Fraud, Penalties and the Closing Provisions

First proviso: public interest. Where the fraud involves public interest, the term of imprisonment shall not be less than three years.

Second proviso: the lesser limb. Where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover, whichever is lower, and does not involve public interest, the punishment is imprisonment up to five years, or fine up to fifty lakh rupees, or both.

Note three things about the structure. The threshold is the lower of the two figures, not the higher. The main limb has a minimum sentence, and the fine cannot be less than the amount of the fraud. And the lesser limb has no minimum at all and permits a fine alone.

The Explanation defines the offence.

"Fraud", in relation to the 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 gain or wrongful loss.

The last eight words are the heart of it. Fraud is complete on the intent; no gain or loss need be shown.

"Wrongful gain" means the gain by unlawful means of property to which the person gaining is not legally entitled; "wrongful loss" the loss by unlawful means of property to which the person losing is legally entitled.

Where section 447 is invoked in this book. Section 7(5) and (6), false information at incorporation; section 206(4), business carried on for a fraudulent or unlawful purpose; section 213, fraud proved after a Tribunal-ordered investigation; section 229, destroying or falsifying documents in an investigation; section 251, a fraudulent application to strike a name off; section 339(3), being knowingly a party to fraudulent conduct of business; and sections 448 and 449 below.

False statements and false evidence: sections 448 and 449

Section 448. Save as otherwise provided, if in any return, report, certificate, financial statement, prospectus, statement or other document required by or for the purposes of the Act or the rules, a person makes a statement (a) which is false in any material particulars, knowing it to be false, or (b) which omits any material fact, knowing it to be material, he shall be liable under section 447.

Note that clause (b) makes an omission an offence, and note that liability is under section 447, so the punishment is that section's.

Section 449. Save as otherwise provided, a person who intentionally gives false evidence (a) upon any examination on oath or solemn affirmation authorised under this Act, or (b) in any affidavit, deposition or solemn affirmation in or about the winding up of a company or otherwise in or about any matter arising under this Act, is punishable with imprisonment of not less than three years extending to seven years and with fine which may extend to ten lakh rupees.

The residual and repeated defaults: sections 450, 451 and 454A

Section 450. Where a company, any officer of a company or any other person contravenes any provision of the Act or the rules, or any condition, limitation or restriction subject to which an approval, sanction, consent, confirmation, recognition, direction or exemption was granted, and no penalty or punishment is provided elsewhere, the company and every officer in default or such other person is liable to a penalty of ten thousand rupees, and for a continuing contravention a further one thousand rupees for each day after the first, subject to a maximum of two lakh rupees for a company and fifty thousand rupees for an officer in default or other person.

Section 451: repeated offence. Where a company or an officer commits an offence punishable either with fine or with imprisonment, and the same offence is committed for the second or subsequent occasion within three years, the company and every officer in default is punishable with twice the amount of fine for that offence, in addition to any imprisonment provided for it.

Section 454A: repeated penalty. Where a company, an officer or any other person having already been subjected to a penalty for a default again commits such default within three years from the date of the order of the adjudicating officer or the Regional Director, he is liable for the second or subsequent default to twice the amount of penalty provided for it.

Sections 451 and 454A are the same idea in the two enforcement streams, prosecution and adjudication, and both use a three year window.

Property, names and adjudication: sections 452 to 454

Section 452(1): wrongful withholding. If an officer or employee of a company (a) wrongfully obtains possession of any property, including cash, of the company, or (b) having such property in his possession, wrongfully withholds it or knowingly applies it for purposes other than those expressed or directed in the articles and authorised by this Act, he is, on the complaint of the company or of any member, creditor or contributory, punishable with fine of not less than one lakh rupees extending to five lakh rupees.

Section 452(2). The court may also order him to deliver up or refund, within a time it fixes, the property or cash and the benefits derived from it, or in default to undergo imprisonment up to two years.

The proviso is a humane one. Imprisonment shall not be ordered for wrongful possession or withholding of a dwelling unit if the court is satisfied that the company has not paid him amounts relating to the provident fund, pension fund, gratuity fund or other welfare fund, or compensation or liability for compensation under the Workmen's Compensation Act, 1923 for death or disablement.

And recall section 435(1), which excepts section 452 from the offences for which Special Courts are established.

Section 453: improper use of "Limited". A person who trades or carries on business under a name of which "Limited" or "Private Limited", or any contraction or imitation of them, is the last word or words, without being duly incorporated with limited liability or as a private company with limited liability, is punishable with fine of not less than five hundred rupees extending to two thousand rupees for every day the name is used.

Section 454: adjudication of penalties.

• (1) and (2) the Central Government may, by order published in the Official Gazette, appoint officers not below the rank of Registrar as adjudicating officers, specifying their jurisdiction;
• (3) the adjudicating officer may by order (a) impose the penalty on the company, the officer in default or any other person, stating the non-compliance or default, and (b) direct them to rectify the default where he thinks fit. Proviso: where the default relates to section 92(4) or section 137(1) or (2) and has been rectified before, or within thirty days of, the notice, no penalty shall be imposed and the proceedings are deemed concluded;
• (4) he shall give a reasonable opportunity of being heard before imposing any penalty;
• (5) and (6) an appeal lies to the Regional Director having jurisdiction, within sixty days of receipt of the copy of the order, in the prescribed form and on the prescribed fees;
• (7) the Regional Director may, after hearing the parties, confirm, modify or set aside the order; and
• (8) failure to comply with an order under sub-section (3) or (7) is itself punished, the company and the officer in default being liable as the sub-section provides.

Dormant companies: section 455

Section 455(1). A company formed and registered for a future project or to hold an asset or intellectual property and having no significant accounting transaction, or an inactive company, may apply to the Registrar for the status of a dormant company.

The Explanation defines both expressions. An "inactive company" is one which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years. A "significant accounting transaction" is any transaction other than the payment of fees to the Registrar, payments made to fulfil the requirements of this Act or any other law, the allotment of shares to fulfil the Act's requirements, and payments for the maintenance of its office and records.

Section 455(2) to (6). The Registrar allows the status and issues a certificate, maintains a register of dormant companies, and shall, where a company has not filed financial statements or annual returns for two consecutive financial years, issue a notice and enter its name in that register. A dormant company must keep the prescribed minimum number of directors, file the prescribed documents and pay the annual fee to retain the status, and may become active on application; and the Registrar shall strike off the name of a dormant company which fails to comply with the section.

Compare section 248(1)(c), under which a company that has carried on no business for two financial years and has not applied for dormant status may have its name struck off. Dormancy is the lawful alternative to being struck off.

Protection, secrecy, delegation and condonation: sections 456 to 462

Section 456. No suit, prosecution or other legal proceeding shall lie against the Government, any officer of the Government or any other person in respect of anything done or intended to be done in good faith under the Act or the rules or orders, or in respect of the publication of any report, paper or proceedings by or under the Government's authority.

Section 457. Notwithstanding any other law, the Registrar, any officer of the Government or any other person shall not be compelled to disclose to any court, Tribunal or authority the source from which he got any information which led the Central Government to order an investigation under section 210 or which is or has been material or relevant in connection with such investigation.

That is the informer's privilege, and it exists because investigations begin with people who will not come forward if they can be named.

Section 458. The Central Government may, by notification and subject to specified conditions, limitations and restrictions, delegate any of its powers or functions under this Act other than the power to make rules; a copy of every such notification shall be laid before each House of Parliament.

Section 459. Where the Central Government or the Tribunal is required or authorised to accord approval, sanction, consent, confirmation or recognition, to give any direction, or to grant any exemption, it may do so subject to such conditions, limitations or restrictions as it thinks fit, and may, on contravention of a condition, rescind or withdraw it; and every application for such approval or direction shall be accompanied by the prescribed fees, different fees being prescribable for different matters or different classes of companies.

Section 460: condonation of delay. Notwithstanding anything in this Act, where an application required to be made to the Central Government is not made in time, or a document required to be filed with the Registrar is not filed in time, the Central Government may, for reasons to be recorded in writing, condone the delay.

Section 461. The Central Government shall cause a general annual report on the working and administration of this Act to be prepared and laid before each House of Parliament within one year of the close of the year to which it relates.

Section 462: exemptions. The Central Government may, in the public interest, by notification, direct that any provisions of this Act shall not apply to a class of companies, or shall apply with exceptions, modifications and adaptations; the draft must be laid before each House of Parliament for thirty days, and if both Houses agree in disapproving it, it shall not be issued, or if both agree on a modification, it shall issue only as modified; prorogation and adjournments of more than four consecutive days are excluded; and every notification issued shall be laid before each House.

That is the same parliamentary procedure as section 406 for Nidhis, and it is worth learning once for both.

Relief, partnerships and the repeal: sections 463 to 470

Section 463: the court's power to relieve. If, in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears that he is or may be liable, but that he has acted honestly and reasonably, and that having regard to all the circumstances including those connected with his appointment he ought fairly to be excused, the court may relieve him wholly or partly on such terms as it thinks fit. Proviso: in a criminal proceeding the court has no power to grant relief from any civil liability which may attach in respect of the same. The section also allows an officer apprehending a claim to apply to the court, which may relieve him as if the proceeding had been brought.

Section 464: large associations. No association or partnership of more than such number of persons as may be prescribed shall be formed for carrying on any business for gain, unless it is registered as a company under this Act or formed under any other law; proviso, the prescribed number shall not exceed one hundred. The sub-section does not apply to (a) a Hindu undivided family carrying on business or (b) an association or partnership formed by professionals governed by special Acts. Every member of an association carrying on business in contravention is punishable with fine up to one lakh rupees and is personally liable for all liabilities incurred in that business.

Section 465: the repeal. The Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961 stand repealed, with savings: until the date notified under section 434 for transfer of matters to the Tribunal, the 1956 Act's provisions about the jurisdiction of the Company Law Board and the court continue to apply; and provisions referred to in a notification under section 67 of the Limited Liability Partnership Act, 2008 continue until replaced.

Section 465(2) preserves eleven categories of thing done under the repealed Acts, of which the ones worth naming are: anything done or action taken is deemed done under the corresponding provisions of this Act; orders, rules, notifications, appointments, conveyances, mortgages, deeds and resolutions continue in force; principles and rules of law, jurisdiction, forms and practice are unaffected; persons appointed to office are deemed appointed under this Act; the registration offices continue; the incorporation of companies registered under the repealed enactments continues to be valid, this Act applying to them as if they were registered under it; registers and funds are deemed constituted under this Act; pending prosecutions continue in the same court; inspections, investigations and inquiries ordered continue; and matters filed with the Registrar, Regional Director or Central Government and not fully addressed are concluded under the 1956 Act despite its repeal. Section 465(3) preserves the general application of section 6 of the General Clauses Act, 1897.

Section 466. The Company Law Board stands dissolved on the constitution of the Tribunal and the Appellate Tribunal, with provisions for its Chairman, Vice-Chairman, Members and staff, and with no claim to compensation for premature termination.

Section 467. The Central Government may, by notification, alter any of the regulations, rules, Tables, forms and other provisions contained in any of the Schedules, the alteration having effect as if enacted in this Act and being laid before each House of Parliament.

Section 468: rules for winding up. The Central Government shall make rules consistent with the Code of Civil Procedure, 1908 providing for all matters relating to the winding up of companies which the Act requires to be prescribed. Such rules may in particular provide for the mode of proceedings for winding up by the Tribunal; the holding of meetings of creditors and members under section 230; giving effect to the provisions on the reduction of capital; applications to the Tribunal generally; the holding of meetings to ascertain the wishes of creditors and contributories; the settling of lists of contributories and the rectification of the register of members, and the collection and application of the assets; the payment, delivery, conveyance, surrender or transfer of money, property, books or papers to the liquidator; the making of calls; and the fixing of a time within which debts and claims shall be proved. Until those rules are made, the rules made by the Supreme Court on those matters continue in force, references in them to the High Court in relation to winding up being construed as references to the Tribunal.

Sections 469 and 470. The Central Government may make rules for carrying out the provisions of this Act, a contravention of a rule being punishable with fine up to five thousand rupees and a further five hundred rupees for every day of a continuing contravention, every rule and every regulation made by the Securities and Exchange Board under the Act being laid before each House of Parliament; and it may, by order published in the Official Gazette, make provision for removing difficulties, within the period section 470 allows.

A worked example

Ghansoli Metals Limited, with a turnover of fifty crore rupees, is found to have obtained credit of thirty lakh rupees on the strength of accounts its finance director knew to be false.

Which limb of section 447? One per cent of the turnover is fifty lakh rupees; the fixed figure is ten lakh rupees. The threshold is the lower, that is ten lakh. The fraud of thirty lakh exceeds it, so the main limb applies: imprisonment of not less than six months extending to ten years, and fine of not less than thirty lakh rupees extending to ninety lakh rupees.

Had the fraud been of six lakh rupees and had it not involved public interest, the second proviso would have applied: imprisonment up to five years, or fine up to fifty lakh rupees, or both, with no minimum.

Had it involved public interest, the first proviso would have fixed a minimum of three years.

Was gain necessary? No. Under the Explanation, fraud includes an act, omission, concealment or abuse of position done with intent to deceive, to gain undue advantage from, or to injure the interests of the company, its shareholders, creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

The false accounts themselves. The finance director made a statement in a financial statement required for the purposes of the Act which was false in a material particular, knowing it to be false, and which omitted a material fact knowing it to be material. He is liable under section 447 by force of section 448.

In the investigation. Examined on oath by an inspector under section 217(4), he intentionally gives false evidence. That is section 449: imprisonment of three to seven years and fine up to ten lakh rupees.

A different officer. The storekeeper has kept a company vehicle at his house since he was suspended. On the complaint of the company or of any member, creditor or contributory, he is punishable under section 452(1) with fine of one lakh to five lakh rupees, and the court may order him to deliver up the vehicle and the benefits derived from it within a fixed time, or undergo imprisonment up to two years. But if what he is holding is a dwelling unit provided by the company, and the company has not paid him his provident fund or gratuity, the court shall not order imprisonment.

A small default. The company fails to comply with a requirement for which the Act provides no specific punishment. Under section 450 the company and every officer in default are liable to ten thousand rupees, with one thousand rupees a day for a continuing contravention, up to two lakh rupees for the company and fifty thousand rupees for an officer.

Adjudication. The penalty is imposed not by a court but by an adjudicating officer, an officer of the Central Government not below the rank of Registrar, who may also direct the default to be rectified, and who must first give a reasonable opportunity of being heard. The company appeals to the Regional Director within sixty days of receiving the order, and the Regional Director may confirm, modify or set aside it: section 454.

A late annual return. The company filed its section 92(4) annual return late but rectified the default within thirty days of the adjudicating officer's notice. By the proviso to section 454(3), no penalty shall be imposed and the proceedings are deemed concluded.

Doing it again. Two years later the company commits the same default. Under section 454A it is liable to twice the penalty; and if the matter were a prosecution rather than an adjudication, section 451 would make it twice the fine, in addition to any imprisonment.

An honest officer. An independent director is sued for breach of duty in relation to the false accounts. He knew nothing, asked the questions a careful director would ask, and was deceived. Under section 463 the court may relieve him wholly or partly if he acted honestly and reasonably and, having regard to all the circumstances including those connected with his appointment, ought fairly to be excused. In a criminal proceeding the court may relieve him of the criminal liability but not of civil liability attaching in respect of the same matter.

A dormant sister company. Ghansoli Holdings Private Limited was formed to hold a plot for a future project and has had no significant accounting transaction, its only payments being fees to the Registrar and the maintenance of its office and records. It may apply for the status of a dormant company, and the Registrar will issue a certificate and enter it in the register of dormant companies. If instead it had simply not filed for two consecutive financial years, the Registrar would have issued a notice and entered it in that register anyway, and could otherwise have struck its name off under section 248(1)(c).

A large partnership. Meanwhile forty of the company's suppliers propose to form an unregistered association for gain. That is lawful, since the prescribed number cannot exceed one hundred; but if the number exceeded the prescribed limit, every member would be punishable with fine up to one lakh rupees and personally liable for all the liabilities incurred in that business, unless the body were a Hindu undivided family or an association of professionals governed by special Acts: section 464.

And the old law. A prosecution begun against the company under the Companies Act, 1956 and pending when this Act commenced continues to be heard and disposed of by the same court, notwithstanding the repeal; the company's incorporation under the 1956 Act remains valid, this Act applying to it as if it were registered under this Act: section 465(2).

Distinctions that carry marks

What this does NOT mean

It does not mean the section 447 threshold is the higher figure. It is ten lakh rupees or one per cent of the turnover, whichever is lower.

It does not mean fraud requires proof of gain or loss. The Explanation applies whether or not there is any wrongful gain or wrongful loss.

It does not mean an omission is safe. Section 448(b) makes the omission of a material fact, known to be material, an offence punishable under section 447.

It does not mean every default must be prosecuted. Section 454 provides for adjudication of penalties by an officer, with an appeal to the Regional Director; and section 441 allows compounding of the compoundable offences.

It does not mean an honest officer is without a remedy. Section 463 allows the court to relieve him wholly or partly where he acted honestly and reasonably and ought fairly to be excused, though not from civil liability in a criminal proceeding.

It does not mean the repeal of the Companies Act, 1956 destroyed what was done under it. Section 465(2) preserves, among much else, the validity of incorporations, pending prosecutions, investigations ordered, and registers and funds.

Quick revision

• 447: fraud of at least ten lakh rupees or one per cent of turnover, whichever is lower, is punishable with six months to ten years' imprisonment and fine of the amount of the fraud up to three times it; minimum three years where public interest is involved; and below the threshold and without public interest, up to five years, or fine up to fifty lakh rupees, or both. Fraud includes any act, omission, concealment of fact or abuse of position, alone or in connivance, with intent to deceive, to gain undue advantage from, or to injure, whether or not there is wrongful gain or wrongful loss; wrongful gain and wrongful loss are gains and losses by unlawful means of property one is not or is legally entitled to.
• 448 and 449: a statement in any return, report, certificate, financial statement, prospectus or other document under the Act which is false in a material particular, known to be false, or which omits a material fact known to be material, makes the maker liable under section 447; and intentionally giving false evidence on an examination on oath or in an affidavit, deposition or solemn affirmation about a winding up or any matter under the Act is punishable with three to seven years and fine up to ten lakh rupees.
• 450, 451 and 454A: where no penalty is provided elsewhere, ten thousand rupees on the company and every officer in default or other person, with one thousand rupees a day, up to two lakh rupees for a company and fifty thousand rupees for an officer or other person; a second or subsequent commission of the same offence within three years carries twice the fine in addition to any imprisonment; and a repeat default within three years of a penalty order carries twice the penalty.
• 452 and 453: an officer or employee who wrongfully obtains, withholds or knowingly misapplies the company's property or cash is, on the complaint of the company, a member, creditor or contributory, punishable with one lakh to five lakh rupees, and may be ordered to deliver up or refund the property and its benefits or undergo imprisonment up to two years, save that imprisonment shall not be ordered for a dwelling unit where the company has not paid his welfare fund dues or workmen's compensation; and improper use of "Limited" or "Private Limited" costs five hundred to two thousand rupees for every day.
• 454: adjudicating officers not below the rank of Registrar, appointed by order in the Official Gazette with specified jurisdiction, may impose penalties and direct rectification, after a reasonable opportunity of being heard, and shall impose none where a section 92(4) or 137(1) or (2) default is rectified before or within thirty days of the notice; an appeal lies to the Regional Director within sixty days, who may confirm, modify or set aside.
• 455: a company formed for a future project or to hold an asset or intellectual property with no significant accounting transaction, or an inactive company, may obtain the status of a dormant company; an inactive company is one with no business or operation, no significant accounting transaction, or no filings for the last two financial years; a significant accounting transaction excludes Registrar's fees, statutory payments, allotments to meet the Act, and office and record maintenance; the Registrar issues a certificate, keeps a register, enters companies that have not filed for two consecutive years, and strikes off those which fail to comply.
• 456 to 462: good faith protection for the Government and its officers; no compulsion to disclose the source of information leading to or material in a section 210 investigation; delegation of powers other than rule-making, laid before Parliament; approvals subject to conditions, rescindable on contravention, with prescribed fees; condonation of delay for reasons recorded in writing; a general annual report on the working and administration of the Act laid before Parliament within one year; and exemption of classes of companies in the public interest, on a draft laid for thirty days and subject to both Houses.
• 463 to 470: the court may relieve an officer who acted honestly and reasonably and ought fairly to be excused, but not from civil liability in a criminal proceeding; an association or partnership exceeding the prescribed number, not exceeding one hundred, must be registered, save a Hindu undivided family and professionals under special Acts, its members otherwise being fined up to one lakh rupees and personally liable; the Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961 are repealed with eleven savings, including the continued validity of incorporations, pending prosecutions and investigations, and matters concluded under the old Act; the Company Law Board is dissolved on the constitution of the Tribunal; and the Central Government may alter the Schedules, make winding up rules consistent with the Code of Civil Procedure, 1908, make rules generally, a contravention costing five thousand rupees and five hundred rupees a day, and remove difficulties by order.

Test yourself

1. State the punishment for fraud. Where the fraud involves at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower: imprisonment of not less than six months extending to ten years, and fine of not less than the amount involved extending to three times that amount; and where public interest is involved, the imprisonment shall be not less than three years. Where the amount is below that threshold and public interest is not involved: imprisonment up to five years, or fine up to fifty lakh rupees, or both: section 447.

2. Define fraud for the purposes of the Act. Any act, omission, concealment of any fact or abuse of position committed by any person, or by 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 gain or wrongful loss: Explanation (i) to section 447.

3. What happens where the Act provides no specific punishment? The company and every officer in default, or such other person, is liable to a penalty of ten thousand rupees, and for a continuing contravention a further one thousand rupees for each day after the first, subject to a maximum of two lakh rupees for a company and fifty thousand rupees for an officer in default or any other person: section 450.

4. Who adjudges penalties, and what appeal lies? Adjudicating officers, being officers of the Central Government not below the rank of Registrar, appointed by order published in the Official Gazette with specified jurisdiction; they may impose the penalty and direct rectification after giving a reasonable opportunity of being heard. An appeal lies to the Regional Director having jurisdiction, within sixty days of receipt of the order, and he may confirm, modify or set aside it: section 454.

5. When may a court relieve an officer of liability? Where, in a proceeding for negligence, default, breach of duty, misfeasance or breach of trust, it appears that he is or may be liable but that he acted honestly and reasonably and that, having regard to all the circumstances including those connected with his appointment, he ought fairly to be excused; the court may then relieve him wholly or partly on such terms as it thinks fit. In a criminal proceeding the court has no power to grant relief from any civil liability attaching in respect of the same: section 463.

6. What did section 465 repeal, and what survives? It repealed the Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961. Among the savings: anything done or action taken under them is deemed done under the corresponding provisions of this Act; orders, appointments, deeds and resolutions in force continue; rules of law, practice and procedure are unaffected; the registration offices continue; the incorporation of companies registered under the repealed Acts remains valid, this Act applying as if they were registered under it; registers and funds are deemed constituted under this Act; pending prosecutions continue in the same court; inspections, investigations and inquiries ordered continue; and matters filed and not fully addressed are concluded under the old Act despite its repeal.