfortable/encouraged to report the concerned discrepancies and inefficiencies.
The stronger the protection to the whistleblowers, more can be the chances of early fraud detections.

Question 18.
What is the term ‘Cheating by personation’.
Answer:
Sections 416 to 420 of Indian Penal Code, 1860 states that A person is said to “cheat by personation” if he cheats by

pretending to be some other person, or
knowingly substituting one person for another, or
representing that he or any other person is a person other than he or such other person really is.
The offence is committed whether the individual personated is a real or imaginary person.

Following are the examples of cheating by personation:

A cheats by pretending to be a certain rich banker of the same name. A cheats by personation.
A cheats by pretending to be B, a person who is deceased. A cheats by personation.
A calls B, a doctor, by pretending to be a leading politician and asks B to donate certain amount to a certain fund. A cheats by personation.
A, using similarity of his name with name of a famous businessman, enters into deals pretending to be such businessman. A cheats by personation. “

Section 417 prescribes the punishment for cheating.
It states that whoever cheats shall be punished with imprisonment for a term which may extend to one year, or with fine, or with both.

Section 418 states that whoever cheats with the knowledge that he is likely to cause wrongful loss to a person whose interest in the transaction to which the cheating relates, he was bound, either by law, or by a legal contract, to protect, shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.

Section 419 provides that whoever cheats by personation shall be punished with imprisonment for a term which may extend to three years, or with fine, or with both.

Question 19.
What is forgery? State the punishment for forgery.
Answer:
Forgery refers to the action of forging a copy or imitation of a document, signature, banknote, or work of art.
Section 463 of the Indian Penal Code 1860 Forgery:
Whoever makes any false document or false electronic record or part of a document or electronic record, with intent to cause damage or injury, ‘ to the public or to any person, or to support any claim or title, or to cause
any person to part with property, or to enter into any express or implied contract, or with intent to commit fraud or that fraud may be committed, commits forgery.

Section 463 of the Indian Penal Code 1860 Punishment for Forgery:
The IPC provides for imprisonment for a term which may extend to two years, or with fine, or with both.

Relevant case laws provided below:
1. In Ramchandran v. State, the SC held that to constitute an offence of forgery, document must be made with dishonest or fraudulent intention. A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.

2. Parminder Kaur v. State of UP The Supreme Court held that mere alteration of document does not make it a forged document. Alteration must be made for some gain or for some objective.

3. Balbir Kaur v. State of Punjab 2011 CrLJ 1546 (P&H):
The allegation against the accused was that she furnished a certificate to get employment as ETT teacher which was found to be bogus and forged in as much as school was not recognized for period given in certificate.

The certificate did not anywhere say that school was recognized. It was held that merely indicating teaching experience of the accused, per se, cannot be said to indicate wrong facts. So the direction which was issued for prosecution is liable to be quashed.

Question 20.
Who can be responsible for a fraud performed on the company? Elaborate.
Answer:
It is important to note who can commit fraud so that possible prevention mechanisms can be implemented and followed.
Fraud can be executed by directors or any of the employees or even auditors or external consultants. However, company faces a greater risk from the actions of directors and employees since they are in possession of confidential information about the company which may not be available with other stakeholders.

There can be many motives of committing fraud. A few common ones are greed for monetary gain,

intention to bring disrepute to the company on account of being ousted (removed from job),
thrill of having power enough to circumvent or make others circumvent the law.

There is an existence of a few ‘Robin hood’ fraudsters who believe they are just increasing the balance in the society by defrauding the rich and bringing the benefits to the less fortunate.

Question 21.
Enumerate the duties of the auditor of the company in case of fraud reporting.
Answer:
The duties of the auditor of the company based on fraud reporting are stated below:

Section 143 of the Companies Act, 2013 confers certain powers and casts certain duties on the auditors of the company.
In case an offence of fraud is committed by the company or by its officers or employees, the auditors are required to report to the central government.
In cases of fraud involving amount less than ₹ 1 crore, the auditors are required to report to the audit committee of the company or to the Board in other cases.
Similar obligations are cast upon the company secretary in practice (secretarial auditor) and the cost accountant in practice (cost auditor) also.
Punishment up to ₹ 25 lakhs can be imposed for non-compliance of duties by an auditor.

Question 22.
Write a note on fraud committed by Directors?
Answer:
Section 447 seeks to penalise any person guilty of fraud involving amounts of at least ten lakh rupees or one per cent of the turnover, whichever is less, with imprisonment from six months to ten years and fine ranging from the amount involved in the fraud to three times such amount.

If the fraud involves public interest, the imprisonment will not be less than three years. If the amount involved is less than ten lakh rupees or one per cent of the turnover and the fraud does not involve public interest, the punishment shall be imprisonment up to five years or fine up to fifty lakh rupees or both.

If a director is found to be guilty of fraud and sentenced to imprisonment for six months or more, he would be required to If any director/person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.

Question 23.
Will fraud by just one director make the other director liable?
Answer:
Executive directors can be held responsible for fraud, since they are involved in and aware of the daily operations and systems of the company and have knowledge about possible loopholes in such operations and systems.
However, the non-executive directors or the independent directors do not claim immunity by virtue of their position and can be held liable if guilty.

‘Every director who consented to the fraud or is aware of the contravention, including contravention of Section 447 can be covered within the term ‘officer in default.

The method of awareness must be either by participating in board proceedings without objecting to the same or even by virtue of receipt of proceedings of the board.

‘Proceedings of the board’ to include minutes and board papers.

Resignation is not the immediate recourse to a non-executive director and does not release him from the liability post resignation. Proviso to Section 168(2) of the Act clearly provides that the director who has resigned shall be liable even after his resignation, for the offences which occurred during his tenure.

The attendance registers, board papers and minutes play a vital role in this regard.

Attendance at the board meeting includes the director within the ‘awareness’ purview.
Recording of the directors at the meeting, participation and non-participation in the discussion, voting and their dissentment if any is important to affixing liability.

Board papers play a critical role. Efficiently complied Board Papers circulated over a period of time, might be instrumental in throwing up a red flag for a director, and might result in an independent either recording his dissent or in extreme cases, resignation.

The SS-1: Secretarial Standard on Meetings of the Board of Directors requires that the draft minutes need to be circulated to all the members of the board of directors, not only those who attended the meeting. Thus the proceedings of the Board can be available even to those who did not attend the meeting and they can therefore be considered to be aware of a contravention. The minutes should be fairly detailed and all directors are expected to thoroughly read the minutes.

Question 24.
If a fraud is committed by director, whether the company will be treated as the fraudster or victim?
Answer:
If directors acting on behalf of the company deceive third parties, the company will also be penalised.
Under most legislations, the sections speaking about the offences by companies implicate the company and the officers in default.

The company might be able to recover the loss from the director, however, this would be at a later stage. Initially, the company will have to make good the losses of the third parties or pay the penalties for the violations.

Relevant case law in this regard is provided below:
Jetivia SA & Anr. v. Bilta (UK) Limited – The UK Court of Appeals decided that where the directors had acted to deprive the company of its assets and thus made it default in VAT payments to the UK HMRC, the company was the victim and did have a claim towards the breach of fiduciary duties owed to it by its directors.

Question 25.
Corporate Governance Mechanism to Prevent fraud from Sprouting.
Answer:
The Act has elaborate deterrent sections and penalties for fraudulent activities, particularly where unwary investors arc made to place their money in untrustworthy hands.

The sudden ‘awakening’ and action by the regulators can also make someone cautious.
A host of forensic audit techniques and methods available for analysing how exactly the fraud was bom and implemented are relevant only after it is discovered that a fraud has been committed and those involved.

1. Safe Guarding Strategy for Fraud Corporate Culture

A strong corporate culture is the prerequisite for any organization.
Fixation of procedures and policies to govern its employees.
Clear definition of the main accountable person, organizational structure of reporting systems, the reporting manager, job responsibilities, segregation of duties, and limitations.
Accurate investigation of a candidate’s history and background before hiring.
Clarity provided to the employees about their fraud prevention tactics.
Proper training provided to employees about documented policies defining fraud, its prevention and detection measures, before implementation.
A zero-tolerance policy for all kinds of fraud should be introduced to get rid of internal fraudsters.

2. Screening and Background Checking:

Adequate screening, background checking and verification before someone is recommended for or appointed as a director or hold senior managerial level positions. (Section 179(1) of the Companies Act, 2013)
‘Fitness and probity’ norms should be complied for someone to be appointed as a director
Checking would be exhaustive where foreign nationals are appointed as directors since criminals in a country might flee and join entities in other countries.

3. Strong Internal Controls:

In the London Whale story it was established that JP Morgan incurred a loss more because of the risk management systems in the bank were not adequately geared to prevent this from happening.
The BFSI (Banks, Financial Services, Insurance) sector entities are required to follow regulatory directions in relation to internal audit and risk As per the provisions of regulation 17(8) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR).
The CEO and CFO are required to furnish a compliance certificate to the board of directors confirming their responsibility to maintain adequate internal controls pertaining to financial reporting and that they have evaluated the effectiveness and disclosed any deficiencies and design and operation of such internal controls to the auditors and the audit committee. The board of directors. will, therefore, rely on such certificate.
If this is fraudulently provided, chances are, the responsibility statement as discussed above will turn out to be incorrect.
In most cases, the CEO and CFO will both also hold the positions of directors.
Internal control systems and techniques such as established policies and procedures, maker – checker processes (separate people to generate and authorize transactions), limits on operation, block leaves etc. can all contribute towards reducing the possibilities of fraud and early detection.
Since certain internal controls like maker checkers and transaction limits can be installed through software systems, this is one of the very few fear or bias-free fraud prevention mechanisms.

4. Whistle Blowing:

The Listing Obligations and Disclosure Requirements Regulations (‘LODR’) requires listed entities to devise effective whistle-blower mechanism reflects on how necessary the lawmakers think these systems are.
Section 177(9) of the Companies Act provides that every listed company or such class or classes of companies as may be prescribed shall establish a vigil mechanism for the directors and employees to report genuine concerns in a manner prescribed therein
The Act expressly requires that whistle-blowers be provided direct access to the Chairman of the Audit Committee and for adequate safeguards to avoid victimisation of the whistle-blowers.
The ineffective protection mechanisms for whistleblowers might result in creating an atmosphere of fear for whistleblowers. The stronger the protection to the whistle blowers, more can be the chances of early fraud detections.

5. Remuneration:
Feeling of not being adequately remunerated can be one reason for a director or senior employee to be driven to ‘take what they are due’ from an entity irrespective of whether the means are acceptable.
Requisite board evaluation and remuneration policies incorporated to establish a measure for rewards against performance with a well-balanced metrics. Clarity in the minds of the management and employees would result in lesser chances of fraud.

6. Exit Checks and Clawbacks:

Exit interviews, particularly when employees are performing and are remunerated well, can raise red flags about possible involvement in fraud.
Clawback provisions in employment agreements, which enable the company to recover incentive and additional compensation paid to executives are an effective deterrent tool, since executive compensation tends to be largely performance linked.
Clawback provisions would provide for recovery of such compen-sation (usually other than the base salary) in case of fraudulent misrepresentation or misstatements.
The biggest fraud prevention mechanisms are, in reality growth-oriented companies which have appropriate recognition and remuneration mechanisms and thus, a high employee morale.
A positive community environment is difficult to quit, and even more difficult to ditch.

7. Independent Audit System:

Regular and surprise audits to be conducted by an independent audit team to check on the safety of the system.
All types of vacation balances to be checked.
The audit committee should monitor the quarterly and annual audits.
Responsibility of the team of experts for validating the results of any internal audit.
The internal audit system is accountable for the detection of 29% of all fraud cases.

8. Operational Reporting System:

An operational and effective reporting system, helpful in reducing fraud in companies.
Awareness amongst employees about the reporting system for reporting any kind of suspicious activity.
A reporting system that encourages the person to report the fraud anonymously could be beneficial as it will keep the identity of the employee private while reporting his/her colleague.
The employees should be encouraged and ensured that there won’t be any problem if they report anything that sparks doubt in their head.

9. Professional Expert for Fraud Prevention:

Surefire strategy to mitigate the deceitful activity.
Companies can hire certified fraud prevention experts as a part of the fraud prevention program.
These experts can prove to be very crucial for creating and instigating fraud prevention policies and invincible strategies.

Fraud under Companies Act, 2013 and Indian Penal Code, 1860 – Resolution of Corporate Disputes, Non-Compliances & Remedies Important Questions

Fraud under Companies Act, 2013 and Indian Penal Code, 1860 – Resolution of Corporate Disputes, Non-Compliances & Remedies Important Questions

Resolution of Corporate Disputes Non-Compliances & Remedies Notes