Constitutional validity of provisions related to SIFO investigation under Companies Act to be examined by High Court

Constitutional validity of provisions related to SIFO investigation under section 212 of Companies Act 2013 to be examined by High Court who found prima facie merit in the allegations.

It is virtually impossible for an accused to contest the averments made in the remand application before the Special Court and make out a case of innocence.

ABCAUS Case Law Citation:
ABCAUS 2496 (2018) 08 HC

The petitioner had filed a writ petition before the Hon’ble High Court challenging inter alia the constitutional validity of Sections 212(6) (ii) and 212(7) Companies Act 2013 on the ground of their being violative of Articles 14 and 21 of the Constitution of India. Both these provisions pertain to the grant of bail to an accused where affairs of the company is investigated by Serious Fraud Investigation Officer (SIFO) under the Companies Act in the context of the offence of fraud under Section 447.

Also, the Petitioner filed an application for an ad interim order for release of the Petitioner from illegal judicial custody of SIFO which was disposed off by the Hon’ble High Court after making observations on the Constitutional validity of the said sections of the Companies Act, 2013.

The main allegation of SIFO against the Petitioner was siphoning off funds raised from banks using multiple associate companies the alleged amount involved was stated to be between Rs. 2000 to Rs. 3000 crore.

The Petitioner was arrested by SIFO on the charges of committing offences punishable under Section 447 of Companies Act 2013. The instant writ was filed when the SIFO filed an application for extension of judicial remand before the Special Judge.

Challenging the constitutional validity of the section 212(6)(ii) and (7), the Petitioner urged that the offence u/s 447 of the Companies Act 2013 has been made cognizable and the grant of bail made subject to a very high threshold of the arrested person having to prove that he is not guilty of the offence as a precondition to grant of regular bail. According to the Petitioner, a similarly worded provision of the PMLA, i.e. Section 45, was struck down by the Supreme Court as unconstitutional

The other challenge was to Section 212(8) of the Companies Act related to the power of arrest, which became effective from 24th August 2017, enabled the SFIO to arrest the Petitioner on the ground that the conditionality under Section 212(8) Companies Act stood fulfilled, i.e. the SFIO had reason to believe that the Petitioner “has been guilty” of the offence punishable under Section 447 Companies Act.

It was prayed that the Hon’ble High Court should direct that Section 212 (8) Companies Act is in the nature of “a presumptive definitive opinion/conclusion which is arbitrary and violative of Articles 14, 20, and 21 of the Constitution.

Referring to section 212 read with section 447 of the Companies Act, 2013, the Hon’ble High Court observed that these provisions of the Companies Act are yet another instance of conferment of police powers on persons who are not part of the regular police force. In other words, officers of the executive government are sought to be conferred coercive powers of searches, seizures and arrest. With effect from 24th August 2017 the senior level officers of the SFIO can arrest a person even without a warrant as in the case of Section 212 (8) read with Sections 212 (6) and 447 of the Companies Act. However, the SFIO Arrest Rules make it explicit that the Cr PC applies to such arrest. The provisions of the Constitution of India, in particular Articles 20 to 22 will undoubtedly apply to the entire gamut of penal provisions in the Companies Act.

On perusing the files, the Hon’ble High Court noticed that the proposal placed before the Director SFIO was for the arrest of the Petitioner and one other person in exercise of the powers under Section 212(8) Companies Act. This proposal was approved. Yet for some unexplained that other person has not been arrested till date.

The Hon’ble High Court remarked that prima facie it appeared that the SFIO was selective about whom it wanted to arrest. Further despite the names of several individuals finding mention in the notes, whose culpability is more or less similar to that of the Petitioner, the coercive provision of arrest has been exercised only qua the Petitioner

The Hon’ble High Court opined that the power vested in an Inspector of the SFIO to use the signed statement of an accused as evidence against him in terms of Section 271 (4) read with Section 217 (7) prima facie appeared to violate the fundamental right against self incrimination enshrined in Article 20 (3) of the Constitution of India.

The Hon’ble High Court stated that in the Companies Act, the Cr PC provisions are not per se excluded except in a limited context of treating Section 447 as a cognisable offence. Section 438 of the Companies Act makes this clear.

The Hon’ble High Court opined that it is all the more incumbent that the discipline of Chapter XII Cr PC including Section 172 Cr PC be adhered to by officer of the SFIO. Section 172 Cr PC requires the IO to enter his proceedings “day by day” in a diary “setting forth the time at which the information reached him, the time at which he began and closed his investigation, the place or places visited by him, and a statement of the circumstances ascertained through his investigation.” Further Section 172 (1A) and (1B) Cr PC as inserted with effect from 31st December 2009 mandate that the statements of witnesses shall be inserted in the case diary which shall “be a volume and duly paginated.”

The Hon’ble High Court observed that no case diary was maintained by the SIFO Officers except for separate files instead of one volume, which were amenable to being tampered by way of removal or addition of documents.

The Hon’ble High Court opined that production of case diary is an important step in seeking custodial remand of a prisoner. It is on going through them that the Court that is approached for remand or extension of remand is satisfied about the justification of the request. Though the accused is not entitled to see the case diary, the Court has to call for it to satisfy itself that the remand or extension thereof is warranted.

The Hon’ble High Court observed that the arrest of the Petitioner for the cognisable offence under Section 447 of the Companies Act could have been only by a police officer and he could have done so only on the registering of an FIR. It was only on 24th August 2017 that Sections 212 (8) to (10) as well as the SFIO Arrest rules became operational. The contention of the SFIO that the said change was merely procedural does not prima facie appear to be well founded.

The Hon’ble High Court expressed that these coercive provisions that are penal in nature are in the realm of criminal law. They affect the life and liberty of the persons against whom the powers thereunder are exercised. They have to be consistent with the fundamental rights guaranteed under the Constitution and in particular Articles 20, 21 and 22. If by the change brought about on 24th August 2017, an SFIO officer was able to arrest a person, without registering a case or even filing a complaint before a Court, and merely on the filing of an application seeking the judicial remand, it cannot be said to be a matter of mere procedure. It has a substantive element which raises an arguable question whether such provisions can be retrospectively applied to events that took place prior to those provisions becoming operational.

The SIFO contended that the arrest of the Petitioner, in his individual capacity, without proceeding against the companies he was promoter of or was controlling, was not illegal since the definition of “fraud” in terms of the explanation to Section 447 of the Companies Act contemplates any “person” committing such fraud against a company. This need not include the company which has suffered such fraudulent acts.

However the Hon’ble High Court rejected the above contention by observing that in light of Section 212 (14) of the Companies act which states that the central government has to take a call on whether prosecution should be launched against “the company and its officers or employees, who are or have been in employment of the company or any other person directly or indirectly connected with the affairs of the company.” It is not the disjunctive “or” that is used between the expressions „the company ‟and” its officers or employees.

As regards the challenge to the validity of Section 212 (6) of the Companies Act insofar as it severely curtails the chances of a person accused of the offence under Section 447 of the Companies Act getting regular bail, The SIFO pointed out that there is slight difference in the wording of Section 45 PMLA and Section 212(6)(ii) Companies Act. It was submitted that the stringent condition for grant of bail under Section 45 PMLA was, at the relevant time, attracted when the offence was punishable with imprisonment for three years or more, whereas under Section 212(6)(ii) Companies Act, the higher threshold is applicable only where the offence is under Section 447 Companies Act which has been made cognizable, and this is irrespective of the length of punishment.

It was contended that the offence under Section 447 Companies Act was of an extremely heinous nature and should be viewed as being as serious as the offences under the legislations to counter terrorist crimes and drug related crimes.

The Hon’ble High Court found notwithstanding the fact that the phraseology of Section 45 PMLA differs slightly from Section 212 (6) Companies Act, what also weighed with the Supreme Court was its view that Section 45 PMLA is “a drastic provision which turns on its head the presumption of innocence which is fundamental to a person accused of an offence”.

According to the Hon’ble High Court both the PMLA provisions and Section 447 Companies Act pertains to economic offences. It was not possible at this stage to decide which offence is more heinous. Secondly, as far as the high threshold for grant of bail is concerned, barring the slight difference in the language, both provisions do make it equally difficult for a person accused of an offence thereunder to obtain bail.

The Hon’ble High Court opined that the observations made by the Hon’ble Supreme Court with respect to Section 45 PMLA prima facie supported the challenge by the Petitioner to the constitutional validity of Section 212 (6) Companies Act. Also, even at a practical level, if indeed for a valid arrest if the records have to bear out the opinion of the Director SFIO that the person arrested “has been guilty” of the offence under Section 447, then it will be virtually impossible for the Special Judge to conclude for the purpose of Section 212 (6) that the said person is not guilty of the offence.

The Hon’ble High Court opined that while it is true that even in a regular criminal case, at the stage of seeking bail, an accused may not know anything more than what is stated in the remand application and he would not be entitled to even peruse the case diary, there would at least be an FIR or a complaint where the precise case against the person arrested would be known. However in the instant case, there was nothing.

According to the Hon’ble High Court, considering the stringent nature of Section 212(6) Companies Act, it is virtually impossible for an accused to contest the averments made in the remand application before the Special Court and make out a case of innocence. This would be an additional factor in examining the validity of Section 212(6) Companies Act.

The Hon’ble High Court observed that the Section 217 (7) Companies Act states that the notes of an examination of an arrested person under Section 217(4) Companies Act “shall be taken down in writing and shall be read over to or signed by the person examined and may thereafter be used in evidence against him”. Considering that this very statement could be used in the criminal proceedings for the purpose of the prosecution for the offence under Section 447 Companies Act, a serious question arises as to whether this procedure envisaged under the Companies Act is consistent with Article 20 (3) of the Constitution. Considering that the SFIO has sought permission of the Special Court to examine the Petitioner, and he has a well-founded apprehension about the applicability of Section 217(7) Companies Act, it does make his position in continued judicial custody vulnerable. This was also a reason for the grant of interim bail.

Accordingly, the Hon’ble High Court, pending the final determination of the writ petition, directed that the Petitioner shall be released on interim bail subject to the specified conditions.

Thus, the application for bail was disposed off with the main writ left for the independent determination of the Constitutional validity of the powers of SIFO under Section 212 (6) and (8) Companies Act, 2013.

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