Supreme Court: Fraud cases under Companies Act require SFIO or government complaint

The Supreme Court has ruled that proceedings for offences related to fraud under the Companies Act cannot be initiated based on a private complaint without it being filed by the Serious Fraud Investigation Office (SFIO) or an authorized central government officer. The court quashed a 2022 complaint case and all consequential proceedings to the extent of Sections 448 and 451 of the Companies Act.

The bench stated that the right recourse for a person making an allegation of fraud in company affairs is to file an application under Section 213 of the Companies Act before the National Company Law Tribunal (NCLT) upon satisfying eligibility criteria under Section 213(a) and 213(b).

Partly allowing appeals filed by Yerram Vijay Kumar and Rajeev Kumar Agarwal, the bench ruled that where the Special Court under the Companies Act takes cognizance of an offence under a section which, if proved, would make persons liable under Section 447, it must also invoke Section 447 with the corresponding section. In such cases, it must comply with the bar against taking cognizance as specified in the second proviso to Section 212(6) of the Companies Act.

The court pointed out that the offence under Section 448 is an offence covered under Section 447 of the Companies Act mentioned in Section 212(6), since Section 448 is inextricably linked to the punishment for fraud as mentioned in Section 447. Therefore, the second proviso to Section 212(6) of the Companies Act is attracted.

The bench emphasized that the bar on taking cognizance by the Special Court in cases involving Section 447 of the Companies Act was a safeguard put in place to prevent filing of frivolous complaints by disgruntled company members, shareholders or competitors with vested interests.

The court held that when an allegation of fraud under Section 447 of the Companies Act is to be made, the complaint must be filed by the Director of SFIO or an officer authorized by 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 cognizance is not taken by the Special Court simply upon filing of a private complaint.

The appeals were filed against the June 20, 2024 judgment of the Telangana High Court, which dismissed the petition under Section 482 of the Code of Criminal Procedure filed for quashing the proceedings.

Based on a private complaint filed against the appellants, the Special Court for Economic Offences at Hyderabad had taken cognizance of offences under Sections 448 and 451 of the Companies Act, 2013 and Sections 420, 406, 426, 468, 470, 471 and 120B of the Indian Penal Code.

The dispute related to affairs of M/s Shreemukh Namitha Homes Private Limited. Both appellants were inducted as directors with no fixed tenure, while the complainant and his wife were promoters with majority shareholding.

Accused No. 1 entered into a Memorandum of Understanding with the complainant and other stakeholders, agreeing to invest approximately Rs 30 crores in a real estate project. Following amendments to the Articles of Association, all directors except the complainant and his wife were required to retire annually and seek re-appointment.

At an Annual General Meeting held on November 30, 2021, resolutions for re-appointment of the accused failed as the complainant and his wife voted against them. The accused ceased to be directors from November 30, 2021. They challenged this removal before the National Company Law Tribunal at Hyderabad.

On May 19, 2022, the complainant filed a private complaint alleging that Accused No. 1 illegally convened an extraordinary general meeting on December 1, 2021 without authority, appointed third parties as directors, fabricated board and shareholders' resolutions, and uploaded forged documents on the Ministry of Corporate Affairs website.

The Special Court took cognizance on October 10, 2022 and issued summons to the appellants. The High Court dismissed their quashing petition, holding that allegations disclosed prima facie commission of serious offences involving forgery and fraud.

The Supreme Court ruled that merely because there is a bar under the second proviso to Section 212(6) against taking cognizance of offences under Section 447 unless specific conditions are met, cognizance cannot be taken under Section 448 without including the punishment section on filing of a private complaint.

However, the court was not convinced with appellants' arguments regarding offences under the IPC. The bench ruled that mere pendency of civil proceedings cannot be ground to quash criminal proceedings or conclude the dispute is purely civil in nature.

Without expressing views on merits, the court held there was no reason to quash the IPC offences of which cognizance had been taken. After quashing proceedings under the Companies Act, the court ordered transfer of the matter to the appropriate court having territorial jurisdiction to try the complaint case for IPC offences.

Case details: Yerram Vijay Kumar vs The State of Telangana & Anr, decided by a bench of Justices J K Maheshwari and K Vinod Chandran on January 9, 2025.