FRAUD

1. Barium Chemicals Ltd. v. CLE ([1966] 36 Comp Cas 639)

No jurisdiction, outside the section which empowers the initiation of

investigation, can be exercised. An action, not based on circumstances
suggesting an inference of the enumerated kind will not be valid. In other
words, the enumeration of the inferences which may be drawn from the
circumstances, postulates the absence of a general discretion to go on a
fishing expedition to find evidence. No doubt the formation of opinion is
subjective but the existence of circumstances relevant to the inference as
the sine qua non for action must be demonstrable. If the action is
questioned on the ground that no circumstance leading to an inference of
the kind contemplated by the section exists, the action might be exposed
to interference unless the existence of the circumstances is made out.

Since the existence of "circumstances" is a condition fundamental to the

making of an opinion, the existence of the circumstances. if questioned,
has to be proved at least prima facie. It is not sufficient to assert that the
circumstances exist and give no clue to what they are because the
circumstances must be such as to lead to conclusions of certain
definiteness. The conclusions must relate to an intent to defraud, a
fraudulent or unlawful purpose, fraud or misconduct or the withholding
of information of a particular kind.

The first circumstance is "delay, bungling and faulty plan- ning" resulting
in "double expenditure" for which the collaborators had put the
responsibility on the second appellant. None of these shows an intent to
defraud by which phrase is meant something to induce another to act to
his disadvantage. The circumstances mentioned show mismanagement
and inefficiency which is not the same thing as fraud or misconduct. The
second and the third circumstance merely establish that there was loss in
making this project work and that a part of capital had been lost.
2. Manrnohan Malik vs. Simplot India Foods Pvt. Ltd. (20.07.2017 - NCLT -
Principal Bench)
Para 2:
Before we embark upon examination of facts, it would be first appropriate
to preface this order by noticing the law on investigation into the affairs of
the company. The object of an investigation under Section 213(b) of 2013
Act is to unearth something which is hidden and is not apparent or
invisible to the naked eye. In cases where the facts are apparent from the
perusal of the record or are otherwise in public domain having been
communicated to the Registrar of Companies or posted on the portal of the
MCA website, then investigation need not be ordered.

Investigation is ordinarily ordered in cases where funds of the company

have siphoned of in a manner shrouded in mystery or accounts of the
company or its management have been conducted in a manner which is
shrouded in a mystery. Therefore, at least a prima facie evidence must
exist with regard to existence of such circumstances which would lead to
the conclusion that an investigation is imperative and must be ordered. In
that regard, we place reliance on a judgment of Hon'ble Delhi High Court
in the case of Delhi Flour Mills Co. Ltd., In Re. (1975) 45 Com Cases 33
(Del.). For a similar view, we also place reliance on the observations made
by the Hon'ble Supreme Court in the case of Barium Chemicals Ltd. v. CLE
([1966] 36 Comp Cas 639) and Rohtas Industries Ltd. v. Agarwal (S.D.)
([1969] 37 Comp Cas 781). A Five Judge Bench in Barium Chemicals Ltd.
(supra), after making a reference to Section 237(b) of the erstwhile
Companies Act, 1956 has held that the exercise of power to order
investigation is discretionary and it depends upon the honest formation of
an opinion that an investigation is necessary. The next requirement is that
circumstances must exist suggesting certain inferences to be drawn.
Referring to such inferences, the majority view has noted as under:
"In dealing with this problem the first point to notice is that the power is
discretionary and its exercise depends upon the honest formation of an
opinion that an investigation is necessary. The words "in the opinion of the
Central Government" indicate that the opinion must be formed by the
Central Government and it is of course implicit that the opinion must be
an honest opinion. The next requirement is that "there are circumstances
suggesting etc." These words indicate that before the Central Government
forms its opinion it must have before it circumstances suggesting certain
inferences. These inferences are of many kinds and it will be useful to
make a mention of them here in a tabular form:-

(a) that the business is being conducted with intent to defraud-

(i) creditors of the company, or
(ii) members, or
(iii) any other person;
(b) that the business is being conducted-
(i) for a fraudulent purpose or
(ii) for an unlawful purpose;
(c) that persons who formed the company or manage its affairs have been
guilty of-
(i) fraud or
(ii) misfeasance or other misconduct- towards the company or
towards any of its members.
(d) That information has been withheld from, the members about its affairs
which might reasonably be expected including calculation of commission
payable to-
(i) managing or other director,
(ii) managing agent,
(iii) the secretaries and treasurers,
(iv) the managers.
Since the existence of "circumstances" is a condition fundamental to the
making of an opinion, the existence of the circumstances, if questioned,
has to be proved at least prima facie. It is not sufficient to assert that the
circumstances exist and give no clue to what they are because the
circumstances must be such as to lead to conclusions of certain
definiteness. The conclusions must relate to an intent to defraud, a
fraudulent or unlawful purpose, fraud or misconduct or the withholding
of information of a particular kind. We have to see whether the Chairman
in his affidavit has shown the existence of circumstances leading to such
tentative conclusions. If he has, his action cannot be questioned because
the in reference is to be drawn subjectively and even if this Court would
not have drawn a similar inference that fact would be irrelevant. But if the
circumstances pointed out are such that no inference of the kind stated in
s. 237(b) can at all be drawn the action would be ultra vires the Act and
void".

Para 3:

According to the view taken by the Hon'ble the Supreme Court the exercise
of jurisdiction to order investigation is limited to the extracted grounds.
An order of investigation which is not based on the circumstances
suggesting an inference of the kind extracted from (a) to (d) would not be
valid. Apparently, there is absence of a general direction to go on a fishing
expedition to find evidence. Although the formation of opinion is subjective
but the existence of circumstances relevant to the inference is a sine qua
non for exercise of jurisdiction. It has further been observed that it is not
sufficient to assert that the circumstances exist and give no clue to what
they are because the circumstances must be such as to lead to conclusions
of certain definiteness. The conclusions must relate to an intent to
defraud, a fraudulent or unlawful purpose, fraud or misconduct or the
withholding of information of a particular kind. In other words the
circumstances as pointed out above do not exist then no inference of the
kind stated in extracted para (a) to (d) could be drawn and the prayer for
investigation must fail.