Bombay High Court Quashes FIR and chargesheet against directors towards delay in depositing Provident Funds

The case

The establishment of the company attracted the provisions of the Employees Provident Funds Act, 1952 (EPF Act) since the number of employees working in the company exceeded 20 as per section 1 (3) of the EPF Act. The petitioners, who were the directors of Zicom Saas Pvt. Ltd., were brought together as accused in an FIR registered in 2018 for offences under Sections 406 and 409 of the Indian Penal Code 1860 (IPC), and Section 14 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

The offences were registered at the instance of the Provident Fund Inspector alleging non-deposit of provident fund as per the scheme.

The Provident Fund Inspector, after perusing the records of the company, alleged that the company failed to deposit Rs. 12,62,018/- into the Provident Fund account within the prescribed period from August 2017 to February 2018 under the Provident Fund scheme. The company was intimated about the default and was asked to deposit the amount.

The petitioners argued that the entire amount was deposited before the FIR was filed, attributing delays to administrative challenges and financial constraints. The Petitioners further pleaded that under circumstances where the amount pending from the defaulting period was already deposited, continuation of criminal proceedings against the Petitioners or Directors would be unfair and against the interest of justice.

Issues

1. Whether the actions of the petitioners constituted criminal breach of trust under Sections 406, 409 of IPC and Section 14 of the EPF Act
2. Whether the FIR and charge-sheet should be quashed due to the rectification of the default before the initiation of legal proceedings
3. Whether the directors of the defaulting company are responsible for criminal breach of trust.

What the laws involved mean

Section 406 of IPC: Defines criminal breach of trust as dishonestly misappropriating or converting to one’s own use any property entrusted to that person.

Section 409 of IPC: Pertains to criminal breach of trust by a public servant, banker, merchant, or agent.

Section 14 of EPF Act: Imposes penalty on employers who contravene and default in depositing employees’ Provident Fund contributions within the prescribed time where the number of employees in a company is more than 20.

Application to court:

The Hon’ble High Court reviewed the complaint, FIR, charge-sheet, and documents including the deposition of funds by the company before the offences were registered. It considered the petitioners’ explanation that the delay in depositing the funds was due to administrative issues, financial constraints, with no criminal intent.

Considering the Judgment of the Gujarat High Court in the case of Vineet Jain Surendrakumar and Ors. V/s. State of Gujarat and Ors. [Cri.Misc. Appl No.15559 of 2017] and the Supreme Court judgment in the case of Employees State Insurance Corporation V/s S.K. Aggarwal and Ors. (1998) 6 SCC 288 relied upon by the Petitioners, the Hon’ble High Court opined that the Petitioners or Directors cannot be termed as employer of an establishment who are responsible for deduction and deposit from wages. They continued that failure to do so does not amount to criminal breach of trust while similarly considering the definition of criminal breach of trust under section 405 of IPC. As a result, sections 406 and 409 of IPC will not be attracted in the present case.

The court examined precedents and legal interpretations related to criminal breach of trust, particularly focusing on whether the actions of directors met the criteria for criminal liability taking into consideration the intent of the present petitioners and that there has to be an ‘intention’ for committing the said offenses.

The outcome

The Bombay High Court, through Justices Bharati Dangre and Manjusha Deshpande, concluded that the essential elements of criminal breach of trust under Sections 406, 409 of IPC were not established.

It emphasized that the petitioners had rectified the default by depositing the entire outstanding amount before the FIR was filed. The court cited legal principles and judgments, including from the Supreme Court and other High Courts, supporting the quashing of criminal proceedings when there is no prima facie case and continuation of prosecution would be unjust or a misuse of legal process.

Therefore, exercising its powers under Section 482 of the Code of Criminal Procedure 1973, the High Court quashed FIR and the charge-sheet pending before the Metropolitan Magistrate Court.

This article was written by Kavisha Shah of the India Law Alliance.