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

Introduction

Date of the Judgment: 28 January 2022

Citation: (2022) INSC 94

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

Can a High Court grant bail in a case involving serious financial fraud, simply because the case arises from a commercial transaction? The Supreme Court of India recently addressed this question, setting aside a High Court order that had granted bail to an accused in a case involving alleged siphoning of funds. The core issue revolved around whether the High Court had appropriately considered the gravity of the allegations and the evidence presented when granting bail. The judgment was delivered by a two-judge bench of Justices M.R. Shah and Sanjiv Khanna, with Justice M.R. Shah authoring the opinion.

Case Background

Centrum Financial Services Limited, a non-banking financial company (NBFC), filed a complaint against M/s Sri Aranath Logistics Limited (formerly M/s LMJ Logistics Limited), its Managing Director Jayant Kumar Jain, and others. The complaint alleged offences under Sections 409, 420, 467, 468, 471, and 120B of the Indian Penal Code (IPC). The NBFC had provided a loan of Rs. 25 crores to M/s Sri Aranath Logistics Limited for 180 days in 2017. It was alleged that this amount was not used for the company’s purposes, but was instead diverted to various shell companies. The complainant also stated that the accused misrepresented the financial health of the company at the time of availing the loan. The funds were allegedly transferred to shell companies created by the accused using forged documents and then siphoned off to other companies connected to the accused. Furthermore, a sum of Rs. 15 crores was transferred to LMJ International Ltd and used to settle previous liabilities with Corporation Bank, Calcutta. After a preliminary investigation, the Economic Offences Wing registered FIR No. 128 against the accused, leading to the arrest of Respondent No. 2, Jayant Kumar Jain, on 03.07.2020.

Timeline:

Course of Proceedings

Following his arrest, Respondent No. 2 filed a bail application before the Metropolitan Magistrate under Section 437 of the Code of Criminal Procedure (Cr.P.C.). Another bail application was moved before the Sessions Judge, Patiala House Courts, New Delhi, which was opposed by the Investigating Officer (I.O.). The Sessions Judge dismissed the bail application on 04.08.2020, after reviewing a status report detailing the siphoning of funds. Subsequently, Respondent No. 2 approached the High Court of Delhi with a bail application. Despite the I.O. filing a detailed status report and a charge sheet, the High Court granted bail, primarily on the grounds that the case was commercial in nature and based on seized documents.

Legal Framework

The case involves offences under the following sections of the Indian Penal Code, 1860:

• Section 409, IPC: This section deals with criminal breach of trust by a public servant, banker, merchant, or agent. The section states:
  “Whoever, being in any manner entrusted with property, or with any dominion over property, in his capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, commits criminal breach of trust in respect of that property, shall be punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.”
• Section 420, IPC: This section addresses cheating and dishonestly inducing delivery of property. It states:
  “Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.”
• Section 467, IPC: This section deals with forgery of valuable security, will, etc. It states:
  “Whoever forges a document which purports to be a valuable security or a will, or an authority to adopt a son, or which purports to give authority to any person to make or transfer any valuable security, or to receive the principal, interest or dividends thereon, or to receive or deliver any money, movable property, or valuable security, or any document purporting to be an acquittance or receipt acknowledging the payment of money, or an acquittance or receipt for the delivery of any movable property or valuable security, shall be punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.”
• Section 468, IPC: This section addresses forgery for the purpose of cheating. It states:
  “Whoever commits forgery, intending that the document or electronic record forged shall be used for the purpose of cheating, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.”
• Section 471, IPC: This section deals with using as genuine a forged document or electronic record. It states:
  “Whoever fraudulently or dishonestly uses as genuine any document or electronic record which he knows or has reason to believe to be a forged document or electronic record, shall be punished in the same manner as if he had forged such document or electronic record.”
• Section 120B, IPC: This section pertains to criminal conspiracy. It states:
  “Whoever is a party to a criminal conspiracy to commit an offence punishable with death, imprisonment for life or rigorous imprisonment for a term of two years or upwards, shall, where no express provision is made in this Code for the punishment of such a conspiracy, be punished in the same manner as if he had abetted such offence.”

Arguments

Arguments on behalf of Respondent No. 2:

• The dispute is civil in nature, arising from a commercial transaction.
• The investigation is complete, and the case is based on documentary evidence that has already been seized.
• The High Court granted bail on 14.09.2020, and since then, there have been no allegations of misuse of liberty by Respondent No. 2.
• Respondent No. 2 cooperated during the investigation.
• The complainant and the State are not seriously opposing the bail application.
• Rs. 15 crores out of the Rs. 25 crores were transferred to a sister concern, LNJ International Limited, which used the funds to pay off its loan. This cannot be considered an offense.
• Relied on the judgments 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 is granted, it should not be cancelled unless there is a violation of bail conditions or misuse of liberty.

Arguments on behalf of the State:

• The State had vehemently opposed the bail application before the High Court.
• A supplementary charge sheet has been filed, detailing how the accused siphoned off Rs. 25 crores through shell companies.
• The State will abide by the directions of the Supreme Court.

Arguments on behalf of the Original Complainant:

• The original complainant filed the appeal against the order of the High Court granting bail.
• The complainant argued that the High Court failed to consider the gravity of the offences and the evidence on record.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a separate section. However, the core issue that the court addressed can be summarized as:

• Whether the High Court was justified in granting bail to Respondent No. 2, considering the serious allegations of financial fraud and the evidence presented by the prosecution.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

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]* to emphasize that High Courts must exercise discretion judiciously and consider factors such as the nature of the accusation, severity of punishment, and the danger of the accused absconding.
• The Supreme Court cited Neeru Yadav vs. State of UP & Anr. [(2016) 15 SCC 422]* to highlight the duty of the Court to consider the nature of the accusation, the severity of punishment, and the prima facie satisfaction of the Court in support of the charge.
• The Supreme Court used Anil Kumar vs. State (NCT of Delhi) [(2018) 12 SCC 129]* to underscore the relevant considerations while granting bail, including the seriousness of the offense, the character of the evidence, and the likelihood of the accused fleeing from justice.
• The Supreme Court referred to Prahlad Singh Bhati vs. NCT of Delhi & Ors. [(2001) 4 SCC 280]* to reiterate that the jurisdiction to grant bail must be exercised based on well-settled principles and not arbitrarily.
• The Supreme Court cited Mahipal vs. Rajesh Kumar alias Polia and Another [(2020) 2 SCC 118]* to differentiate between the power of an appellate court in assessing the correctness of an order granting bail and an application for the cancellation of bail.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the High Court’s failure to consider the gravity of the accusations and the evidence presented by the prosecution. The Court emphasized that the High Court had mechanically granted bail without applying its mind to the relevant factors. The Court noted that the High Court had not considered the modus operandi of the accused, the systematic siphoning of funds through shell companies, and the creation of false documents. The Court also highlighted the need for High Courts to consider the status report and the evidence collected during the investigation before granting bail in serious cases of financial fraud.

Fact:Law

The Supreme Court’s decision was influenced more by the factual aspects of the case, particularly the evidence of fraud and siphoning of funds, than by purely legal considerations. The Court focused on the High Court’s failure to properly assess the facts and evidence presented by the prosecution.

Logical Reasoning:

The Supreme Court found that the High Court had not considered the relevant factors while granting bail. The High Court’s reasoning was primarily based on the fact that the case arose out of a commercial transaction and that the documents were already seized. The Supreme Court, however, found that the High Court had failed to consider the serious allegations of fraud and siphoning of funds, the modus operandi of the accused, and the evidence collected during the investigation. The Supreme Court held that the High Court had not exercised its jurisdiction judiciously and had not applied its mind to the relevant considerations. The Supreme Court, therefore, set aside the High Court’s order and cancelled the bail granted to Respondent No. 2.

The Supreme Court quoted the following from the judgment:

“16. Coming to the facts of the present case, it is an admitted fact that the co­accused namely Navin Kumar Jain and Hulash Chand Jain were the other Directors and shareholders of SALL as well as LMJIL. They also signed/undertook personal guarantee to the complainant company in their capacity as Directors of the SALL against the “Working Capital Demand Loan”. Navin Jain had also signed the Tripartite Off­take Agreement in the capacity of Director of LMJIL. Both of them were not even arrested and the charge sheet against them was filed without arrest. During two years of enquiry/investigation, the petitioner joined investigation on multiple occasions. After his arrest, the EOW sought only one day PC remand. Neither in the Status Report nor during the course of arguments, any apprehension was shown that the petitioner is a “flight risk”. The case arises out of a commercial transaction and is based on documents that already stand seized. The petitioner has already approached the NCLT where a moratorium on the assets/properties has been declared and an IRP has been appointed. The complainant has already approached NCLT.”

“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.”

“Therefore, the High Court has not at all taken into consideration the relevant considerations while grant of bail. 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.”

Key Takeaways

• High Courts must exercise their discretion judiciously when granting bail, especially in cases involving serious economic offenses.
• The nature and gravity of accusations, the evidence collected during the investigation, and the modus operandi of the accused must be considered.
• Bail should not be granted mechanically, merely because a case arises out of a commercial transaction.
• The absence of misuse of liberty after the grant of bail is not a sufficient ground to uphold a flawed bail order.
• The status report and the evidence collected during the investigation must be given due consideration.
• The principles laid down in 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, must be adhered to while granting bail.

Directions

The Supreme Court directed that:

• The impugned judgment and order passed by the High Court releasing Respondent No. 2 on bail was quashed and set aside.
• Respondent No. 2 was to surrender before the concerned Court/Jail Authority forthwith.
• It was clarified that any observations made in the order would not affect the trial.
• It was further observed that after surrender, Respondent No. 2 could move an appropriate application for bail before the High Court afresh after a period of three months. The High Court would consider the bail application in accordance with law, on its own merits, and after taking into consideration the relevant material collected during the course of the investigation.

Development of Law

The ratio decidendi of this case is that High Courts must not grant bail in serious economic offenses merely because the case arises out of a commercial transaction. The High Court must consider the gravity of the accusations, the evidence collected during the investigation, and the modus operandi of the accused. This judgment reinforces the principles laid down in previous Supreme Court decisions regarding the grant of bail and clarifies that a flawed bail order can be set aside even if there is no misuse of liberty after the grant of bail. This judgment emphasizes the importance of a judicious exercise of discretion by the High Courts while granting bail in serious cases of financial fraud.

Conclusion

The Supreme Court, in this case, set aside the High Court’s order granting bail to Respondent No. 2, emphasizing that the High Court had failed to consider the relevant factors and had granted bail mechanically. The Supreme Court reiterated the importance of considering the gravity of accusations, evidence, and modus operandi in cases of financial fraud. The judgment serves as a reminder to High Courts to exercise their discretion judiciously and to adhere to established principles while granting bail.