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 74
Judges: M.R. Shah, J., Sanjiv Khanna, J. (authored by M.R. Shah, J.)

Can a High Court grant bail in a case of serious financial fraud by overlooking crucial evidence and the gravity of the offense? The Supreme Court of India recently addressed this question, emphasizing the need for a thorough examination of facts and circumstances before granting bail, especially in economic offenses. This case involves allegations of a significant financial fraud where a non-banking financial company (NBFC) was defrauded of ₹25 crores. The Supreme Court, in this judgment, overturned the High Court’s decision to grant bail, highlighting the importance of considering the nature and gravity of the accusations. The judgment was authored by Justice M.R. Shah, with Justice Sanjiv Khanna concurring.

Case Background

Centrum Financial Services Limited, a non-banking financial company (NBFC), filed a complaint with the Economic Offences Wing in New Delhi against M/s Sri Aranath Logistics Limited (formerly known as M/s LMJ Logistics Limited), its Managing Director Jayant Kumar Jain, and others. The complaint alleged offenses under Sections 409, 420, 467, 468, 471, and 120B of the Indian Penal Code (IPC). It was stated that M/s Sri Aranath Logistics Limited, engaged in multi-commodity trading, availed a loan of ₹25 crores from the complainant for 180 days in 2017. The loan was meant for the company’s use, but it was alleged that the funds were diverted to various fake or shell companies.

The complainant further alleged that the accused misrepresented the financial health of their company while availing the loan. Approximately ₹8 crores were allegedly diverted to shell companies created by the accused in the names of their employees, using forged documents. Additionally, ₹15 crores were transferred to LMJ International Ltd. to settle its previous liabilities. The directors of the shell companies stated that their KYC documents were misused, and they did not open the bank accounts in question. Following a preliminary investigation, the Economic Offences Wing registered FIR No. 128, leading to the arrest of Jayant Kumar Jain on 03.07.2020.

The accused, Jayant Kumar Jain, filed a bail application which was rejected by the Sessions Court on 04.08.2020. Subsequently, he filed a bail application before the High Court, which was allowed. The High Court granted bail, stating the case arose from a commercial transaction and was based on seized documents. The original complainant, Centrum Financial Services Limited, then appealed to the Supreme Court against the High Court’s order.

Timeline

Course of Proceedings

The Respondent No. 2, Jayant Kumar Jain, initially filed a bail application before the Metropolitan Magistrate under Section 437 of the Code of Criminal Procedure (CrPC). Subsequently, another bail application was moved before the Sessions Judge, Patiala House Courts, New Delhi. The Sessions Court dismissed the bail application on 04.08.2020 after considering the status report filed by the Investigating Officer (I.O.), which detailed how the ₹25 crores were siphoned off and transferred to shell companies. The Sessions Court’s detailed order highlighted the seriousness of the allegations and the evidence presented by the prosecution.

Following the rejection of bail by the Sessions Court, Respondent No. 2 approached the High Court with a bail application. The High Court, despite a detailed status report filed by the I.O. outlining the systematic fraud, granted bail to Respondent No. 2. The High Court’s decision was primarily based on the grounds that the case arose from a commercial transaction and was based on documents already seized. The High Court did not consider the seriousness of the allegations, the modus operandi of the fraud, or the evidence of fund diversion through shell companies.

Legal Framework

The case involves alleged offenses under the following sections of the Indian Penal Code (IPC):

• Section 409, IPC: This section deals with criminal breach of trust by a public servant, banker, merchant, or agent. It is applicable when someone entrusted with property dishonestly misappropriates or converts it for their own use.
• Section 420, IPC: This section pertains to cheating and dishonestly inducing delivery of property. It applies when a person deceives another, leading them to part with their property.
• Section 467, IPC: This section addresses forgery of valuable security, will, etc. It is applicable when a person forges documents with the intention to cause harm or commit fraud.
• Section 468, IPC: This section deals with forgery for the purpose of cheating. It applies when a person forges a document with the intention to deceive another.
• Section 471, IPC: This section addresses using as genuine a forged document or electronic record. It is applicable when a person uses a document they know to be forged as if it were genuine.
• Section 120B, IPC: This section pertains to criminal conspiracy, where two or more persons agree to do or cause to be done an illegal act.

These provisions of the IPC are invoked to address the alleged financial fraud, which involves misappropriation of funds, cheating, forgery, and criminal conspiracy. The legal framework aims to penalize individuals who engage in such fraudulent activities and to protect the public from financial harm.

Arguments

The arguments presented by both sides are as follows:

Arguments by Respondent No. 2 (Accused):

• Shri Mukul Rohatgi, learned Senior Advocate appearing on behalf of Respondent No. 2, argued that the dispute was of a civil nature arising out of commercial transactions. He contended that the investigation was concluded, and the case rested on documentary evidence already seized.

• It was submitted that the High Court had granted bail on 14.09.2020, and since then, there were no allegations that Respondent No. 2 had misused his liberty. It was also argued that Respondent No. 2 had cooperated during the investigation.

• It was further argued that out of the ₹25 crores, ₹15 crores were transferred to a sister concern, LNJ International Limited, which used the funds to pay off its loan, which should not be considered an offense.

• Shri Rohatgi 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 support the argument that once bail has been granted, it should not be canceled unless there is a violation of bail conditions or misuse of liberty.

Arguments by the Appellant (Original Complainant) and Respondent – State:

• The State opposed the bail, stating that a detailed status report was filed before the High Court, which was not considered. The State emphasized that a supplementary charge sheet had been filed, highlighting the systematic fraud committed by Respondent No. 2.

• The State argued that the investigation revealed that ₹25 crores were siphoned off through shell companies, which were found to be fake and non-existent. It was also pointed out that the funds were not used for the intended business purposes but were rotated through shell entities and transferred to another company, LMJ International Limited, to settle liabilities.

• The State highlighted that employees were made directors of shell companies without their knowledge, and their KYC documents were misused. The accounts were created to inflate the company’s turnover to avail credit facilities from various banks.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the High Court was justified in releasing Respondent No. 2 on bail, considering the nature of accusations and the material collected during the investigation.
2. Whether the High Court had considered the relevant factors while granting bail, as laid down by the Supreme Court in various judgments.
3. Whether the High Court had overlooked the serious allegations of siphoning off huge amounts through shell companies.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

On the principles for granting bail:

• Prasanta Kumar Sarkar vs. Ashis Chatterjee and Anr., (2010) 14 SCC 496 – The Supreme Court cited this case to emphasize the factors to be considered while granting bail, including the nature of the accusation, severity of punishment, and the risk of the accused absconding. The court noted that if the High Court does not consider these factors, the order would suffer from non-application of mind.
• Neeru Yadav vs. State of UP & Anr., (2016) 15 SCC 422 – This case was cited to reiterate the duty of the court to consider the nature of accusation, severity of punishment, and the reasonable apprehension of tampering with witnesses while granting bail.
• Anil Kumar vs. State (NCT of Delhi), (2018) 12 SCC 129 – This authority was used to highlight that the relevant considerations for granting bail include the seriousness of the offense, character of evidence, likelihood of the accused fleeing from justice, and the impact of release on witnesses and society.
• Prahlad Singh Bhati vs. NCT of Delhi & Ors., (2001) 4 SCC 280 – The court referred to this case to emphasize that the jurisdiction to grant bail must be exercised based on well-settled principles, considering the nature of accusations, evidence, severity of punishment, and the possibility of tampering with witnesses.

On the cancellation of bail:

• Mahipal vs. Rajesh Kumar alias Polia and Another, (2020) 2 SCC 118 – This case was cited to distinguish between the power of an appellate court in assessing the correctness of an order granting bail and an application for the cancellation of bail. The court noted that an order granting bail can be set aside if it is perverse, illegal, or unjustified.

Cases cited by the Respondent No. 2 (Accused) but distinguished by the Supreme Court:

• Dolat Ram vs. State of Haryana, (1995) 1 SCC 349 – This case was cited by the respondent to argue that once bail is granted, it should not be canceled unless conditions are violated. However, the Supreme Court distinguished this case, stating that it does not apply when the grant of bail itself is under challenge.
• X vs. State of Telangana, (2018) 16 SCC 511 – Similar to Dolat Ram, this case was distinguished by the Supreme Court, emphasizing that the principle of not canceling bail unless conditions are violated does not apply when the initial grant of bail is flawed.
• Prabhakar Tewari vs. State of U.P., (2020) 11 SCC 648 – This case was also distinguished on the same grounds as Dolat Ram and X vs. State of Telangana.
• Gurcharan Singh vs. State (Delhi Administration), (1978) 1 SCC 118 – This case was also distinguished by the Supreme Court on the same grounds.

Authorities Considered by the Court

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*, 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 for granting bail and the circumstances under which bail can be canceled. These authorities were used to highlight that the High Court had failed to consider the relevant factors while granting bail. The Court distinguished the authorities cited by the Respondent No. 2, such as 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 they do not apply when the initial grant of bail is under challenge.

What weighed in the mind of the Court?

The Supreme Court’s decision to cancel the bail granted by the High Court was primarily influenced by the following factors:

• Seriousness of the Economic Offense: The Court emphasized that the case involved a serious economic offense, with allegations of siphoning off ₹25 crores through shell companies. The Court noted that the High Court had overlooked the gravity of the accusations and the modus operandi of the fraud.
• Non-Consideration of Evidence: The Court found that the High Court had not considered the status report filed by the Investigating Officer (I.O.), which detailed the systematic fraud and the evidence collected during the investigation. The High Court’s decision was based merely on the fact that the case arose out of a commercial transaction and was based on seized documents, ignoring the serious nature of the allegations.
• Modus Operandi of the Fraud: The Court highlighted that the accused had used shell companies to divert funds, misused employee documents, and created fake accounts to inflate turnover. The High Court failed to consider these aspects, which were crucial in understanding the nature of the offense.
• Failure to Apply Legal Principles: The Court noted that the High Court had not applied the relevant legal principles laid down by the Supreme Court in various judgments while granting bail. The High Court failed to consider the nature of accusations, the severity of punishment, and the risk of the accused absconding.
• Distinction between Grant and Cancellation of Bail: The Court clarified the distinction between the power of an appellate court in assessing the correctness of an order granting bail and an application for the cancellation of bail. The Court emphasized that an order granting bail can be set aside if it is perverse, illegal, or unjustified.

Sentiment Analysis Ranking

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• Thorough Examination of Facts: Courts must thoroughly examine the facts and circumstances of a case, especially in economic offenses, before granting bail. Overlooking crucial evidence and the gravity of the offense can lead to the cancellation of bail by higher courts.
• Consideration of Status Reports: Courts should carefully consider status reports filed by investigating agencies, which provide detailed information on the nature of the offense and the evidence collected. Ignoring such reports can result in flawed decisions.
• Application of Legal Principles: Courts must apply the relevant legal principles laid down by the Supreme Court while granting bail. These principles include considering the nature of accusations, the severity of punishment, and the risk of the accused absconding or tampering with witnesses.
• Distinction between Commercial Disputes and Economic Offenses: Courts should not treat serious economic offenses as mere commercial disputes. The modus operandi of the fraud, the use of shell companies, and the diversion of funds must be taken into account.
• Importance of Legal Precedents: Courts must apply legal precedents correctly, distinguishing between cases where the grant of bail is challenged and cases where the cancellation of bail is sought. The principle that bail should not be canceled unless conditions are violated does not apply when the initial grant of bail is flawed.
• Impact on Economic Offenses: This judgment underscores the seriousness with which the Supreme Court views economic offenses. It emphasizes that such offenses, which involve large-scale fraud and misappropriation of funds, cannot be treated lightly. The judgment serves as a reminder to lower courts to exercise caution and diligence while granting bail in such cases.

Conclusion

In the case of Centrum Financial Services Limited vs. State of NCT of Delhi and Anr. (2022), the Supreme Court’s decision to cancel the bail granted by the High Court highlights the importance of a thorough and judicious approach to bail applications, particularly in cases involving economic offenses. The Court emphasized that the High Court had failed to consider the gravity of the accusations, the evidence presented by the prosecution, and the established legal principles for granting bail. The judgment serves as a significant precedent, reinforcing the need for courts to meticulously examine all relevant facts and circumstances before granting bail in cases of financial fraud. It also underscores the Supreme Court’s commitment to ensuring that economic offenders are not allowed to evade justice through flawed bail orders. This case is a reminder that the judiciary must remain vigilant in safeguarding public interest and upholding the rule of law, especially in matters involving large-scale financial irregularities.