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TMI Blog2020 (9) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act indicates that a person would be liable under Section 447 of the Act only if he makes a statement knowing it to be false or omits any material fact knowing that the said fact is material. Thus, knowledge that the statement is false or fails to disclose material fact(s) is an essential ingredient of an offence under Section 448 of the Companies Act - Undisputedly, the petitioner cannot be prosecuted solely for the reason that he was a Director on the Board of BSL at the material time when the Board of Directors had approved the financial statements and the Director s Report for the year ended 31.03.2017. The petitioner cannot be proceeded against for any acts of commission or omission done in good faith in discharge of his duties as a Nominee Director. SFIO s contention that all members of the Board of Directors of BSL can be prosecuted for violating Sections 128(1) and 129(1) of the Companies Act, because no other officer had been charged for maintaining the accounts is plainly unmerited. As discussed above, the obligation to maintain true and fair accounts is that of the Company and the Directors of a Company are not vicariously liable for the acts of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cope of Section 448 of the Companies Act. Neither the complaint made by the SFIO nor the Investigation Report submitted by the SFIO contains any specific allegations against the petitioner of being complicit or having acted in bad faith. The reasoning of the learned Court that the petitioner had connived with the Promoters and is liable to be proceeded against, is clearly unsustainable and not supported by the allegations made in the complaint or the Investigation Report furnished by the SFIO - Undisputedly, the scope of examination at the stage of issuing process is limited and the concerned Court is not required to evaluate the evidence in any detail. However, it is well settled that even at the stage of taking cognizance, the concerned Court does not act mechanically or as a post office. The Court must apply its mind to the facts of the case and the law applicable thereto. It must satisfy itself that the allegations made in the complaint constitutes an offence. In the present case, the learned Trial Court has issued summons on the reasoning that it is alleged that the petitioner has connived with the Promoters. However, it is seen that there is no such allegation either in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason that the petitioner was a director of BSL and, whether there is any material on record to indicate that the petitioner was complicit in the commission of the alleged offence. 3. The summoning order was issued pursuant to Criminal Complaint No. 770/2019 (hereinafter referred as complaint ) filed by the Serious Fraud Investigation Office (hereinafter referred as SFIO ). The said complaint was filed pursuant to the investigation carried out by SFIO into the affairs of BSL and other companies. The Government of India had by an order dated 03.05.2016 issued directions to SFIO under Section 212(1) of the Companies Act to investigate into the affairs of certain companies (fifteen in number) including BSL. Subsequently, approval was also granted to SFIO to investigate the affairs of other companies based on the material that was collected during the investigation. 4. SFIO submitted its investigation report into the affairs of BSL and one hundred and fifty six other companies (hereinafter referred as Investigation Report ) to the Government of India on 27.06.2019. Thereafter, on 29.06.2019, Ministry of Corporate Affairs, Government of India issued directions to the SFIO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from BSL and BEL fund generating companies from the year 2009-10 onwards. Apart from inducing part of the said funds as capital, the Promoters also used part of the said funds to purchase movable and immovable properties. 6. SFIO alleges that the funds were siphoned off using various methods. One such method was to transfer the funds from BSL and BEL to associate companies (Category B and C companies) by reflecting the same as capital advances . It is alleged that the recipient companies then transferred the funds through one or more layers of associated companies of the Promoters, to BSL, as promoter s equity. It is alleged that these transactions took place in the year 2009-10 and 2010-11. SFIO further alleges that during the financial year 2013-14 and 2014-15, the amounts receivable from eighteen companies in category B and fourteen companies in category C were adjusted from the head Capital Advances to Capital Work In Progress . SFIO alleges that in the year 2011-12, three category B companies and the Promoters routed ₹575 crores, which was borrowed from banks and reflected the same as investments in preference shares of BSL. The interest payments for these l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. He was, thereafter on 14.08.2019, appointed as a Director in BSL and continued to hold the said office till 08.10.2017. Admittedly, the petitioner did not share any executive responsibilities of BSL and his role was that of a Non-Executive Director. The petitioner continued to function as a whole-time employee of PNB and at the material time, he was working as an Executive Director of the said bank. The petitioner claims that during the period that he held the office of a nominated director on the Board of BSL, he acted in good faith and there is no material to even prima facie conclude that the petitioner is guilty of any offence under Sections 128, 129 and 448 of the Companies Act. The petitioner contends that the impugned summoning order is ex facie erroneous and without application of mind. 11. In view of the above, the scope of the present petition is limited to examining whether there is sufficient material on record against the petitioner for him to be proceeded against for the offence under Section 128, 129, 448 read with Section 447 of the Companies Act. Submissions 12. Mr Pinaki Mishra, learned senior counsel appearing for the petitioner submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in paragraphs 75 to 79 of the complaint that set out and specify the roles of different individuals in falsification of the accounts. However, paragraph 80 of the complaint mentions the name of the persons who are allegedly liable to be prosecuted under Section 128, 129, 448 read with Section 447 of the Companies Act and the petitioner s name is mentioned therein. Apart from the above, the complaint also sets out allegations under the headings: Failure to discharge duties as Statutory Auditors; Manipulation of the Books of Accounts viz. Concealment of true state of affairs; Financial statements not giving true and fair view of the affairs of Category B and C Companies; Concealment of Books of Accounts; and Non-declaration of beneficial interest. 14. Mr Mishra submitted that merely mentioning the petitioner s name as being one of the persons who is allegedly liable to be prosecuted under Sections 128, 129 and 448 of the Companies Act, without ascribing any specific role or pointing out any culpable conduct would not constitute sufficient material to persuade any Court to issue summons. He further emphasized that there was no allegation in the complaint that the petitioner has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es constituting those banks that stipulated that Nominated Directors would not incur any obligation or liability, by reason of being a Director or for anything done or omitted to be done in good faith in discharge of his duties as a Director. The provisions of Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act was also referred to in the said letter. Mr Mishra submitted that in view of the said clarification, there was no question of proceeding against any Nominee Director of a Public Sector Bank in respect of any act done or omitted to be done in discharge of its duties as a Director, unless it was established that he had acted in bad faith and was complicit in commission of any such offence. 18. Mr Sharma, learned ASG appearing for SFIO (respondent no. 1) submitted that an investigation into the affairs of BSL had established that the Promoters and their family members assisted by employees and close associates had used a complex web of one hundred and fiftyseven companies to siphon off funds from BSL for various purposes. It was also established that they had fraudulently availed of credit from various lender banks and manipulated the books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, which relate to fraud. 20. Lastly, Mr Sharma submitted that although there was no specific allegation in the complaint that the petitioner was complicit and had acted in connivance with BSL, the complaint expressly stated that the roles played by various individuals had been set out in the Investigation Report furnished by SFIO and therefore, the same was required to be read as a part of the complaint. He submitted that if the Investigation Report was perused, the involvement of the petitioner in commission of the offences would be clear. He also stated that the learned Court had not only examined the complaint and the Investigation Report but also all material furnished along therewith and, therefore, the Court s view was not restricted only to the averments mentioned in the complaint filed by SFIO. 21. Mr Rajesh Gautam, learned counsel appearing for PNB (respondent no.2) referred to Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act and submitted that a Nominee Director could not be prosecuted solely because he or she was on the board of the said Company. He submitted that the immunity afforded to such Nominee Directors was unqualified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Office Memorandum dated 16.07.2020, is set out below: 2. Both the officers in their representations have submitted that the SFIO alleged that they did not raise valid concerns during the Board Meetings, which resulted in manipulations of the amount of stocks-intransit, which figures were adjusted under the garb of migration to the new Accounting Standards, viz. Ind AS. In this regard, both the officers clarified that M/s BSL is a listed company. Financial Statements and Auditor s Report were price sensitive, hence these were not circulated to the Nominee Directors seven days in advance, but were tabled at Board meeting. In a span of few minutes allotted for discussions on this particular agenda item, it is practically impossible for anyone to analyse the results in detail, compare all the figures with the previous year s figure, much lesser reconcile the figures of stocks-in-transit and that too for a multiproduct and multi-locational company. The figures of stocks-n-transit did not separately figure as an agenda item for discussion for that Board Meeting. As a Board Member, they were not involved in drawing up of Trial Balances of M/s BSL, or of finalizing of their ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05.07.2017 and for approving the financial statements for the year ended 31.03.2017 as well as the Director s Report for the said year. 26. It is necessary to bear in mind that SFIO s allegation is of a deep seeded fraud involving several entities/individuals, which had been perpetrated over a period of several years. It is alleged that the Promoters of BSL had in connivance with its employees fraudulently reflected their assets including stock-in-transit at inflated figures during the years prior to the financial year 2016-17. With effect from 01.04.2016 (that is, with effect from the financial year 2016-17), it became mandatory for companies to draw up their final accounts in accordance with the IndAS. It is alleged that under the guise of recasting the accounts in accordance with IndAS, the values of assets that were earlier inflated, were reduced and a large amount was written off. 27. The value of stock-in-transit which was reflected at ₹6,524.20 crores at the end of the financial year 2015-16 was recast to ₹298.14 crores as on 31.03.2016, as reflected in the statements for the financial year ending 31.03.2017. The final accounts for the year ended 31.03.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its Board of Directors on 05.07.2017, conceal the true reason for recasting the figures of the current assets including the stock-in-transit. It is alleged that the reason for recasting the said figures was not on account of any material difference in the accounting policy, but the ostensible reason to migrate to IndAS was used as a subterfuge to recast the figures that had been inflated earlier to avail of higher loans from lenders. It is also alleged that the notes made in the Director s Report and the financial accounts are inaccurate and thus, the said statements do not reflect a true and fair view of the state of affairs of BSL. 30. The learned Trial Court had found that in view of the aforesaid allegations there was sufficient material on record to proceed against the petitioner under Sections 128, 129, 448 read with 447 of the Companies Act. 31. At this stage, it would be relevant to refer to Section 128, 129, 447 and 448 of the Companies Act. Sub-section (1) of Section 128 of the Companies Act mandates that every company shall prepare and keep at its registered office books of accounts and other books and papers and financial statements for every year, which gives a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... punishment, if the same are contravened. The primary duty to carry on the affairs of the company including maintaining the books of accounts rests with the managing director, the whole-time director and other persons charged with the management of the company. It is well settled that a Nominee Director is not obliged to carry out any executive functions and cannot be charged with performance of any executive function of the company. 34. In K Subramony v. The Official Liquidator (supra), the Kerela High Court has held as under: .. As already stated, a Director appointed by a financial institution to the Board of a company has to predominantly protect the interest of the financial institution. Financial institutions advance funds to the company by way of loans or they even participate in the equity of the company. As a director representing the Financial Institution, he is concerned about the application of funds by the company, financial management etc. and he should ensure that the company acts not to the detriment of the interest of the financial institution. Therefore, nominee director of a financial institution is not engaged in regular management of the company su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointed by the corresponding new bank in pursuance of the arrangement as aforesaid. (2) Any director appointed as aforesaid shall- (a) hold office during the pleasure of the corresponding new bank and may be removed or substituted by any person by order in writing of the corresponding new bank; (b) not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto; (c) not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement. 36. It is also important to note that it is not the SFIO s case that the petitioner was charged with performance of any such function. SFIO in its counter affidavit (as well as the Investigation Report) states that since the company has not charged any person to comply with requirement under Section 129(7) of the Companies Act, 2013, the complete Board of Directors of BSL are liable for prosecution for violating the provisions of Section 129 under Section 448 of the Companies Act, 2013 . However, Mr Sharma, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than six months but which may extend to ten 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 the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to fifty lakh rupees or with both. 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 ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or omitted to be done in that capacity.. 44. Even if it is accepted that the petitioner can be proceeded against for violation of Section 128(1) and/or 129(1) of the Companies Act, on account of the Company not maintaining accounts, books and papers reflecting a true and fair view of the state of affairs of the company, the same can be done only if there is material to allege that the petitioner was aware of the same and had not acted in good faith. Similarly, in terms of Section 448 of the Companies Act, a person is liable for punishment under Section 447 of the Companies Act if the person makes a statement, which he knows to be false or omits any material facts in the statement knowing it to be material. 45. Thus, unless there is material to indicate that the petitioner had knowingly and willfully subscribed to approving the financial accounts of BSL knowing the same to be false and misleading, any prosecution launched against the petitioner would be unsustainable. 46. The learned Trial Court had indicated the reason for proceeding against the petitioner, in paragraph 2.41 of the impugned order. The same is set out below: 2.41 A-168 to A-178 were also the Independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation against the petitioner. He had referred to paragraph 4.94, 5.12.9, 5.12.11 and 5.13.14 of the Investigation Report furnished by the SFIO. The said paragraphs are set out below: 4.94 In the said meeting, the draft standalone and Consolidated Balance Sheet and statement of Profit Loss and Cash Flow statement of BSL for the year ended 31st March 2017 and draft auditor s report were placed before the committee for their consideration and review before submission to the Board for approval. The members of Audit Committee reviewed and financial statement with particular reference to:- i Matters required to be included in the director s responsibility statement to be included in the board s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act 2013. ii Changes, if any, in accounting policies and practices and reasons for the same; iii Major accounting entries involving estimates based on the exercise of judgement by management; iv Significant adjustments made in the financial statements arising out of audit findings; v Compliance with listing and other legal requirements relating to financial statements; vi Disclosu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the associated company (Category C ) of BBS and NS . During the course of recording of statement of BBS and Pankaj Kumar Agarwal, Head (Accounts), they were specially asked whether BOD has specifically charged any person with regard to compliance of requirement of section 129 of the Companies Act, 2013. They deposed that Board has not charged any person with regard to compliance to the provisions of section 129 of the Companies Act 2013. The Board had not charged any officer or any other person with the duty of complying with the requirements of section 129 of Companies Act, 2013, or the earlier section 209 of Companies Act, 1956 including for ensuring that the financial statements give a true and fair view of the state of affairs of the company and comply with the Accounting Standards notified under the Companies Act, 1956/2013. * * * 5.12.9 The Board of Directors of BSL comprised of the ex-promoters, the Whole time Directors, the Independent Directors and the Nominee Directors. The Board of Directors considered and passed the financial statements containing the effect of fraudulent adjustments, as established in Finding 1 3. The deteriorating financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner had relied upon the Auditor s Report in approving the financial statements of BSL. It is mentioned that the petitioner was examined and his statement was recorded. The said statement also does not indicate that he was complicit with the Promoters of BSL. The petitioner was also asked whether he had tried to verify why and how there was a drastic reduction in the value of stock-in-transit as shown in the balance sheets prepared on 31.03.2016 and 31.03.2017 and he had responded that the Auditors had confirmed that the accounts reflect a true and fair view of BSL. The relevant question and the petitioner s response to the same is material to the controversy and is reproduced below: Q. No.20. On 03.06.2019, you were asked to explain the following:- After the examination of the balance sheet of F.Y 2015-16 it was observed that BSL has shown stock in transit of ₹ 6523 crore whereas after the examination of balance sheet of F.Y 2016-17, when the accounts were prepared under IndAS, BSL has shown stock in transit of ₹ 298 crore as on 31.03.2016. Please state whether as a nominee director you tried to verify why and how drastic reduction in stock in transit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that figures of certain assets had been falsely inflated in earlier years or that they were aware that the accounts had been recast under the guise of compliance with IndAS to correct the inflated values of current assets. There is also no allegation that the Nominee Directors were aware that the statements approved by them did not reflect true and fair view of the affairs of BSL. 56. There is no allegation that the petitioner had knowingly been a party to make false statements or conceal any material fact. There is a material difference between the allegation that a Nominee Director has been negligent or has failed to discharge his responsibility and an allegation that he has connived or has been complicit in approving statements, which he knows to be false or conceal material information. While the latter may constitute an offence under Section 448 of the Companies Act, the former does not constitute any such offence. In this view, it is clear that the SFIO has not made any allegation in its Investigation Report or in its complaint against the petitioner that falls within the scope of Section 448 of the Companies Act. 57. The learned Trial Court has proceeded on the assum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y complaint filed before him and issue process as a matter of course. There must be sufficient indication in the order passed by the Magistrate that he is satisfied that the allegations in the complaint constitute an offence and when considered along with the statements recorded and the result of inquiry or report of investigation under Section 202 Cr.P.C., if any, the accused is answerable before the criminal court, there is ground for proceeding against the accused under Section 204 CrPC, by issuing process for appearance. The application of mind is best demonstrated by disclosure of mind on the satisfaction. If there is no such indication in a case where the Magistrate proceeds under Sections 190/204 CrPC, the High Court under Section 482 CrPC is bound to invoke its inherent power in order to prevent abuse of the power of the criminal court. To be called to appear before the criminal court as an accused is serious matter affecting one s dignity, self-respect and image in society. Hence, the process of criminal court shall not be made a weapon of harassment. 62. In a recent decision of the Supreme Court in Sunil Bharti Mittal v. Central Bureau of Investigation (supra), the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain detailed reasons. A fortiori, the order would be bad in law if the reason given turns out to be ex facie incorrect. 54. However, there has to be a proper satisfaction in this behalf which should be duly recorded by the Special Judge on the basis of material on record. No such exercise is done. In this scenario, having regard to the aforesaid aspects coupled with the legal position explained above, it is difficult to sustain the impugned order dated 19-3-2013 in its present form insofar as it relates to implicating the appellants and summoning them as accused persons. The appeals arising out of SLP (Crl.) No. 2961 of 2013 and SLP (Crl.) No. 3161 of 2013 filed by Mr. Sunil Bharti Mittal and Ravi Ruia respectively are, accordingly, allowed and order summoning these appellants is set aside. The appeals arising out of SLPs (Crl.) Nos. 3326-27 of 2013 filed by Telecom Watchdog are dismissed. 63. In the present case, the learned Trial Court has issued summons on the reasoning that it is alleged that the petitioner has connived with the Promoters. However, it is seen that there is no such allegation either in the complaint or in the Investigation Report furnished by the SFIO. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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