2025 (8) TMI 1482 - HC - Companies Law

SFIO activation under Section 212 valid on RP representation; LOC lawful during Section 447 criminal probe; appeal allowed

Union of India and Anr. and Bank of Baroda Versus Prashant Bothra and Ors.

Union of India and Anr. and Bank of Baroda Versus Prashant Bothra and Ors. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the statutory investigation agency formed under the Companies Act, 2013 (SFIO) may issue a Look Out Circular (LOC) while conducting investigations under Section 212 of the Companies Act, 2013. 2. Whether a banking institution may issue a Look Out Circular (LOC) without first classifying the borrower's account as a 'fraud' under the Reserve Bank of India's Master Directions on Frauds. 3. What reliefs or directions are appropriate where (a) an investigating agency or bank issues LOCs in the context of corporate fraud and insolvency proceedings and (b) an investigating agency refuses or delays registration of a criminal complaint lodged by a bank. ISSUE-WISE DETAILED ANALYSIS - I. Power of SFIO to issue LOC while investigating under Section 212 Legal framework: Sections 211-219 (Chapter XIV) and Section 447 of the Companies Act, 2013 govern SFIO's constitution, powers to investigate (including powers under Sections 217, 219), obligations of persons to assist, arrest powers under Section 212(8), report and prosecution route under Section 212(11)-(15), and the offence and punishment framework for fraud under Section 447. Precedent treatment: The memorandum consolidating LOC guidelines dated February 22, 2021 (Ministry of Home Affairs) - which permits an officer of SFIO of prescribed rank to request/issue LOCs and allows LOCs in exceptional cases where economic interest of India is at stake - and judicial recognition that NPAs have public-interest implications were applied. Interpretation and reasoning: SFIO was validly activated by the Central Government pursuant to a representation by the Resolution Professional; the resultant investigation under Section 212 encompassed inquiry into offences punishable under Section 447. Section 212(4)/(8)/(11-15) and the MHA memorandum (clause 6 and subclauses) together permit SFIO to take preventive steps, including issuance of LOCs, to ensure availability of persons for criminal investigation. Clause 6(H) of the memorandum does not require prior conviction; it requires that the person be investigated for cognizable offences. Given the gravity of alleged defaults and their public-interest dimension (large NPA), SFIO's apprehension of flight risk had objective basis (one respondent was intercepted at airport). Ratio vs. Obiter: Ratio - SFIO, properly authorized under Section 212 and consistent with MHA guidelines, may issue LOCs while investigation is pending; the absence of conviction is not a barrier to issuing LOCs when cognizable offences are under investigation. Obiter - observations on the comparative quantum of punishments between Companies Act fraud provisions and new penal code provisions and general remarks on SFIO's investigatory complexity. Conclusion: The Court answers Issue I affirmatively - SFIO was entitled to issue the LOC in the circumstances described and the issuance is not vitiated for want of material at that stage given the representation of the Resolution Professional and the statutory scheme. ISSUE-WISE DETAILED ANALYSIS - II. Power of a bank to issue LOC absent prior classification of account as 'fraud' under RBI Master Directions Legal framework: Reserve Bank of India Master Directions on Frauds (Fraud Classification and Reporting by Commercial Banks and Selected FIs) govern classification of accounts as fraud and reporting obligations (including lodging criminal complaints). The Memorandum dated February 22, 2021 prescribes LOC issuance procedures and recognizes banks as originating agencies entitled to request LOCs where cognizable offences are involved. Precedent treatment: Supreme Court authority (Rajesh Agarwal) establishes that principles of natural justice are not attracted at the stage of reporting a criminal offence and that criminal complaints based on Master Directions need not be preceded by hearing of the borrower; Master Directions are binding on banks. Interpretation and reasoning: Classification of an account as 'fraud' under the Master Directions largely engages civil consequences and procedural safeguards (natural justice) where adverse classification is made by a bank. However, the duty to lodge a criminal complaint upon encountering materials disclosing cognizable offences is distinct and immediate; it should not be made contingent on completion of internal fraud-classification processes. The MHA memorandum and Master Directions contemplate issuance of LOCs by banks in respect of persons suspected of cognizable offences. Requiring a bank to await formal fraud-classification would impede criminal investigation and enable flight, frustrating recovery and public-interest considerations tied to NPAs. The investigatory and reporting obligations of banks under the Master Directions and the duty of investigating agencies to register complaints (per Rajesh Agarwal) were applied; the Court found the investigating agency's refusal to register inconsistent with that ratio. Ratio vs. Obiter: Ratio - A bank may issue a LOC and lodge a criminal complaint without first completing an internal fraud-classification under the Master Directions; criminal reporting obligations and LOC issuance are not dependent on prior fraud classification. Obiter - policy and economic observations on NPAs as public-interest harms and enumerations of statutory recovery tools available to banks. Conclusion: The Court answers Issue II affirmatively - a bank may validly issue an LOC even if it has not yet classified the account as a 'fraud' under the Master Directions, where materials disclose cognizable offences and flight risk exists. ISSUE-WISE DETAILED ANALYSIS - III. Appropriate reliefs/directions where LOCs issued and complaint registration delayed/refused Legal framework: Obligations of investigating agencies to register FIR/complaint where cognizable offences are disclosed (as held in Rajesh Agarwal), interplay between Section 212(2) prohibiting other agencies from investigating offences under the Companies Act in certain circumstances, and powers of local police to investigate subject to statutory limitations. Precedent treatment: Rajesh Agarwal was applied to require registration of criminal complaints without prior hearing and to emphasize investigating agencies' duties. Interpretation and reasoning: The CBI's failure or delay to register the bank's complaint was found contrary to the legal position that criminal complaints disclosing cognizable offences must be registered; given the need for expeditious action and to prevent frustration of criminal investigations, conditional directions were warranted. Recognizing the primacy of Section 212 in certain respects, the Court directed a time-bound remedy: CBI to register and investigate within seven days or else transmit records to the jurisdictional police (Deputy Commissioner of Police) who must form a Special Investigation Team (SIT) to investigate expeditiously while respecting prohibitions in Section 212 to the extent applicable. Ratio vs. Obiter: Ratio - Where an investigating agency unlawfully delays or refuses to register a complaint disclosing cognizable offences, the court can direct registration within a stated period and, failing that, mandate transmission of records to local police and constitution of a SIT with specific instructions to investigate in conformity with statutory restraints. Obiter - directions on composition of SIT and emphasis on consideration of Section 212 constraints during local investigation. Conclusion / Reliefs: The impugned order quashing LOCs was set aside. Directions issued: CBI to register the bank's complaint as an FIR and proceed within seven days; if CBI does not, it must forward records to the jurisdictional police immediately thereafter, and the local police must form an SIT to investigate expeditiously while taking into account Section 212's limitations. All connected appeals and applications disposed of without costs.