| CASE NAME | Dr. Rajesh Kumar Yaduvanshi v. Serious Fraud Investigation Office (Sfio) & Anr. |
| CITATION | AIRONLINE 2020 DEL 1298 |
| COURT | Delhi High Court |
| PETITIONER | Dr. Rajesh Kumar Yaduvanshi |
| RESPONDENTS | Serious Fraud Investigation Office (Sfio) & Anr. |
| DECIDED ON | 21 September, 2020 |
INTRODUCTION
The High Court decision of the Delhi High Court delivered on September 21, 2020, on the issue of prosecution of nominee director under Companies Act, 2013 in Dr. Rajesh Kumar Yaduvanshi vs Serious Fraud Investigation Office examined fundamental issues related to the responsibility of directors, nominee directors, and the standard of proof necessary to engage a director to answer for corporate fraud. The petitioner, who was summoned as a result of allegations made against him, challenged the summoning order of the lower court issued against him to be summoned to answer for fraud allegations relating to Bhushan Steel Limited (BSL).
This case deals with the responsibilities and protections of nominee directors in corporate governance. Dr. Rajesh Kumar Yaduvanshi, a nominee director representing Punjab National Bank on the board of Bhushan Steel Limited, was summoned by the SFIO for alleged financial fraud by the company’s promoters. The key question was whether a nominee director can be held liable for corporate fraud without evidence of personal involvement or complicity. The Delhi High Court examined statutory protections under Section 16A and the Companies Act, ultimately emphasizing that mere board membership does not create automatic liability. The judgment reinforces that prosecution requires clear evidence of knowledge or participation in fraudulent activities.
FACTS
- Case Background: The petitioner, Dr. Rajesh Kumar Yaduvanshi, was a nominee director of Punjab National Bank (PNB) on the Board of Directors of BSL. This case arose from a complaint made by the Serious Fraud Investigation Office (SFIO) which investigated BSL for financial fraud.
- Complaint: The complaint against BSL and 286 other persons/entities was based on the result of an investigation requiring SIFO issued under Section 212(1) of the Companies Act, 2013. The investigation determined that the promoters of BSL (the “Promoters”) had allegedly siphoned funds from BSL using multiple companies in a maze-like structure.
- Allegations against the Petitioner: The SFIO alleged that the petitioner failed to ensure that BSL’s financial statements spelled a true and fair view of the company’s affairs with other directors, and the petitioner was also charged under a number of sections of the Companies Act, being Sections 128, 129 and 448 of the Companies Act, which related to, maintenance of books of accounts (Section 128), preparation of financial statements (Section 129) punishments for making false statement or account (Section 448).
- The Petitioner: As a nominee director, the petitioner did not have any executive power at BSL to manage BSL, and in fact, explained that his role was non-executive, attending board meetings and engaged in conversations, but the day-to-day operations of BSL were not under his authority.
- Findings of Investigation: According to the report from the SFIO’s investigation, BSL’s promoters manipulated the financial statements resulting in inflated asset values and fraudulent inducement of loans. The investigation cited that money was siphoned off for personal benefit, while the directors, including the petitioner, did not take any action against these activities for which the loans were taken ostensibly by BSL as employer benefit as also the wrongful gain against the bank.
- Legal Proceedings: The petitioner filed a petition challenging the summoning order from the learned ASJ in Complaint Case No. 770/2019. The main point of contention is whether the prosecution can maintain charges against the petitioner solely based on him being a director knowing what he did at BSL.
ISSUES
- Prosecuting Nominee Directors: Is it sufficient to prosecute a nominee director for corporate fraud merely, based on the role in the Company? Or, in order to prosecute, is it necessary to establish the nominee director is party to the fraud?
- Adequacy of Evidence: Was there adequate record materials to support the summons against the petitioner in relation to the Companies Act?
- Applicability of Section 16A: Does Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act provide immunity to the petitioner from prosecution for the actions conducted as a nominee director.
CONTENTIONS
PETITIONER’S CONTENTIONS
- Absence of Culpable Conduct: The petitioner argued that the complaint and investigation report did not demonstrate any actual culpable conduct by him, and he pointed out that the complaint describes a story outlining the fraud carried on by the promoters but not against him.
- Nominee Director Protection: The petitioner stated that as a nominee director by Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act, he had a statutory protection from prosecution in relation to the actions he took in good faith in the role of director.
- No Proof of Conduct: The petitioner asserted that at no point in the complaint does it suggest that he connived with the promoters or had any knowledge of the fraud. The petitioner asserted that his name was mentioned in the complaints context, without any allegations of wrongdoing was insufficient grounds to justify any prosecution.
- Judicial Principles: The petitioner referred to a series of Supreme Court cases including Birla Corporation Ltd. v. Adventz Investments and Holdings Ltd and Sunil Bharti Mittal .v. CBI as propositions that summons can be issued when there is evidence of complicity or culpable conduct.
RESPONDENT’S CONTENTIONS
- Fraudulent Acts: The SFIO argued that the investigation showed a repeated series of fraudulent acts committed by the promoters of BSL, and that there is a collective responsibility for all directors, including the petitioner, to take action to prevent fraud. They argue that the petitioner, as a nominee director, had the obligation to question the financial statements.
- Information Access: The SFIO argued that the petitioner had access to important financial documents and information and reports that would have alerted him to the actions of fraudulent behaviour being conducted inside the company. The SFIO argued that the petitioner’s failure to act is impliedly agreeing with the fraud.
- Directors Collective Accountability: The respondent argued that there is collective accountability within a company and therefore all directors have collective responsibility for the company’s affairs and cannot try and evade liability under the guise of being a nominee director.
- Framework for Fraud. The SFIO advanced the provisions in the Companies Act that provide for punishment for fraud and false statement i.e. Sections 447 and 448. The SFIO maintained that the petitioner could be prosecuted if the prosecution could show that the petitioner had knowledge or was complicit in the fraudulent actions.
JUDGMENT
- Failure to set Specific Allegations: The High Court found the complaint and investigation report failed to set out specific allegations against the petitioner that would justify prosecution. The court noted mere status as a director did not make culpability any intention of complicity.
- Immunity: The court provided again consideration of the immunity available to nominee directors in section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act – section 16A states that no nominee director is liable if acting in good faith while performing their duties.
- Absence of Evidence of Complicity: The court found no evidence this petitioner knowingly participated in any fraud or failed to act in good faith, the allegations defendant’ had failed to commit any action that amounted to criminal culpability to satisfy prosecution.
- Judicial Scrutiny of the Summons: The court further considered that the summons may only be issued on the basis of sufficient grounds and a proper application of mind by the lower court. In this case the lower court did not properly consider the absence of evidence against the petitioner prior to issuing summons.
- Cancellation of summons: With the determined findings, the High Court set aside the summons ordering against the petitioner on the basis that the allegations made did not provide a basis for criminal proceedings.
However, The Supreme Court set aside the Delhi High Court’s judgment that had quashed the summons issued against Dr. Rajesh Kumar Yaduvanshi. The apex court restored the proceedings initiated by the Serious Fraud Investigation Office (SFIO) against him. The Supreme Court’s decision emphasized that the nominee director’s role and statutory protections under Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, do not absolve them from liability if there is evidence of complicity or failure to act in good faith
CONCLUSION
The Delhi High Court, in determining the case of Dr. Rajesh Kumar Yaduvanshi, has reaffirmed the position of nominee directors under specific statutory provisions and the fact that ‘some clear evidence of collusion in the fraud’ should be shown in order for the prosecution of directors, especially nominee directors. The judgment has emphasized that the courts must scrutinize any summoning of accused subject to criminal proceedings as held in this case.
As a case report, this matter will prove to be an important marker in the future of nominee directors obligations and protections in corporate decision-making and particularly in relation to financial fraud investigations. This judgement has drawn a distinction between having a positional authority (as a board member) and involvement in a corruption or fraud of some type, and supports the basic idea that board members only should be held accountable when there is unequivocal evidence of their fraudulent involvement.
‘This article has been written by Tamanna Jain from University Five Year Law College, University of Rajasthan.’
