Delhi High Court: Under Companies Act, Twin Conditions of Bail Apply if Accused is Under Incarceration, Not in Custody

Delhi High Court: Under Companies Act, Twin Conditions of Bail Apply if Accused is Under Incarceration, Not in Custody

The application was filed in a case against the applicant by the Serious Fraud Investigation Office

The Delhi High Court has held that the special Judge of the Dwarka Courts, New Delhi, erred in remanding the applicant to custody and applying the conditions of Section 212(6) of the Companies Act since the applicant had never been arrested.

The Court explained that the conditions did not apply automatically and were subject to certain conditions, and granted bail to the applicant.

The single Judge Bench of Justice Anup Jairam Bhambhani stated, “This Court is at pains to explain, that when the petitioner appeared before the special Judge in compliance with the summons issued to him, he was not under arrest. It must also be re-emphasized that on taking cognizance of the offence the special Judge issued only a summons for the petitioner to appear. He did not deem it necessary to issue warrants for his arrest.”

Justice Bhambani added, “Clearly, the special Judge misdirected himself in applying Section 212(6) of the Companies Act, on the flawed premise that it was the stage for grant of bail. However, it was the stage of considering whether there was any need to remand the petitioner to judicial custody at all. As discussed, it was for the investigating officer to seek that the petitioner be remanded to judicial custody, for justifiable reasons based on the material gathered during investigation, which was not done.”

The Judge observed, “Nothing in this judgment should be taken to detract from the position that economic offences are serious in nature, and the allegations against the petitioner and other co-accused if proved at the trial, must be met with requisite punishment. However, that punishment must follow conviction, and the severity of the allegations by themselves cannot be justification for pre-trial incarceration.”

The bail application was filed in a case against the applicant by the Serious Fraud Investigation Office (SFIO), which took cognizance of offences inter-alia under Section 447 of the Companies Act. The applicant was implicated in his role as a director of Parul Polymers Pvt Ltd and accused of financial fraud.

The alleged offences were that the company that indulged in cash sales, was involved in the fictitious sale of food grain and the creation of accommodation/adjustment accounting entries, apart from misuse of cheque discounting facilities. It was also alleged that the company manipulated financial statements to project substantial growth in its revenues. This was done to mislead the banks and induce them to extend and enhance credit limits. The monies were diverted and siphoned off to other entities with no genuine underlying business transactions.

The other allegations on the company were that it indulged in fraudulent diversion of funds to sister concerns instead of applying the monies towards its business activities.

The summoning order showed that the petitioner was implicated for his role as an ‘officer who is in default’ within the meaning of Section 2(60) of the Companies Act since the petitioner was a ‘director’ of the company at the relevant time; and was, therefore, liable for the company’s affairs.

The SFIO opposed the applicant's bail application on the ground that he was the main accused in the case. It maintained that the charges against the petitioner were yet to be framed and evidence still to be recorded. There was reasonable apprehension that if released on bail, the petitioner would attempt to intimidate or influence witnesses, especially since the witnesses were either his employees or close associates.

The investigation office also alleged that the petitioner was the ‘mastermind’ on whose directions the other co-accused worked. Therefore, he could not seek bail on grounds of parity.

The Bench stated that Section 212(8) of the Act provided for an investigating officer to have the power to arrest an accused if he had reason to believe based on the material available to him. He could then say that the person was guilty of the commission of an offence under Section 212(6).

The Judge held, “Though, no doubt, this power of arrest is meant to enforce ‘police custody’ in aid of investigation, what is important to note is that the arrest is permissible if the investigating officer has reason to believe that the accused is guilty of the offence based on available material.”

The Bench further noted that the investigating officer never arrested the petitioner throughout the investigation, for further investigation, and other pre-cognizance stages - all of which took more than six years. Even at the stage when the final investigation report was filed before the special Judge, the investigating officer did not seek that the petitioner should be either arrested or remanded to judicial custody.

The Court stated that the applicant had not been arrested throughout the six years of investigation and proceedings and only appeared in the Court pursuant to a summons. When he appeared in Court, the special Judge immediately remanded him to judicial custody. The special Judge also rejected his bail application even though for around 14 months, the petitioner had by then been in custody.

Justice Bhambani added that the applicant was not under arrest when he appeared in Court. Thus, he held that the twin conditions for bail under Section 212(6) of the Companies Act would only apply after an accused was already under incarceration, not simply in custody.

He reiterated that as the usual and ordinary triple-test for bail was concerned, the investigating officer nowhere alleged that the petitioner had attempted to tamper with evidence; that he had influenced the witnesses; or that he was a flight risk.

In fact, the Investigating Officer did not even file any application seeking that the petitioner should be placed in judicial custody up to the stage when the petitioner appeared before the special Judge on being summoned. The officer did not arrest the petitioner during the more than six-year-long proceedings and investigation. Evidently, the investigating officer did not consider it necessary to do so based on the material in his possession collected during the investigation.

The Court stated that the mere gravity of an offence was not sufficient reason to deny bail. It held that bail should be granted judiciously and compassionately to a person.