TaxTMI 
TaxTMI 
2020 (9) TMI 852
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....on in respect of offences under Sections 128, 129, 448 read with Section 447 of the Companies Act, 2013 (hereinafter referred as 'Companies Act'). The petitioner is one of the 287 persons/entities that are accused in the said complaint and against whom summons have been directed to be issued in terms of the impugned summoning order. However, the scope of the present petition is confined in the direction to issue summons to the petitioner. 2. The petitioner was Punjab National Bank Limited's nominee on the Board of Directors of Bhushan Steel Limited (hereinafter referred as 'BSL') at the material time. The principal issue that arises for consideration in this case is whether the petitioner can be prosecuted for the alleged fraud committed by BSL and/or promoters solely for 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 pu....
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....ing manpower while the remaining companies were used for diversion of funds from BSL. Category D comprises of eight companies, which were allegedly managed by entry operators primarily engaged in providing accommodation entries. These were used as a conduit for diversion of funds from BSL and other associated companies of the Promoters. It is alleged that these companies were managed by dummy directors for the benefit of the Promoters. 5. The Promoters were required to maintain an appropriate debt equity ratio in BSL and for the said purpose, were required to infuse capital in the said companies. SFIO alleges that the Promoters aided and assisted by their employees and close associates, had through a series of concerted actions using a web of companies, siphoned funds 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 reflect....
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....r the purpose of this petition. Suffice it to state that the gravamen of SFIO's allegation is that the Promoters had borrowed funds in companies from various lenders including Punjab National Bank (hereinafter referred as 'PNB') and State Bank of India (hereinafter referred as 'SBI') and had through an elaborate scheme siphoned off the said funds through other companies for their gains. It is alleged that to achieve the said end, they were assisted by various other persons and employees. 9. Insofar as the petitioner is concerned, the petitioner was a Nominee Director of PNB on the Board of BSL. 10. On 12.05.2015, the petitioner was directed by the Competent Authority of PNB to be inducted on the Board of BSL as PNB's Nominee Director. 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 ....
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....er's name is not mentioned in paragraph 70 of the complaint and is also not mentioned amongst the individuals who are specifically involved in the said culpable acts. Paragraphs 71 to 73 of the complaint relates to inducing lender banks to grant facilities to BSL. Paragraphs 71 to 73 set out the roles of different individuals who are liable to be prosecuted for inducing lenders to give credit to BSL. The petitioner's name does not feature as one of the said persons. 13. Paragraphs 75 to 79 of the complaint sets out allegations against different individuals allegedly involved in the falsification of accounts and non-discharge of duties by the audit committee. Mr Mishra pointed out that the petitioner's name is not mentioned 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 discha....
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.... the said order. He submitted that since there is no specific allegation against the petitioner in the complaint, the Court could not have proceeded on the basis that the petitioner had connived for falsification of the account. He submitted that apart from the fact that no such allegation had been made, there was also no material to support the said view. 17. Mr Mishra referred to a letter dated 19.01.2015 issued by the Department of Financial Services, Ministry of Finance, whereby it confirmed that the provisions of Section 2(60) and 161(3) of the Companies Act are inapplicable to Nominee Directors of Public Sector Banks. It noted that the Statutory Public Sector Banks had specific provisions in the statutes 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 ....
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....17. The said statements had been approved by the Board of Directors of BSL and the petitioner was a party to approving the said financial statements. The said financial statements were not only not in compliance with IndAS but also did not reflect the true and fair view of the affairs of BSL. Thus, the petitioner also had a key role in the fraud by BSL. 19. He further submitted that the Circular dated 19.01.2015 issued by the Department of Financial Services, Ministry of Finance, Government of India could not override the provisions of the Companies Act. He also submitted that the said letter would have no relevance while examining the applicability of provisions of Sections 447 and 448 of the Companies 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....
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....issued by the Central Vigilance Commission (hereinafter referred as 'CVC') accepting the representation made by the petitioner and the Nominee Director of SBI that they did not get sufficient time at the Board Meeting to analyze the financial statements. It was accepted that it was not possible for them to examine the same in view of the limited time that is available for discussion of the agenda items at the Board Meetings. It was also pointed out that BSL is a Public Listed Company and its financials cannot be disclosed prior to the Board Meeting. 23. The relevant extract of the Office Memorandum dated 27.09.2019 issued by the CVC and accepted by the Ministry of Finance, Government of India 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 Re....
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....ncial accounts for the years ended 31.03.2016 and 31.03.2017 were considered and were approved by the Board of Directors of BSL. The financial statements of BSL for the year ended 31.03.2016 were approved at the meeting of the Board of Directors of BSL held on 06.08.2016. However, the petitioner was not present at the said meeting and was granted leave of absence. Concededly, the petitioner cannot be proceeded in respect of the financial statements and other reports as approved by the Board of Directors of BSL at the meeting held on 06.08.2016. The petitioner is, essentially, being proceeded on account of his participation in the meeting of the Board of Directors of BSL held on 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 fi....
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....also reflect the recast figures of stock-in-transit and other current assets pertaining to previous years. There does not appear to be any controversy that the figures as recast reflect a true and fair view. However, it is alleged that the figures of current assets reflected in the statements of earlier years was highly inflated and the same are also indicated in the statements pertaining to the financial year ended 31.03.2017 for the limited purpose of reflecting the figures that would have been reflected in financial statements of those years if IndAS was complied with. 29. The financial statements of BSL for the year ended 31.03.2017, which were approved by 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 a....
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....Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both." 33. The plain language of Section 128(6) and Section 129(7) of the Companies Act indicates that only the executives of the company or any other person charged by the Board of Directors to comply with the provisions of the said Sections would be liable for 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: "..... ....
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....ntment by the corresponding new bank of one or more directors of such company, such provision and any appointment of directors made in pursuance thereof shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956), or in any other law for the time being in force or in the memorandum, articles of association or any other instrument relating to the Company, and any provision regarding share qualification, age limit, number of directorships, removal from office of directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any director 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 r....
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....tted by or on behalf of the company." 40. The petitioner is also being proceeded against under Section 448 read with Section 447 of the Companies Act. Sections 447 and 448 of the Companies Act are set out below: "447. Punishment for Fraud.- Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less 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....
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....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 in the absence of a statutory provision imputing such liability. They can, of course, be proceeded against if it is established that they had individually committed the offence. Further, Section 16A(2)(b) of the Banking Companies (Acquisition and Transfer of Undertakings) Act expressly grants immunity to a director nominated by a bank for any acts done 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....
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....al statements, which he knew to be not fairly and truly reflecting the affairs of BSL. 51. The Learned ASG had submitted that the alleged role of the petitioner ought to be viewed on the basis of the Investigation Report submitted by SFIO, which by virtue of paragraph 96 of the complaint was sought to be incorporated as a part of the said complaint. In view of the aforesaid submission, this Court had called upon the learned ASG to refer to the relevant paragraphs of the Investigation Report submitted by SFIO, which would reflect the allegation 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 respo....
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....s present in the meeting held on 5th July 2016 was also recorded. During his deposition he submitted that he relied upon the audited accounted submitted by the auditors of "BSL". The statement or information from other directors of Board of "BSL" was examined and it was observed that they simply rely on the observation made by "BBS" and "NJ" with regard to finalization of financials of "BSL". It also observed one of the independent director Pankaj Sharma was also drawing salary from one of 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 gi....
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....entions that he was a Nominee Director of PNB and was present in the meeting of the Board of Directors held on 05.07.2017 (incorrectly mentioned as 05.07.2016 in the Investigation Report) and that he had relied on the audited accounts submitted by the Auditors of BSL. Clearly, paragraph 4.94 of the Investigation Report does not support any allegation that the petitioner was complicit or had connived with the Promoters. On the contrary, it indicates that the petitioner 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 as....
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....ccess not only to financial statements but other reports that had raised a number of red flags about BSL. However, despite the same, they had failed in their responsibility to object to the fraudulent misstatement. According to SFIO, the same made them liable to be proceeded against. 55. It is at once clear that there is no allegation in paragraph 5.12.11 and 5.13.14 of the Investigation report that the Nominee Directors were aware 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....
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....10). 61. In Mehmood Ul Rehman v. Khazir Mohammad Tunda and Ors.: (2015) 12 SCC 420, the Supreme Court has held as under: "22. ....The Code of Criminal Procedure requires speaking order to be passed under Section 203 Cr.P.C. when the complaint is dismissed and that too the reasons need to be stated only briefly. In other words, the Magistrate is not to act as a post office in taking cognizance of each and every 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 inher....
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....ly suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the order itself. The order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against the accused, though the order need not contain 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....