2022 (10) TMI 963 - HC - Companies Law

Shareholder cannot file criminal case for Companies Act offense; must apply to Tribunal for investigation. Magistrate's order quashed.

Sri. M. Gopal Versus Sri. Ganga Reddy

The shareholder cannot initiate proceedings before the Magistrate for an offence under Section 447 of the Companies Act, 2013. The offence under Section ... Fraud - minority shareholders or not - applicability of Section 439 of the Companies Act - submission is that once an offence has been designated to be cognizable under Sub-section 6 of Section 212 of the Act, the provision of Section 439 of the Act that deals with non-cognizable offences would not be applicable and the procedure prescribed under Section 212 of the Act has to be strictly followed - initiation of proceedings under Section 447 of the Companies Act, 2013. Whether a shareholder, minority or otherwise, can initiate proceedings before the Magistrate by himself or herself for an alleged offence under Section 447 of the Companies Act, 2013? - HELD THAT:- Section 439 of the Companies Act, which has been reproduced herein above, makes all the offences under the Companies Act non-cognizable and Sub-Section (3) of Section 439 provides that a complaint could be filed by the Registrar or a Shareholder of the Company or a person authorized by the Central Government in that behalf. Thus, any offence being non-cognizable, a complaint could be filed by the Registrar, Shareholder of the Company or a person authorized by the Central Government - Sub-Section (6) of Section 212 of the Act specifically deals with the offences covered under Section 447 of the Act and makes it clear that no Court shall take cognizance unless a complaint is made by the Director, Serious Fraud Investigation Office (SFIO) or the officer of the Central Government authorized by a general or special order in writing in this behalf by that Government. Thus, an offence under Section 447 of the Act is given special treatment in terms of Sub-Section (6) of Section 212 of the Act. It is only that procedure which is prescribed under Sub- Section (6) of Section 212 of the Act which would apply. It is held that a shareholder, minority or otherwise cannot initiate proceedings before the Magistrate by himself or herself for an alleged offence under Section 447 of the Act. Whether the offence under Section 447 of the Companies Act, 2013 is a cognizable offence or a non-cognizable offence? - HELD THAT:- Sub-Section (6) of Section 212 of the Act is clear that an offence under Section 447 of the Act is cognizable and the method of taking cognizance is also provided. Thus, it is held that an offence under Section 447 of the Act is a cognizable offence. What is the remedy available to a shareholder in the event of the shareholder alleging fraud requiring the initiation of proceedings under Section 447 of the Companies Act, 2013? - HELD THAT:- It is held that a shareholder cannot file any proceedings before the Magistrate for an offence under Section 447 of the Act. However, such a shareholder is not remediless. In the event of after investigation, it was proved that the business of the Company is being conducted with an intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or the Company was formed for any fraudulent or unlawful purpose, then every officer of the Company who is in default and the person or persons concerned in the formation of the Company would be punishable for fraud in the manner provided under Section 447 of the Act - for a shareholder to avail a remedy under Section 447 of the Act such shareholder essentially needs to go through the procedure under Section 213 of the Act and in the event of a report being submitted by the Inspector to the Tribunal of there being a fraud either the Shareholder or the Tribunal could refer the report to the SFIO who can then follow the procedure provided under Section 212 of the Act and initiate criminal proceedings against the offenders for an offence under Section 447 of the Act. Does the order passed by the learned Magistrate in the present matter suffer from legal infirmity requiring interference? - HELD THAT:- Having come to a conclusion that no proceedings could have been initiated by a Shareholder by himself under Section 447 of the Act and that the requirement under Sub- Section (6) of Section 212 of the Act was required to be complied with. The learned Magistrate without having gone through and appreciated the provisions of Sections 212, 213, 439 and 447 of the Act, the order of cognizance is contrary to the applicable law and therefore, suffers from legal infirmity requiring this Court’s interference. The Criminal Petition is allowed. Issues Involved:1. Whether a shareholder, minority or otherwise, can initiate proceedings before the Magistrate for an alleged offence under Section 447 of the Companies Act, 2013.2. Whether the offence under Section 447 of the Companies Act, 2013 is a cognizable or non-cognizable offence.3. What is the remedy available to a shareholder alleging fraud requiring initiation of proceedings under Section 447 of the Companies Act, 2013.4. Does the order passed by the learned Magistrate in the present matter suffer from legal infirmity requiring interference.5. What order should be passed.Detailed Analysis:1. Whether a shareholder, minority or otherwise, can initiate proceedings before the Magistrate for an alleged offence under Section 447 of the Companies Act, 2013:Section 447 of the Companies Act provides for punishment for fraud involving a significant amount or public interest. However, Section 439 makes all offences under the Companies Act non-cognizable, allowing complaints by the Registrar, a shareholder, or a person authorized by the Central Government. Specifically, Sub-Section (6) of Section 212 mandates that for offences under Section 447, only a complaint by the Director, Serious Fraud Investigation Office (SFIO), or an authorized officer of the Central Government is valid. Therefore, a shareholder cannot initiate proceedings for an offence under Section 447 by themselves.2. Whether the offence under Section 447 of the Companies Act, 2013 is a cognizable or non-cognizable offence:Sub-Section (6) of Section 212 clearly states that an offence under Section 447 is cognizable. Thus, the offence under Section 447 of the Act is a cognizable offence.3. What is the remedy available to a shareholder alleging fraud requiring initiation of proceedings under Section 447 of the Companies Act, 2013:A shareholder cannot file proceedings directly before the Magistrate for an offence under Section 447. Instead, they can apply to the Tribunal under Section 213, which allows for an investigation into the company's affairs by an inspector appointed by the Central Government. If the inspector's report indicates fraud, the SFIO can proceed under Section 212, leading to criminal proceedings under Section 447.4. Does the order passed by the learned Magistrate in the present matter suffer from legal infirmity requiring interference:The Magistrate's order suffers from legal infirmity as it did not comply with the requirements of Sections 212, 213, 439, and 447. The Magistrate took cognizance without adhering to the mandated procedure, making the order contrary to applicable law.5. What order should be passed:ORDER:i. The Criminal Petition is allowed.ii. The proceedings in C.C.No.561/2016 pending on the file of the Principal Civil Judge and JMFC, Mulabagal, and all orders passed therein are hereby quashed.