IN BAIL APPLN 1741 OF 2022 - DEL HC - Applicant was not under arrest when he appeared in Court; twin conditions for bail under Section 212(6) of Companies Act would apply only if accused was already under incarceration, not simply in custody: Delhi High Court
Justice Anup Jairam Bhambhani [19.07.2023]

Read Order: Suman Chadha v. Serious Fraud Investigation Office

Simran Singh

New Delhi, July 20, 2023: The Delhi High Court concluded that the Special Judge (Companies Act), Dwarka Courts, New Delhi erred in remanding the applicant to custody and applying Section 212(6) of the Companies Act,2013  conditions, since the applicant had never been arrested. Thus, the said conditions did not automatically apply, the Court said and granted bail to the applicant subject to certain conditions.

The Single Judge Bench of Justice Anup Jairam Bhambhani stated that “this court is at pains to explain, that when the petitioner appeared before the learned Special Judge in compliance of the summons issued to him, he was not under arrest. It must also be re-emphasised that on taking cognizance of the offence, the learned Special Judge issued only summons for the petitioner to appear and did not deem it necessary to issue warrants for his arrest. Clearly therefore, learned Special Judge misdirected himself in applying section 212(6) of the Companies Act, on the flawed premise that that that was the stage for grant of bail, whereas, it was the stage of considering whether there was any need to remand the petitioner to judicial custody at all. As discussed above, it was for the Investigating Officer to seek that the petitioner be remanded to judicial custody, for justifiable reasons based on material gathered during investigation, which he did not do.”

The Bench observed that “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.”

In the matter at hand, a Bail Application was filed in a case against the applicant by the Serious Fraud Investigation Office (SFIO) who took a cognizance of offences inter-alia under Section 447 of the Companies Act. He was implicated for his role as a director of Parul Polymers Pvt Ltd, accused of financial fraud. The gravamen of the offences alleged were that the company was indulged in cash sales, in fictitious sale of food grain and in creation of accommodation/adjustment accounting entries, apart from misuse of cheque discounting facilities. It was also the allegation that the company manipulated financial statements in order to project substantial growth in its revenues, to mislead banks and to induce them to extend and enhance credit limits, which monies were however diverted and siphoned-off to other entities, with no genuine underlying business transactions. Thereby, it was alleged that the company indulged in fraudulent diversion of funds to sister concerns instead of applying the monies towards the business activities of the company.

The summoning order showed that the petitioner had been 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 affairs of the company.

The SFIO opposed the applicant's bail application on the ground that he was the main accused in the case; that charges were yet to be framed against the petitioner; and evidence was yet 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 his close associates. It was also alleged that the petitioner was the ‘mastermind’ on whose directions the other co-accused worked; and therefore, the petitioner could not seek bail on grounds of parity.

The Bench stated that Section 212(8) of the Companies Act provides for an investigating officer to have the power to arrest an accused if he has reason to believe on the basis of material available with him that the person is guilty of commission of an offence under section 212(6). “Though, no doubt, this power of arrest is meant to enforce ‘police custody’ in aid of investigation, what is important to note is that 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 stated that the the investigating officer never arrested the petitioner throughout the investigation, further investigation and other pre-cognizance stages, all of which took more than 06 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 be either arrested or remanded to judicial custody.

The Court stated that the applicant had not been arrested throughout the 6 years of investigation and proceedings and only appeared in Court pursuant to a summon. When he appeared in Court, the Special Judge immediately remanded him to judicial custody and rejected his bail application who had now been in custody for around 14 months.

The Bench noted that the applicant was not under arrest when he appeared in Court thus, 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.

The Court stated that even insofar 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; or that he had influenced witnesses; or that he was a flight risk. In fact, the Investigating Officer had not filed any application seeking that the petitioner be placed in judicial custody, even upto the stage when the petitioner appeared before the learned Special Judge on being summonsed. Since the Investigating Officer did not arrest the petitioner during the more than 06-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 in the course of investigation.

The Court stated that mere gravity of an offence was not sufficient reason to deny Bail and was of the view that Bail should be granted judiciously and compassionately.