"Private Complaint for fraud under Section 447 of Companies Act not maintainable before Special Court": Telangana High Court

"Private Complaint for fraud under Section 447 of Companies Act not maintainable before Special Court": Telangana High Court

The Court quashed the criminal proceedings against the Accused of the original criminal proceedings.

The Telangana High Court in a recent judgment held that a private complaint for fraud under Section 447 of the Companies Act, 2013 is not maintainable before the Special Court.

It was also observed that Section 212(6) safeguards against frivolous complaints, therefore a prosecution for fraud can only be launched upon due investigation.

In the present case, a petition was filed to quash the proceedings on the file of the Special Judge for Economic Offences by the Accused (Father and Daughter by relation) of the original petition.

The facts of the case are that the Respondent (Complainant of the original petition) and his late brother incorporated a Company in the name of M/s Peregrine Agro Private Ltd in 1997 and they were the promoter and director of the said Company.

In June 2002, the Accused stayed as a tenant in the building which was owned by the Complainant's family. The Complainant, along with his mother and minor daughter [from his first marriage] also resided in the same building.

In 2010, the Complainant's brother was diagnosed with colon cancer and hence, the affairs of the business were neglected.

The Complainant thereby claimed that Accused no. 1 (Daughter) induced him to make her a Director of the Company and thereby promised to look after the Company. Having agreed to this, the Complainant appointed Accused no. 1 as an Additional Director.

It is further claimed by the Complainant that Accused no. 1 made him sign several documents including blank sheets on grounds that the Complainant's signatures will be required for various documents.

Due to increasing ill health, the Complainant's brother resigned from his position. In the meantime, the Complainant and Accused no. 1 got married, and Accused no. 1 was made the Director of the Company. However, soon the marriage broke.

Since the Complainant was out of India most time, he claimed that Accused no. 1, along with Accused no. 2 (Father) made several management changes in the Company, including, Board Resolutions, Annuals Reports, financial documents, and shareholding of the company.

It was also alleged that Accused No. 1 issued 63,000 shares of the Company in her name, making the Complainant a minority shareholder. Accused No. 1 also fraudulently made Accused No. 2 an Additional Director of the Company in 2014 and thereafter a Director in 2015, as alleged by the Complaint.

The Complainant hence filed a criminal complaint against the Accused of fraud, following which the present petition arose.

In its submissions, the Accused (Petitioners of the present matter) stated that under Section 212 (6) of the Companies Act, an Economic Offences Court can only take cognizance of offences of fraud under Section 447 of the Act when the same is filed by Director, SFIO (Serious Fraud Investigation Office) or to any of the Officer of the Central Government authorized in writing in that behalf by that Government. Therefore, the present suit is not maintainable.

In response to this, the Complainant (Respondent of the present matter) submitted that Section 212 is applicable only to investigate matters relating to the affairs of a company by SFIO. Under Section 439 for a non-cognizable offence, Court can take cognizance of an offence under Section 447 as long as an SFIO has not been assigned in accordance with Section 212 of the Act.

In view of the arguments and submissions, the Court was of the opinion that:

"If the contention of the complainant that any shareholder can file a complaint for fraud is accepted, it would open flood gates for any person commencing criminal proceedings merely by filing a complaint….The condition prescribed under Section 212(6) of the Act is a safeguard against frivolous criminal complaints. As such, I do not find any merit in the contention of the learned counsel for the respondent No.1 that a private complaint for fraud is maintainable before the Special Court."

Upon the perusal of Section 439(1), the Court held that an exception has been carved out in the said Section which provides that every offence under this Act is a non-cognizable offence, except offences under Section 212( 6) of the Act. Therefore, Section 439 cannot be applied to offences under Section 447 of the said Act. As a result, cognizance of offences under Section 447 cannot be taken by a trial court for private complaints.

The Court further ruled that "Thus, the petitioner could not be prosecuted for the offences under Sections 447, 448, and 451 of the Companies Act, 2013 due to bar of cognizance under Section 212(6) of the Companies Act, when a complaint was not given in writing by the Director, SFIO, or any Officer of the Central Government authorized in that behalf by the said Government."

As a result, the present petition was allowed by quashing the criminal petition against the Accused.