This article has been written by Ishika rawat , a student studying LLB from Asian law college , Noida. The author is 1st year law student.

INTRODUCTION 

It was defined that fraud under Indian contract act  1872 , section 17 defines the fraud mean and includes any if the following acts committed by the party to a contract or  with his conveyance  or by his agent with intent to deceive another party thereto or his agent or to induce him to enter into the contract:-

1. The suggestive as a fact of that which is not true by one who does not the believe it to be  true.
2. The active concealment of a fact by one having knowledge or belief of the fact
3. A promise made without any intention of performing it 
4. Any other act fitted to deceive 
5. Any such act or omission as the law specially declares to be fraudulent .

 

• CHARACTERISTIC OF FRAUD IN THE COMPANY 

 

The following are the characteristic of fraud done in the company:-

1. The fraud is determined in the company due to the compensation scheme plays important role in the company
2. Agency cost and fraud are also connected through the corporate governance practise.
3. The corporate control is highly competitive and highly skilled manager can manipulate earning in order to prevent being fired
4. Financing needs are also important for expansion of company . so the capital too become reason for fraud in the company 
5. The hypothesis of fraud commitment due to the high growth is also the commitment of fraud in the company.

FRAUD AND ITS CONSEQUENCES TO THE COMPANY

Its consequences are following :-

1. Excess negative returns 
2. Reputation loss
3. Other implication of fraud to cost in the capital
4. Advantages to its rivals 

Excess negative returns 

When a company get accused of fraud , it was mainly get penalty of fine , fees etc . the accused company earns the negative impact by society and abnormal profit .

Reputation loss 

Total 132 case in USA has faced the reputation loss in the market due to the fraud committed by them or any other person of the company .

Other implication of fraud to cost in the capital 

Company commenting the fraud get increase in cost of capital in the case of trade.allegation of fraud can result in revision of existing of contract , including bank loans etc.

To its rivals

 There could be 2 possibilities:-

1. Loss in the rival company due to the fraud in the one company leads to fall in the reliability,flexibility of information given by the industry 
2. The benefit to rival company for lack competition in the industry.

 

TYPES OF CORPORATE FRAUD 

1. Fraudulent financial statement
2. Employee fraud
3. Vendor fraud
4. Customer fraud
5. Investment scam
6. Bankruptcy fraud 
7. Miscellaneous

COMMON TYPES OF FRAUD 

 

• Financial fraud

• Manipulation,falsification

• Misapplication of accounting principle

• Misrepresenting of account

• Misappropriate of assets

• Causing improper payment

• Theft of tangible assets by internal or external parties 

• Sales of proprietary information 

1. Corruption 

• Making or receiving improper payment

• Offering briber to public and private officials 

• Adding and abetting fraud by other

HOW THE MANAGEMENT ENCOURAGES FRAUD

 

1. Responsibilty , authority not established
2. Goals , objective is not establisehd 
3. No written policies
4. Treatment of employes -favorite or low morale.

• FRAUDULANT CONDUCT OF BUSINESS UNDER INDIAN COMPANY ACT,2013 ;

 

• Section 339. Liability for fraudulent conduct of business.— (1) If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct: 

 

Provided that on the hearing of an application under this sub-section, the Official Liquidator or the Company Liquidator, as the case may be, may himself give evidence or call witnesses.

 

1. Where the Tribunal makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that declaration and, in particular,—

 

1. make provision for making the liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf;

 

1. make such further order as may be necessary for the purpose of enforcing any charge imposed under this sub-section. 

 

(3) Where any business of a company is carried on with such intent or for such purpose as is 

mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be liable for action under section 447. 

1. This section shall apply, notwithstanding that the person concerned may be punishable under any other law for the time being in force in respect of the matters on the ground of which the declaration is to be made.

 

Explanation.—For the purposes of this section,— 

1. the expression ―assignee‖ includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest was created, but does not include an assignee for valuable consideration, not including consideration by way of marriage, given in good faith and without notice of any of the matters on the ground of which the declaration is made; 

 

(b) the expression ―officer‖ includes any person in accordance with whose directions or 

instructions the directors of the company have been accustomed to act. 

 

• Section 447. Punishment for fraud.— Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: 

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. 

 

Explanation.—For the purposes of this section— 

 

1. ―fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; 

 

(ii) ―wrongful gain‖ means the gain by unlawful means of property to which the person gaining is not legally entitled; 

 

(iii) ―wrongful loss‖ means the loss by unlawful means of property to which the person losing is legally entitled.

 

• Section 337. Penalty for frauds by officers.— If any person, being at the time of the commission of the alleged offence an officer of a company which is subsequently ordered to be wound up by the Tribunal or which subsequently passes a resolution for voluntary winding up,— 

1. has, by false pretences or by means of any other fraud, induced any person to give credit to the company; 

 

(b) with intent to defraud creditors of the company or any other person, has made or caused to be made any gift or transfer of, or charge on, or has caused or connived at the levying of any execution against, the property of the company; or 

 

(c) with intent to defraud creditors of the company, has concealed or removed any part of the 

property of the company since the date of any unsatisfied judgment or order for payment of money obtained against the company or within two months before that date, 

he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.

 

Management of these fraud issue in company

• Section 211. Establishment of Serious Fraud Investigation Office.— (1) The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a company: 

Provided that until the Serious Fraud Investigation Office is established under subsection (1), the Serious Fraud Investigation Office set-up by the Central Government in terms of the Government of India Resolution No. 45011/16/2003-Adm-I, dated the 2nd July, 2003 shall be deemed to be the Serious Fraud Investigation Office for the purpose of this section. 

(2) The Serious Fraud Investigation Office shall be headed by a Director and consist of such number 

of experts from the following fields to be appointed by the Central Government from amongst persons of 

ability, integrity and experience in,— 

(i) banking; 

(ii) corporate affairs; 

(iii) taxation; 

(iv) forensic audit; 

(v) capital market; 

(vi) information technology; 

(vii) law; or 

(viii) such other fields as may be prescribed. 

(3) The Central Government shall, by notification, appoint a Director in the Serious Fraud 

Investigation Office, who shall be an officer not below the rank of a Joint Secretary to the Government of 

India having knowledge and experience in dealing with matters relating to corporate affairs. 

(4) The Central Government may appoint such experts and other officers and employees in the 

Serious Fraud Investigation Office as it considers necessary for the efficient discharge of its functions 

under this Act. 

(5) The terms and conditions of service of Director, experts, and other officers and employees of the 

Serious Fraud Investigation Office shall be such as may be prescribed. 

• Section 212. Investigation into affairs of Company by Serious Fraud Investigation Office.— (1) Without 

prejudice to the provisions of section 210, where the Central Government is of the opinion, that it is 

necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office— 

(a) on receipt of a report of the Registrar or inspector under section 208; 

(b) on intimation of a special resolution passed by a company that its affairs are required to be 

investigated; 

(c) in the public interest; or 

(d) on request from any Department of the Central Government or a State Government, 

the Central Government may, by order, assign the investigation into the affairs of the said company to the 

Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may 

consider necessary for the purpose of such investigation. 

(2) Where any case has been assigned by the Central Government to the Serious Fraud Investigation 

Office for investigation under this Act, no other investigating agency of Central Government or any State 

Government shall proceed with investigation in such case in respect of any offence under this Act and in 

case any such investigation has already been initiated, it shall not be proceeded further with and the 

concerned agency shall transfer the relevant documents and records in respect of such offences under this 

Act to Serious Fraud Investigation Office. 

(3) Where the investigation into the affairs of a company has been assigned by the Central 

Government to Serious Fraud Investigation Office, it shall conduct the investigation in the manner and 

131follow the procedure provided in this Chapter; and submit its report to the Central Government within 

such period as may be specified in the order. 

(4) The Director, Serious Fraud Investigation Office shall cause the affairs of the company to be 

investigated by an Investigating Officer who shall have the power of the inspector under section 217. 

(5) The company and its officers and employees, who are or have been in employment of the 

company shall be responsible to provide all information, explanation, documents and assistance to the 

Investigating Officer as he may require for conduct of the investigation. 

(6) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), 

1 [offence covered under section 447] of this Act shall be cognizable and no person accused of any offence 

under those sections shall be released on bail or on his own bond unless— 

(i) the Public Prosecutor has been given an opportunity to oppose the application for such release; 

and 

(ii) where the Public Prosecutor opposes the application, the court is satisfied that there are 

reasonable grounds for believing that he is not guilty of such offence and that he is not likely to 

commit any offence while on bail: 

Provided that a person, who, is under the age of sixteen years or is a woman or is sick or infirm, may 

be released on bail, if the Special Court so directs: 

Provided further that the Special Court shall not take cognizance of any offence referred to this sub

section except upon a complaint in writing made by— 

(i) the Director, Serious Fraud Investigation Office; or 

(ii) any officer of the Central Government authorised, by a general or special order in writing in 

this behalf by that Government. 

(7) The limitation on granting of bail specified in sub-section (6) is in addition to the limitations under 

the Code of Criminal Procedure, 1973 (2 of 1974) or any other law for the time being in force on granting 

of bail. 

(8) If the Director, Additional Director or Assistant Director of Serious Fraud Investigation Office 

authorised in this behalf by the Central Government by general or special order, has on the basis of 

material in his possession reason to believe (the reason for such belief to be recorded in writing) that any 

person has been guilty of any offence punishable under sections referred to in sub-section (6), he may 

arrest such person and shall, as soon as may be, inform him of the grounds for such arrest. 

(9) The Director, Additional Director or Assistant Director of Serious Fraud Investigation Office 

shall, immediately after arrest of such person under sub-section (8), forward a copy of the order, along 

with the material in his possession, referred to in that sub-section, to the Serious Fraud Investigation 

Office in a sealed envelope, in such manner as may be prescribed and the Serious Fraud Investigation 

Office shall keep such order and material for such period as may be prescribed. 

(10) Every person arrested under sub-section (8) shall within twenty-four hours, be taken to a Judical 

Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction: 

Provided that the period of twenty-four hours shall exclude the time necessary for the journey from 

the place of arrest to the Magistrate’s court. 

(11) The Central Government if so directs, the Serious Fraud Investigation Office shall submit an 

interim report to the Central Government. 

(12) On completion of the investigation, the Serious Fraud Investigation Office shall submit the 

investigation report to the Central Government. 

1. Subs. by Act 21 of 2015, s. 17, for certain words, brackets and figures (w.e.f. 29-5-2015). 

132(13) Notwithstanding anything contained in this Act or in any other law for the time being in force, a 

copy of the investigation report may be obtained by any person concerned by making an application in 

this regard to the court. 

(14) On receipt of the investigation report, the Central Government may, after examination of the 

report (and after taking such legal advice, as it may think fit), direct the Serious Fraud Investigation 

Office to initiate prosecution against the company and its officers or employees, who are or have been in 

employment of the company or any other person directly or indirectly connected with the affairs of the 

company. 

(15) Notwithstanding anything contained in this Act or in any other law for the time being in force, 

the investigation report filed with the Special Court for framing of charges shall be deemed to be a report 

filed by a police officer under section 173 of the Code of Criminal Procedure, 1973 (2 of 1974). 

(16) Notwithstanding anything contained in this Act, any investigation or other action taken or 

initiated by Serious Fraud Investigation Office under the provisions of the Companies Act, 1956 (1 of 

1956) shall continue to be proceeded with under that Act as if this Act had not been passed. 

(17) (a) In case Serious Fraud Investigation Office has been investigating any offence under this Act, any other investigating agency, State Government, police authority, income-tax authorities having any information or documents in respect of such offence shall provide all such information or documents available with it to the Serious Fraud Investigation Office; 

 

(b) The Serious Fraud Investigation Office shall share any information or documents available with it, with any investigating agency, State Government, police authority or income-tax authorities, which may be relevant or useful for such investigating agency, State Government, police authority or income-tax authorities in respect of any offence or matter being investigated or examined by it under any other law. 

By establishing the :-

1. Fraud risk managemnt 
2. Anti fraud strategy
3. A sound ethical culture
4. Sound internal control system
5. Fraud detection
6. Fraudelent detecton tool and techniques like internal audit, data matching
7. Adot anti corruption and anti bribery practises 
8. Let say no to corruption 
9. Strong ethical value in organisation 
10. Clear roles and responsibilty.