Companies Act | Private Complaint Not Maintainable Against Fraud; Can Be Filed Only By SFIO : Supreme Court

The Supreme Court on Friday (January 9) held that complaints alleging fraud under the Companies Act, 2013 cannot be initiated through private complaints, as cognizance can be taken by a Special Court only on a complaint filed by the Director of the Serious Fraud Investigation Office (SFIO) or an officer authorised by the Central Government under Section 212(6) of the Act.

The Court, however, clarified that an individual is not remediless, and can approach the National Company Law Tribunal (NCLT) under Section 213 of the Act to demand an investigation by Serious Fraud Investigation Office in to the allegations of fraud, upon satisfying the eligibility to register the complaint.

“As such, the offence under Section 448 of the Companies Act is an 'offence covered under Section 447' as mentioned in Section 212(6) of the Companies Act and therefore, the bar against taking cognizance under the second proviso of Section 212(6) of the Companies Act, unless specific conditions are met, is attracted in the present case. Cognizance, therefore, in such a case, cannot be taken merely by filing of a private complaint by the Complainant. However, it is not to say that the Complainant is left absolutely remediless. The right recourse for a person, who makes an allegation of fraud in the affairs of a company is to file an application under Section 213 of the Companies Act before the NCLT upon satisfying the eligibility under Section 213(a) and 213(b) of the Companies Act.”, observed a bench of Justices JK Maheshwari and K Vinod Chandran, while quashing criminal proceedings against former directors of a company for offenses under Sections 448 (false statement) and 451 (repeated default) of the Companies Act.

Background

The dispute arose from a tussle for control of a Hyderabad-based real estate company. The complainant, the original promoter, and the appellants, former directors, fell out over management. The appellants were removed as directors in November 2021 after amendments to the Articles of Association and a failed re-appointment resolution.

Subsequently, the complainant filed a private criminal complaint alleging that the appellants, after ceasing to be directors, illegally convened an Extraordinary General Meeting on December 1, 2021, passed forged resolutions appointing new directors, and fraudulently uploaded Form DIR-12 on the Ministry of Corporate Affairs portal.

The Special Court for Economic Offences in Hyderabad took cognizance of offenses under Sections 448 and 451 of the Companies Act and Sections 420, 406, 426, 468, 470, 471, and 120B of the IPC. The Telangana High Court dismissed the appellants' plea to quash the proceedings, leading to filing of an instant appeal before the Supreme Court.

Arguments

Before the Supreme Court, the appellants contended that offenses under Sections 448 and 451 are "offences covered under Section 447" (punishment for fraud) as per the language of the sections themselves. They argued that the second proviso to Section 212(6) of the Companies Act bars the Special Court from taking cognizance of such offenses except on a complaint by the SFIO Director or an authorized Central Government officer. Therefore, a private complaint was not maintainable.

Per contra, the complainant argued that after the 2015 amendment, the bar under Section 212(6) applied only to the offense under Section 447 itself, not to Sections 448 or 451.

Decision

Setting aside the impugned order, the judgment authored by Justice Maheshwari held that since Section 448 prescribes punishment for fraud as defined under Section 447 of the Companies Act, the bar under Section 212(6) squarely applies. Consequently, allegations of fraud can be taken cognisance of only on a complaint filed by the Director of the Serious Fraud Investigation Office (SFIO) or an officer authorised by the Central Government, leaving no scope for the institution of a private complaint.

“the bar on taking cognizance by the Special Court in cases involving Section 447 of the Companies Act was a safeguard which was put in place to prevent filing of frivolous complaints by disgruntled company members / shareholders or competitors with vested interests. As such, in case an allegation of fraud under Section 447 of the Companies Act is to be made out, the complaint has to be made by the Director, SFIO or an officer authorized by a written order of the Government. This adds a further level of scrutiny and investigation prior to taking cognizance in cases where allegations of fraud are made and ensures that cognizance is not taken by the Special Court simply upon filing of a private complaint.”, the court observed.

The Court said that the High Court had ignored its own ruling in a case of Sumana Paruchuri v. Jakka Vinod Kumar Reddy (2022), where a similar opinion was expressed by the High Court, holding that a private complaint would not be maintainable for offences extrinsically linked to fraud under Section 447.

Accordingly, the appeal was allowed, and the impugned order upholding the registration of a private complaint against the Appellant was set aside. The Complaint was quashed.

Cause Title: YERRAM VIJAY KUMAR VERSUS THE STATE OF TELANGANA & ANR.

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Appearance:

For Petitioner(s) : Mr. Shailesh Madhiyal, Sr. Adv. Mr. Awanish Kumar, Adv. Mr. Anchit Singa, Adv. Ms. Garima, Adv. M/S. Dharmaprabhas Law Associates, AOR

For Respondent(s) : Mr. Kumar Vaibhaw, Adv. Ms. Devina Sehgal, AOR Mr. Dhananjay Yadav, Adv. Mr. Jayanth Muth Raj, Sr. Adv. Mr. Sadineni Ravi Kumar, AOR