Only Final SFIO Report, Not Interim Report, Can Trigger Prosecution Under Companies Act: Calcutta High Court

The Calcutta High Court has clarified that the central government cannot initiate prosecution under the Companies Act on the basis of an interim report submitted by the Serious Fraud Investigation Office and must wait for the final investigation report after completion of the probe.

Justice Krishna Rao made the observation while allowing a writ petition filed by Sunil Kumar Agarwal and quashing a Look Out Circular issued against him during the pendency of an SFIO investigation, noting that neither an interim report nor a final investigation report had been submitted to the central government.

Explaining the law, the court noted that the Companies Act contemplates two distinct kinds of reports.

“The first kind of report is under Section 212(11) which report is an “interim report” and can be issued at any point of time during the course of investigation by SFIO. The second kind of report is an “Investigation Report” which can be issued only after completion of the investigation by SFIO."

It added, "Only the “Investigation Report” can be considered by the Central Government under Section 212(14) for the purposes of commencement of prosecution."

Agarwal was earlier part of the managerial personnel of a construction company that was admitted into corporate insolvency resolution in November 2021. The Ministry of Corporate Affairs, by an order dated July 19, 2022, directed the SFIO to investigate the affairs of the company.

While the investigation was still ongoing, a Look Out Circular was issued against Agarwal, restricting his foreign travel.

Agarwal argued that no interim report or final investigation report had been submitted by the SFIO to the central government. He said the investigation was still underway and that, in the absence of any report forming the basis of prosecution, the issuance of a Look Out Circular had no statutory foundation. The Union government and the SFIO contended that the matter involved serious allegations of fraud and large public interest, warranting preventive measures.

The court rejected this justification. It held that under Section 212(14), the central government is required to examine only the final investigation report and apply its mind before deciding whether prosecution should be initiated.

It also clarified that proceedings before the NCLT under Section 212(14-A), including applications for disgorgement of assets or fixing personal liability, stand on a different footing and may be initiated on the basis of either an interim report or the final report.

On the facts, the court recorded that neither an interim report nor a final investigation report had been submitted to the government. “Thus, this Court failed to appreciate under what basis the LOC is issued against the petitioner,” it observed. Holding that the Look Out Circular lacked statutory backing, the court set it aside.