Supreme Court Cancels Bail in Financial Fraud Case: Centrum Financial Services Ltd. vs. State of NCT of Delhi (28 January 2022)

Date of the Judgment: 28 January 2022

Citation: 2022 INSC 115

Judges: M.R. Shah, J. and Sanjiv Khanna, J.

Can a High Court grant bail in a case of financial fraud by merely stating it is a commercial transaction? The Supreme Court of India recently addressed this question, setting aside a High Court order that granted bail to an accused in a case involving allegations of siphoning off a large sum of money through shell companies. The Supreme Court emphasized that the High Court failed to consider the seriousness of the charges and the evidence presented by the investigating agency. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice Sanjiv Khanna.

Case Background

The case originated from a complaint filed by Centrum Financial Services Limited, a non-banking financial company (NBFC). The complaint was against M/s Sri Aranath Logistics Limited (formerly known as M/s LMJ Logistics Limited), its Managing Director, Jayant Kumar Jain, and others. The NBFC alleged that M/s Sri Aranath Logistics Limited had availed a loan credit facility of Rs. 25 crores for 180 days in 2017. It was alleged that the loan was to be used for the company’s business purposes, but instead, the funds were transferred to several fake or shell companies. The complainant also alleged that the accused misrepresented the financial health of the company at the time of availing the loan. Further, it was alleged that around Rs. 8 crores were diverted to shell companies created by the accused in the name of his employees using forged documents. Additionally, Rs. 15 crores were transferred to LMJ International Ltd. to settle its previous liabilities with Corporation Bank, Calcutta.

Timeline:

Course of Proceedings

After a preliminary investigation, the Economic Offences Wing registered FIR No. 128 against the accused. The accused, Jayant Kumar Jain, was arrested on 03.07.2020. His bail application before the Metropolitan Magistrate under Section 437 of the Criminal Procedure Code (Cr.P.C.) was not successful. A subsequent bail application before the Sessions Judge, Patiala House Courts, New Delhi, was also dismissed on 04.08.2020, after the investigating officer (I.O.) submitted a status report detailing the siphoning of funds. However, the High Court of Delhi, in its judgment dated 14.09.2020, granted bail to Respondent No. 2, stating that the case arose from a commercial transaction and was based on seized documents. The original complainant then appealed to the Supreme Court against the High Court’s order.

Legal Framework

The First Information Report (FIR) was registered for offences under Sections 409 (Criminal breach of trust), 420 (Cheating), 467 (Forgery of valuable security), 468 (Forgery for purpose of cheating), 471 (Using as genuine a forged document) and 120B (Criminal conspiracy) of the Indian Penal Code (IPC). These sections deal with offenses related to financial fraud, forgery, and criminal conspiracy.

Arguments

Arguments by Respondent No. 2 (Accused):

• The dispute is of a civil nature arising out of commercial transactions. The investigation is concluded, and the case rests on documentary evidence already seized.

• The High Court’s order granting bail was passed on 14.09.2020, and since then, there are no allegations that Respondent No. 2 has misused his liberty.

• During the investigation, Respondent No. 2 cooperated with the authorities.

• Out of Rs. 25 crores, Rs. 15 crores were transferred to a sister concern, LNJ International Limited, which used the amount to pay off its loan. This cannot be considered an offense.

• The respondent relied on the decisions of the Supreme Court in Dolat Ram vs. State of Haryana, (1995) 1 SCC 349, X vs. State of Telangana, (2018) 16 SCC 511, Prabhakar Tewari vs. State of U.P., (2020) 11 SCC 648 and Gurcharan Singh vs. State (Delhi Administration) (1978) 1 SCC 118 to argue that once bail has been granted, it should not be cancelled unless there is a violation of bail conditions or misuse of liberty.

Arguments by the State:

• The State vehemently opposed the bail application before the High Court.

• A supplementary charge sheet has been filed.

• The status report details how a systematic fraud was committed by Respondent No. 2 and others, siphoning off Rs. 25 crores through fake shell companies.

• The State shall abide by the directions/order passed by the Supreme Court.

Arguments by the Appellant (Original Complainant):

• The High Court did not consider the nature of the accusations and the seriousness of the allegations of siphoning off a huge amount through various shell companies.

• The High Court failed to consider the material collected during the investigation, as detailed in the status report filed by the I.O.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the High Court was justified in releasing Respondent No. 2 on bail, given the serious allegations and the material collected during the investigation.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court relied on Prasanta Kumar Sarkar vs. Ashis Chatterjee and Anr., (2010) 14 SCC 496, Neeru Yadav vs. State of UP & Anr., (2016) 15 SCC 422, Anil Kumar vs. State (NCT of Delhi), (2018) 12 SCC 129, Prahlad Singh Bhati vs. NCT of Delhi & Ors., (2001) 4 SCC 280 and Mahipal vs. Rajesh Kumar alias Polia and Another, (2020) 2 SCC 118 to emphasize the principles and factors that must be considered while granting bail.
• The Supreme Court distinguished Dolat Ram vs. State of Haryana, (1995) 1 SCC 349, X vs. State of Telangana, (2018) 16 SCC 511, Prabhakar Tewari vs. State of U.P., (2020) 11 SCC 648 and Gurcharan Singh vs. State (Delhi Administration) (1978) 1 SCC 118 stating that those cases do not apply when the initial grant of bail is itself flawed.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the High Court’s failure to consider the seriousness of the allegations and the evidence presented by the investigating agency. The Court emphasized the following points:

• The High Court did not consider the modus operandi of the fraud, involving the creation of shell companies and the siphoning of funds.
• The High Court did not take into account the status report filed by the I.O., which detailed the systematic nature of the fraud.
• The High Court mechanically granted bail by observing that the case arose out of a commercial transaction, ignoring the serious allegations of financial fraud.
• The High Court failed to consider the relevant factors for granting bail, such as the nature and gravity of the accusations, the severity of the punishment, and the likelihood of the accused absconding.

Fact:Law Ratio

Logical Reasoning:

The Supreme Court held that the High Court’s decision was flawed because it failed to consider the relevant factors and the seriousness of the allegations. The Court emphasized that the High Court had not applied its mind to the material evidence and had mechanically granted bail. The Supreme Court stated, “From the aforesaid it can be seen that while releasing the Respondent No.2 on bail the High Court has not at all adverted to and/or considered the nature of accusation and the material found/collected during the course of investigation and the serious allegations of siphoning off the huge amount through various shell companies.” The Court also observed, “Therefore, the High Court has not at all taken into consideration the relevant considerations while grant of bail.” Additionally, the Court noted, “Even the High Court has not at all taken note of the reasoning given by the learned Sessions Court while rejecting the bail application of Respondent No.2.”

The Supreme Court rejected the argument that bail should not be cancelled if there is no misuse of liberty. The Court clarified that this principle does not apply when the initial grant of bail was itself illegal. The Supreme Court stated, “What is observed and held is that the rejection of bail in a non­bailable case at an initial stage and cancellation of bail so granted has to be dealt with and considered on different basis and that very cogent and overwhelming circumstances are necessary for an order directing the cancellation of the bail already granted.” The Court also stated, “Thus, as per the law laid down by this Court where a Court while considering an application for bail fails to consider the relevant factors, an Appellate Court may justifiably set aside the order granting bail.”

Key Takeaways

• High Courts must consider the seriousness of the allegations and the evidence presented by the investigating agency when deciding on bail applications, especially in cases of financial fraud.
• Granting bail merely on the basis that a case arises from a commercial transaction is not sufficient; the court must consider the nature and gravity of the accusations.
• The absence of misuse of liberty is not a sufficient ground to uphold an illegal bail order.
• Appellate courts can set aside a bail order if the lower court failed to consider relevant factors or mechanically granted bail.
• The modus operandi of the crime and the material collected during the investigation are crucial factors that must be considered while granting bail.

Directions

The Supreme Court directed the following:

• The High Court’s order releasing Respondent No. 2 on bail was quashed and set aside.
• Respondent No. 2 was directed to surrender before the concerned Court/Jail Authority forthwith.
• Respondent No. 2 was given the liberty to move an appropriate application for bail before the High Court afresh after a period of three months.
• The High Court was directed to consider the fresh bail application in accordance with the law, on its own merits, and after taking into consideration the relevant material collected during the investigation.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that a High Court cannot grant bail in a case involving serious allegations of financial fraud by merely stating that it is a commercial transaction. The High Court must consider the nature and gravity of the accusations, the modus operandi of the crime, and the evidence collected during the investigation. This judgment reinforces the principle that bail orders must be based on a careful consideration of all relevant factors and not on a mechanical application of general principles. It also clarifies that appellate courts can set aside bail orders if the lower court failed to consider relevant factors or mechanically granted bail, even if there is no misuse of liberty by the accused.

Conclusion

The Supreme Court allowed the appeal filed by Centrum Financial Services Limited, setting aside the High Court’s order that had granted bail to the accused, Jayant Kumar Jain. The Supreme Court held that the High Court failed to consider the seriousness of the allegations, the modus operandi of the fraud, and the evidence collected during the investigation. The Court emphasized that bail orders must be based on a careful consideration of all relevant factors and not on a mechanical application of general principles. The accused was directed to surrender, but was given the option to apply for bail again after three months, which the High Court would consider in accordance with the law.