Fraud Under Companies Act

The financial and corporate frauds in recent years in India have rekindled the thought on the need for stringent provisions to tackle fraud. This prompted our government to statutorily address the problem of corporate frauds by introducing stringent provisions in the new Companies Act, 2013, ranging from increasing the role and duties of independent directors and that of the auditors. The Companies Act, 2013 focus on the issue of tackling fraud is an indication of the trend in this direction which is likely to continue in the future. Not only by means of rules and regulations, there is also a realization in the minds of corporate India to abide by strict standards and they are becoming cautious and serious about the fraud.

India has witnessed several financial and corporate fraud such as 27,000 crore Sahara fraud case which started in 2010, Rs. 7,000 crore Satyam fiasco in 2009, Rs.  5,000 crore Harshad Mehta scam in 1992.

DEFINITION OF FRAUD UNDER COMPANIES ACT

As per Section 447, Fraud in relation to affairs of a company or a body corporate, includes:

1. any act, 
2. any omission, 
3. concealment of any fact, or, 
4. abuse of position committed 

by a person or any other person with the convineance in any manner

1. with intent to deceive, 
2. to gain undue advantage from, or 
3. to injure the interests of;
4. the company, or,
5. its shareholders, or,
6. its creditors, or,
7. any other person,

whether or not there is any wrongful gain, or any wrong loss.

EXPLANATION OF DEFINITION OF FRAUD

The definition of the term fraud uses the term ‘Person or any other person’ which gives it a very wide scope. Thus, it just doesn’t only cover certain officers, employees or directors of the company, instead it covers any person in relation to the affairs of the company. So regardless of who that person is in the context of the affairs of the company falls within the ambit of the definition of fraud, he will be guilty of committing fraud.

The definition fraud specifies that not all acts, omissions, concealment of fact or abuse of position will lead to fraud. In order to fall within the meaning of ‘fraud’ these acts, omissions, concealment or abuse should be done with an intent to deceive or to injure the interest or to gain undue advantage of the company or its shareholders or creditors or any other person. Therefore, this is based on the concept of mens rea.

The acts, omissions, concealment of fact or abuse of position would still constitute fraud whether or not there is any wrongful gain, or any wrong loss.

Wrongful gain has been defined to mean gain or profit by unlawful means of property or asset to which the person gaining is not legally entitled.

Wrongful loss has been defined to mean loss by unlawful means of property or asset to which the person losing is legally entitled.

To conclude that, to fall within the definition of fraud, the following need to happen

1. The Action, omissions, concealment of fact or abuse of position should have happened.
2. The Action, omissions, concealment of fact or abuse of position shall have essence of mens rea.
3. Regardless of the fact whether or not they resulted in ‘wrongful gain’ or ‘wrongful loss

PUNISHMENT FOR FRAUD

Any Person who is found to be guilty of fraud shall be shall be punishable with

1. Amount of Fraud at least, the lower than of Rs. 10 lakhs or 1% of turnover of the company  

Imprisonment from 6 month extends up to 10 years (if fraud involving public interest, Minimum term is 3 years)

AND

Fine equivalent to the amount involved in the fraud can extend up to 3 times the amount involved in the fraud.

1. Amount of Fraud is less than, the lower than of Rs. 10 lakhs or 1% of turnover of the company  

Imprisonment for a period which may extend to five years or

Fine which may extend up to Rs. 50 Lakhs or Both.

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