What Is Fraud Under Section 447 Companies Act?

Fraud under section 447 of the Companies Act, 2013 is a defined offence with its own definition, its own two tier punishment and, through section 448, its own route in from a false filing. It is also the provision that other sections of the Act point at when they want a serious consequence, which is why it turns up at the foot of so many forms.

The definition, element by element

The Explanation to section 447 defines three terms. The first is the one that carries the weight.

Fraud includes four kinds of conduct: an act, an omission, the concealment of any fact, or an abuse of position. The statutory phrase for who commits it is "by any person or any other person with the connivance in any manner", so a participant acting through or alongside another is inside the definition. It must be committed with one of three intents:

1. to deceive
2. to gain undue advantage from the company, its shareholders, its creditors or any other person
3. to injure the interests of the company, its shareholders, its creditors or any other person

And then the clause that decides most arguments: whether or not there is any wrongful gain or wrongful loss. The offence is complete on intent plus conduct. A scheme that failed is still fraud.

The other two definitions are the pair the section needs to make that last clause coherent. Wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled. Wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled.

The two tiers of punishment

Section 447 was amended by Act 1 of 2018, section 92, with effect from 9 February 2018, which inserted both the monetary threshold in the main limb and the second proviso creating the lower tier. The structure now has a line running through it.

Two further points on the table. The first proviso raises the floor where the fraud in question involves public interest: the term of imprisonment shall not be less than three years. And the fifty lakh rupee figure in the lower tier was substituted by Act 22 of 2019, section 41, with effect from 2 November 2018, replacing "twenty lakh rupees".

The threshold itself is a whichever is lower test, so the one per cent limb only ever binds a company whose turnover is under ten crore rupees. For a company with a turnover of five hundred crore rupees, one per cent is five crore, so ten lakh remains the operative figure. For a company with a turnover of five crore rupees, one per cent is five lakh, so the harsher tier reaches down to half the default figure and the lower tier shrinks to match.

Section 448, and why a false filing is a section 447 matter

Section 448 does not create its own punishment. It creates liability under section 447, and it does so for statements in documents.

Save as otherwise provided in the Act, if in any return, report, certificate, financial statement, prospectus, statement or other document required by or for the purposes of any provision of the Act or the rules made under it, any person makes a statement:

• (a) which is false in any material particulars, knowing it to be false; or
• (b) which omits any material fact, knowing it to be material

he shall be liable under section 447.

Clause (b) is the one that is easy to miss. A knowing omission of a material fact is treated the same as a knowing false statement. Both limbs require knowledge, so an honest error is not caught by section 448.

This is the reason so many declarations and forms under the Act carry a footnote pointing at sections 447 and 448. The footnote is not decoration. It is the statement of what a knowingly false particular in that document attracts.

The neighbouring offences

Two sections that sit immediately after are frequently quoted alongside, and they are separate offences with their own punishment.

Section 449, false evidence. If any person intentionally gives false evidence upon any examination on oath or solemn affirmation authorised under the Act, or in any affidavit, deposition or solemn affirmation in or about the winding up of any company or any matter arising under the Act, he shall be punishable with imprisonment of not less than three years extending to seven years, and with fine which may extend to ten lakh rupees.

Section 450, the residual penalty. Where a company, any officer of a company or any other person contravenes any provision of the Act or the rules, or any condition, limitation or restriction subject to which an approval, sanction, consent, confirmation, recognition, direction or exemption was granted, and no penalty or punishment is provided elsewhere in the Act, the company and every officer in default or such other person shall be liable to a penalty of ten thousand rupees, and for a continuing contravention a further penalty of one thousand rupees for each day after the first, subject to a maximum of two lakh rupees for a company and fifty thousand rupees for an officer in default or any other person. That penalty structure was substituted by Act 29 of 2020, section 63, with effect from 21 December 2020.

Where this sits in the disclosure picture

Section 447 is not a disclosure provision. It is the consequence that hangs off the disclosure provisions, which is why it matters to anyone reading filings: the declarations at the foot of a form under the Companies Act are made against this section.

• How to claim shares from IEPF is one of the processes whose claim form carries the sections 447 and 448 declaration.
• What is a class action suit under the Companies Act covers the section 245 remedy against fraudulent, unlawful or wrongful acts.
• What is oppression and mismanagement covers the section 241(3) reference where the Central Government alleges fraud by a person in management.
• What is a secretarial audit report is one of the reports whose accuracy sits inside the section 448 net.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.