Private Fraud Complaint U/S 447 of the Companies Act Inadmissible in the Special Court for Economic Crimes: The Telangana High Court


Recently, the Telangana High Court ruled that a private claim for fraud under Section 447 of the Companies Act 2013 is not admissible in the Special Court. Section 212(6) of the Companies Act ensures that prosecution for fraud can only be brought after a proper investigation. This provides protection against frivolous complaints from millions of shareholders of various companies.

If the plaintiff’s assertion that any shareholder can file a fraud complaint is accepted, it would open the floodgates for anyone initiating criminal proceedings simply by filing a complaint.”

Quick facts

The petitions were filed by petitioners under Article 482 of the Code of Criminal Procedure to have the proceedings on the case of the special judge for economic crimes annulled. The applicants, father and daughter by relationship, were classified as defendants n° 1 and 2 respectively.

According to the complaint, the complainant, that is, respondent no. 1 and his late brother incorporated a company under the name and style of M/s Peregrine Agro Private Ltd., in 1997 under the provisions of the Companies Act. The complainant and his late brother were promoters/directors of the company. In June 2002, it was alleged that Accused 1 was a tenant of part of the building in Hyderabad which belonged to the applicant’s family.

The plaintiff claimed to be divorced and to live in the same building as his mother and his minor daughter from his first marriage. Around 2010, the Complainant’s brother was diagnosed with colon cancer and the Company’s business was neglected.

It is alleged that Accused #1 enticed the Claimant to induct him as the director of the business and promised to take care of the business. Believing his representation, the Complainant agreed to induct him as an additional director in the company. To this end, accused no. I compelled the Complainant to sign various documents, including blank sheets of paper, on the grounds that several documents might require his signature.

The complainant’s brother resigned from his position as director of the company in 2010 because he was totally bedridden. In the meantime, Complainant and Accused no. 1 married in 2011 and accused no. 1 was appointed director of the company. The marriage between the two never worked out and fell apart irretrievably.

Complainant was out of India most of the time and claimed that Defendant #1 illegally made major changes in management, board resolutions, annual reports, financial documents and shareholding in the company in collusion with her father, i.e. defendant no. 2. It was alleged that she also issued herself 63,000 shares of the company to make respondent n ° 1 a minority shareholder. Additionally, it was alleged that she illegally appointed her father as an additional administrator in 2014 and then as an administrator in 2015.

Party conflicts

The claimant’s solicitor’s argument was that under section 212(6) of the Companies Act 2013, the Economic Crimes Court could not hear the offense relating to the suppression of fraud under section 447 of the Companies Act 2013 only on a complaint made in writing by the Director of the Serious Fraud Investigation Office (SFIO) or one of the central government officers authorized in writing for this purpose by this government. The Economic Crimes Court took cognizance of the complaint even though it was not made by the classes of persons prescribed under section 212(6) of the Companies Act 2013, therefore the same thing was not acceptable.

The argument of counsel for Respondent 1 was that section 212 of the Companies Act 2013 was only applicable to the investigation of the company’s affairs by the SFIO and the ceded by the central government. Section 439 of the Companies Act 2013 dealing with unrecognized offences, the court could hear any offence, including Section 447, as long as the SFIO had not been commissioned with the investigation by the central government in under section 212 of the Companies Act 2013.

Court decision

Judge G. Radha Rani reviewed Section 212(6) of the Companies Act 2013, to conclude that it provides protection against frivolous claims and ensures that a prosecution for fraud can only be brought after due investigation.

The court held that an exception is provided under section 439 (1) itself whereby any offense under the law, except for the offenses referred to in subsection (6) of section 212 of the law, must be deemed unrecognizable. Thus, Section 439 of the Companies Act 2013 is not applicable to the offenses referred to in Section 447 of that Act. Therefore, knowledge of the offense under section 447 of the law could not have been taken by the court of first instance on private complaint.

“Under Section 206 of the Companies Act 2013, the Registrar of Companies, on the basis of information received by him, shall request an explanation, request the production of a document and conduct an enquiry. investigation by the Registrar reveals material for further investigation, he or she under Section 210 of the Companies Act, 2013 may report to the Central Government to carry out an investigation into the affairs of the company. If the Central Government considers the allegations to be true and considering the seriousness of the offence, the matter was fit to be investigated by the SFIO, orders the matter to be investigated by the SFIO under of Section 212 of the Companies Act 2013.”

“If Complainant/Defendant 2 was aggrieved, he should have used the procedure provided by law. The Registrar of Companies is a competent person to request the records, conduct an investigation and form an opinion. If there is any material, it will submit a report to the government for investigation by the SFIO, and if the SFIO is able to collect sufficient evidence to prosecute, it will file an indictment after taking the necessary sanctions from the central government.

Thus, the claimant could not be prosecuted for the breaches of sections 447, 448 and 451 of the Companies Act 2013 due to the prohibition of knowledge under section 212(6) of the Act on companies, when a complaint has not been filed in writing by the Director, SFIO or any State Officer mandated for this purpose by the said Government.

Accordingly, the criminal motion was allowed.

Case Title: Ms. Sumana Paruchuri v. Jakka Vinod Kumar Reddy


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