2025 (11) TMI 15 - HC - Companies Law

Anticipatory bail granted to chartered accountants; no prima facie conspiracy found, negligence warrants dereliction proceedings, not custody

Anuj Agarwal, Khem Chand, Mayank Goyal, Naresh Kumar, Pankaj Kumar Bansal, Harish Gupta, Sachin Singhal, Yogesh Gupta Versus Serious Fraud Investigation Officer.

HC granted anticipatory bail to the petitioning chartered accountants, finding no prima facie evidence of criminal conspiracy or receipt of undue favours ... Grant of anticipatory bail to Chartered Accountants - role of Chartered Accountants in obtaining loans and siphoning them off, or in their rotation - failure to inspect the statutory registers - Auditors did not follow the generally accepted accounting principles, accounting standards, and standard auditing practices required by professionals under the law and ethical code - HELD THAT:- The statutory auditors are paid professional fee as remunerations for their services in accordance with the rules or prevalent market practices. A perusal of the complaint or the reply filed by the consortium of banks, does not point towards a single averment that any of the petitioners-Chartered Accountants, who were statutory auditors, were paid remunerations which were disproportionate to the work they had done or was it more than the market rates or it was on the higher side, which would reflect that the SRS Group of Companies was compensating them for favourable audit reports. Needless to say, the company's funds can be withdrawn or transferred only by the company. If the Chartered Accountants had to be paid any money for undue favours, the only methods for such payment were either to inflate their remuneration/professional bills or to give them cash under the table or in kind, i.e., unlisted shares at discounted or below book value, jewellery, antiques, etc. It is clear that the petitioners, Chartered Accountants, had no role in obtaining bank loans. Thus, the only role this Court sees is the rotation of funds and the siphoning off of funds by the SRS Group of Companies. If the auditors were involved, there had to be a criminal conspiracy by the Chartered Accountants, including whether the Statutory Auditors or the Internal Auditors were the main controllers of the SRS Group, as mentioned (supra). There is no evidence that any of the statutory or internal auditors were paid or given undue favors, which would serve as a motive to favor the company in return. In the absence of any such undue favors, the culpability is reduced to dereliction of duty, for which custodial interrogation is not required. Section 212 of the Companies Act, 2013 empowers the Serious Fraud Investigation Office to investigate into affairs of Company. The powers of bail are subject to rigors of Section 212(6) of the Companies Act, 2013. However, except in strict liability cases or civil offences which are quasi criminal for recovery of the money and valuables, the criminal jurisprudence puts the primary burden on the accuser and not on the accused. The doctrine of reverse burden activates when any accused takes burden on themselves or the statutes place burden on such an accused. Even where the statutes put burden on the accused, the burden on such an accused shifts only after the accusers had discharged the primary burden. Regarding satisfying the statutory conditions for denying bail, needless to say, there has to be prima facie evidence to implicate the petitioners, Chartered Accountants of having conspired with the Directors or owners of the company in lieu of favors or some returns, and only then, the burden would shift upon them to explain the statutory burden under the tax laws and regulations. A perusal of the complaint, coupled with the reply filed by the State Bank of India, does not point to any such criminal conspiracy or undue favours. Thus, even the burden would not fall on the statutory auditors - Additionally, the petitioners, who are statutory auditors, are also entitled to bail on the principle of parity, as two of them, namely Ruchi Jain and Pankaj Mittal, were already granted bail by the trial Court vide orders dated 15.11.2022 and 28.03.2022, respectively. Regarding disbursal of loans from the loan taken by SRS Group from the consortium of banks, the non-inspection of statutory registers is to be seen in the light of the fact that the Income Tax department did not timely survey the individuals and corporate bodies who had obtained the loans. The manner in which the money was routed, rotated, and loans were disbursed points to a systematic failure by financial institutions, the Taxation departments, the Department of Income Tax, and the consortium of banks, all of whom failed to predict, track, and unearth such massive sham transactions. The investigators should have summoned or arrested all the accused involved and taken steps to recover the proceeds of crime. Instead of arresting, they preferred to complete the investigation without recovering the material object — i.e., the money that was usurped — and are now hunting for someone to blame. If there were intentional lapses by Chartered Accountants, why were they not arrested and subjected to a custodial investigation before the complaint was filed? The siphoning of massive funds points to failures not only of the Chartered Accountants but also of the Regulators and Tax Authorities, as well as loopholes in statutes and rules. The evidence might be prima facie sufficient to launch prosecution or to frame charges, but this Court is not considering the evidence at that stage, but is analyzing it for the stage of anticipatory bail. An analysis of the above does not justify custodial interrogation or pre-trial incarceration. The Investigators did not arrest the petitioner; if they intended to arrest the petitioner, it was not impossible - the petitions make out a case for anticipatory bail, subject to furnishing personal and surety bonds to the satisfaction of the trial Court, within 15 days from today, and subject to the compliance with all the terms and conditions of the bonds. Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether anticipatory bail under Section 438 CrPC (as applied to offences under the Companies Act) should be granted to chartered accountants accused of offences under Sections 143 r/w 147, 448 and related provisions of the Companies Act, 2013, arising from alleged falsification of financial statements and diversion/siphoning of bank funds. 2. Whether the statutory rigours of Section 212(6) of the Companies Act, 2013 (reverse burden and heightened conditions for bail in offences under Section 447/447-class offences) apply to the accused auditors and how those rigours affect the Court's exercise of bail jurisdiction. 3. Whether there is prima facie evidence of criminal conspiracy, undue favour or culpable mens rea on the part of the statutory and internal auditors sufficient to deny anticipatory bail (i.e., whether custodial interrogation is necessary to further the investigation). 4. Whether parity with co-accused granted bail or the absence of arrest during investigation are valid grounds to refuse or grant anticipatory bail to the auditors. 5. Whether systemic failures by banks, regulators and investigators (including non-recovery of proceeds before filing complaint) bear on entitlement to anticipatory bail for the auditors. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Grant of anticipatory bail to auditors accused under Companies Act provisions Legal framework: Anticipatory bail under Section 438 CrPC; offences under Sections 143 r/w 147, 448 (and related sections) of the Companies Act, 2013; cognizance under Section 200 CrPC and investigation under Section 212 of the Companies Act. Precedent treatment: The Court referred to the principles articulated by the Supreme Court (including the three-Judge decision cited in the judgment) emphasising stringent approach to economic offences and the need to balance personal liberty with effective prosecution; the decision in Serious Fraud Investigation Office v. Nittin Johari was considered. Interpretation and reasoning: The Court examined the complaint, SFIO report and bank replies to evaluate the auditors' role. The investigation attributes falsified financial statements, non-disclosure of related party transactions, failure to verify stock and debtors, and reliance on management representations. However, the Court found the documentary record and bank filings indicate that banks did not rely on auditors' certifications as a precondition for sanctioning credit and in many instances loans were granted without auditors' statements or physical stock assessments. The Court noted absence of allegations of disproportionate payments, quid pro quo, or other direct evidence of corruption or motive for deliberate concealment by auditors. Ratio vs. Obiter: Ratio - where the prosecution's material does fails to show prima facie involvement in obtaining loans or proof of undue favour/motive, anticipatory bail may be justified; Obiter - general observations about auditors' ethical duties and dereliction vs. criminality. Conclusion: The Court held that, on the material before it, anticipatory bail was maintainable for the auditors, subject to conditions, because the allegations primarily indicate dereliction of professional duty rather than demonstrable criminal conspiracy warranting custodial interrogation. Issue 2 - Application and effect of Section 212(6) Companies Act (reverse burden/rigours) on bail Legal framework: Section 212(6) mandates that for offences covered by Section 447 (fraud), bail shall not be granted unless public prosecutor given opportunity to oppose and, where opposed, court is satisfied there are reasonable grounds for believing accused is not guilty and not likely to offend on bail. Precedent treatment: The Court relied on statutory language and authoritative guidance that Section 212(6) imposes a reverse burden/heightened conditions but does not nullify the Court's power to grant bail; principles under CrPC and judicial pronouncements on bail in economic offences were applied. Interpretation and reasoning: The Court analyzed the twin conditions of Section 212(6). It emphasised that the reverse burden is triggered only if prima facie evidence implicates the accused in offences of the nature contemplated by Section 447. The Court found the prosecution had not established prima facie a conspiracy or active culpability by the auditors sufficient to shift the evidential burden onto them. The Court further noted Section 212(7) makes the limitation additional to existing CrPC principles; therefore, the Court must record satisfaction on the statutory twin conditions before denying bail. Ratio vs. Obiter: Ratio - Section 212(6) imposes a statutory hurdle but its protective effect is conditional on prima facie material; Obiter - observations on legislative intent to protect financial stakeholders and the role of reverse burden in severe cases. Conclusion: The statutory rigours did not, on the present material, preclude grant of anticipatory bail because the prosecution had not discharged the prima facie threshold required to invoke the reverse burden decisively against the auditors. Issue 3 - Existence of prima facie evidence of conspiracy/culpable mens rea of auditors Legal framework: Criminal liability for fraud under Section 447/448 (including 'knowing' falsification) requires proof of knowledge, intent to deceive or connivance; auditors' professional obligations under auditing and accounting standards relevant to establishing mens rea vs. negligence/dereliction. Precedent treatment: The Court considered authority stressing need for careful prima facie appraisal at bail stage and that custodial interrogation is justified only where necessary for furtherance of investigation. Interpretation and reasoning: The Court scrutinised SFIO findings alleging failures in due diligence, omission of related-party disclosure, and adoption of circular transactions. It observed absence of allegations of unjust enrichment, excessive remuneration, or other indicia of quid pro quo that would supply motive for deliberate criminality. The Court distinguished between professional negligence/dereliction (which may attract regulatory/civil consequences) and criminal conspiracy to siphon funds (which requires stronger material). The Court further noted investigators could have arrested earlier if custodial interrogation were deemed necessary. Ratio vs. Obiter: Ratio - where prosecution lacks material of active connivance or motive, dereliction does not ipso facto justify custodial arrest; Obiter - commentary on investigative omissions and systemic lapses. Conclusion: The material did not disclose sufficient prima facie evidence of conspiracy or mens rea to deny anticipatory bail; culpability is, at most, negligent performance of audit duties which does not necessitate pre-trial custody. Issue 4 - Parity with co-accused and non-arrest during investigation as grounds on bail Legal framework: Principle of parity in bail jurisprudence; relevance of prior orders granting or refusing bail to co-accused; significance of non-arrest during investigation in assessing necessity of custodial interrogation. Precedent treatment: The Court applied established parity principles and examined reasons for different orders in co-accused cases. Interpretation and reasoning: The Court analysed co-accused bail orders and found relief granted to others was on particular facts (custody period or peculiar circumstances) not on merits which would bind the present determination. Nevertheless, parity supported auditors' entitlement where allegations against them were not materially stronger. The Court also found that prolonged non-arrest during investigation undermined the assertion that custodial interrogation of the auditors was essential and pointed to investigative choices inconsistent with need for custody. Ratio vs. Obiter: Ratio - parity and non-arrest during probe are relevant factors militating towards grant of anticipatory bail where prima facie culpability is not established; Obiter - remarks on differing fact patterns for co-accused orders. Conclusion: Parity and the investigative approach weighed in favour of grant of anticipatory bail to the auditors, subject to usual conditions. Issue 5 - Impact of systemic failures by banks, regulators and investigators on bail assessment Legal framework: Bail jurisprudence requires assessment of totality of circumstances, including systemic factors that bear on necessity of custodial measures; role of banks and regulators in detection/prevention of fraud. Precedent treatment: The Court relied on principles that responsibility for adequate investigation and recovery lies with prosecuting agencies and complainants, and that failure to recover proceeds or arrest co-accused before complaint is a relevant consideration. Interpretation and reasoning: The Court recorded extensive documentary material showing banks' routine lending practices, lack of reliance on auditors' certificates in loan sanction, and that banks and tax/regulatory authorities did not timely detect or prevent round-tripping and related transactions. The Court criticised investigators for not seeking recovery or arrest where allegedly necessary before filing complaint, and observed these systemic lapses reduce the justification for custodial interrogation of auditors absent stronger direct evidence of criminality. Ratio vs. Obiter: Ratio - systemic failures and investigative choices are pertinent to the bail exercise; Obiter - wider policy observations about regulatory oversight and recovery efforts. Conclusion: Systemic and investigative failures undermined the prosecution's case for custodial custody of auditors at the anticipatory bail stage, supporting grant of bail subject to conditions. CONCLUSIVE DIRECTIONS AND RESULT The Court concluded that, on the material then before it, anticipatory bail should be granted to the petitioning statutory and internal auditors (making interim orders absolute), subject to furnishing personal and surety bonds to the satisfaction of the trial Court within the stipulated time and compliance with bond conditions. The Court emphasised that the grant rests on absence of prima facie material of active connivance, undue favour or motive, and on statutory requirements of Section 212(6) not being satisfied by the prosecution's material.