FRAUD

FRAUD: According to the section 17 of Indian contract act 1872, fraud means and includes
of any of the following acts committed by a party to a contract or with his connivance, or by
his agent with intend to deceive another party thereto or his agent, or to induce him to enter
into the contract.

Means that the act of fraud must have been committed within intention to deceive another
party. No course of action arises where is fraud without damage and damage without fraud.

Fraud Was proved when it was shown thats false representation has been made:
(1) knowingly
(2) without belief in its truth
(3) recklessly whether it is true or false

Recklessness means carelessness. If a person gives a statement without having information

whether it is true or false to the other party for believing such statement that is called
recklessness of contact. Statement made without belief in the truth would include statement
made recklessly.

According to section 17 of Indian contract act 1872, there are some essential of fraud:

(1) There should be false statement of fact by person who himself does not believe the
statement to be true.
(2) The statement should be made with a wrongful intention of deceiving another party and
inducing them into enter into an contract.
(3) The other party must have suffered the loss.
(4) There must be any of the acts of fraud mention in section 17 be performed.

FALSE STATEMENT OF FACT

SECTION 17(1):
If the statement of fact is not true then it is amount to fraud.

Ex: if a person who is aged over 60 years and thus beyond insurable age, deliberately makes a
false statement that his age is 48 years in order to take out an insurance policy, it amounts to
fraud and the insurer is entitled to avoid the policy.

MERE SILENCE IS NO FRAUD

Mere silence as to fact likely to affect the willingness of a person to enter into a contract is
not a fraud. Unless the circumstances of the case are such that, regard being had to ,it is the
duty of the person keeping silence to speak or unless his silence is in itself equivalent to
speech.

A contracting party is not obliged to disclose each and everything to the other party.

KEATES V. LORD CADOGAN

In this case A let his house to B which is knew was in ruinous condition. He also knew that
the house is going to be occupied by B immediately. A did not disclose the condition of house
to B. it was held that he had committed no fraud.

EXCEPTION OF MERE SILENCE IS NO FRAUD

(1) DUTY TO SPEAK : If it is the duty of the person keeping silence to speak, keeping
silence in such a case amounts to fraud. Where there is a duty to disclose facts, one should do
so rather than to remain silent by remaining silent ,one may be responsible for creating a false
impression in the mind of other.

CONTRACT OF GOOD FAITH (UBERIMA FIDES): Contracts of good faith, in utmost

good faith the party in whom good faith is reposed would make full disclosurement and not
keep silent. It is the duty of party to disclose the material facts.

EX: contract of insurance.

P.J.CHACKO V. CHAIRMAN LIC OF INDIA

In this case the insured had undergone an operation for thyroid, a major operations four years
prior to the date of proposal made him without disclosing the fact while obtaining the
insurance policy. He took policy on 6 th July 1987 and within six month on 21 st February 1987
he died. Then court held that insured does not disclose the all material fact of contract so it is
amount to fraud.

(1) MARITAL STATUS:

Non disclosurement of material facts relating to parties to marriage has been held to
constitute fraud.

(2)

CHANGE OF CIRCUMSTANCES:

Sometime a representation is true when it is made, but it may an account of a change

circumstances, become false when it is actually acted upon by other party. In such
circumstances, it is the duty of the person who made the representation to communicate the
change of circumstances.

(3). SILENT BEING EQUIVALENT TO SPEECH:

Sometime keeping silent as to certain Facts may be capable of creating an impression as to
existence of certain situation. In such a case silent amount to fraud.

EX: if B say to A if you do not deny it, is hall assume that horse is sound. A says nothing
here As silence is equivalent to speech.

(4). HALF TRUTH:

Even when a person is under no duty to disclose a fact, he may becomes guilty of fraud by
non disclosure if he voluntarily disclose something and then stop half the way. Court said that
a person keep silence, but if he speaks a duty arises to disclose the whole truth.

SECTION 17(2): ACTIVE CONCEALMENT OF A FACT BY ONE HAVING

KNOWLEDGE OR BELIEF OF THE FACT:

When there is active concealment of a fact by one having knowledge or belief of the fact that
Amount to a fraud.

SECTION 17(3): PROMISE MADE WITHOUT ANY INTENTION TO PERFORM IT:

When a person makes a promise, there deemed to be an undertaking by him to perform. If
there is no such intention when contract being made, it amount to fraud.
EX:
Man takes a loan without any intention to repay it.

SECTION 17(4) : ANY OTHER ACT FITTED TO DECEIVE.

Any other act fitted to deceive is also fraud. Its include such cases of fraud which would not
come in purview the earlier three clauses.

SECTION 17(5): ANY ACT OR OMISSION AS THE LAW SPECIALLY DECLARES

TO BE FRAUDULENT:

Fraud also includes any such act or omission as the law specially declare to be fraudulent. In
some cases law requires certain duties to be performed, failure to do which is expressly
declared as fraud.

WRONGFUL INTENTION

In order to constitute fraud it is necessary that a person should intentionally.

DERRY V. PEEK

In this case director of company issued a prospectus stating that they had got the authority to
run tramways with steam or mechanical power instead of animal power . director honestly
believed that the board of trade, who had to accord its sanction for the same would do so as a
matter of course. But the board refused the sanction and company had to wound up .who
taken share in the company brought an action for the tort of fraud. It was held by the court
that since statement had not been made with intention to deceive . so there was no fraud.

IF THE OTHER PARTY HAS THE MEANS TO KNOW THE CORRECT POSITION
AND OUGHT TO HAVE KOW THE TRUTH, THERE IS NO FRAUD:

KAMALKANT V. PRAKASH DEVI

Kamalkanth filed a suit against his mother Prakash Devi and some others. Seeking
cancellation of a trusted on the ground that his signature to it were obtained by fraud that it
was a general power of attorney. In this case court held that plaintiff was an educated man
and had all the means to know the contents of documents so there is no fraud.

IF A PERSON MIND HAS NOT BEEN INFLUENCED BY THE FALSE STATEMENT

WHEN HE ENTER INTO THE CONTRACT IS NO FRAUD:

SMITH V. CHADWICK :
In this case it was held that if the prospectus of a company contains a false statement that a
particular person would be on the board of director, but the plaintiffs mind is not influenced
by the state he cannot claim relief.

EFFECT:

In the case of fraud the contract was voidable at the option of of the party whose consent has
been so obtained. According to the section 19 of Indian contract act 1872 when consent to an
agreement caused by fraud, then the agreement is voidable at the options of other party whose
consent was so caused.

The term 'fraud' has not been defined in the Indian Penal Code (IPC). Nevertheless, Section
25 of the IPC does attempt to define the word 'fraudulently' by saying that there can be no
fraud unless there is an intention to defraud. In general, fraud is committed in three different
ways:

To deprive a person of his/her right/s, either by obtaining something by deception or

by taking something wrongfully without the knowledge or consent of the owner;

To withhold wrongfully from another what is due to him/her, or to wrongfully prevent

a person from obtaining what he/she may claim first, and;

To defeat or frustrate wrongfully another person's right to property.

Whenever the words 'fraud', 'intent to defraud' and 'fraudulently' occur in the
definition of a crime under the IPC, two elements are essential to the commission of
that crime:

Deceit or an intention to deceive, and;

Either actual injury or possible injury or an intent to expose some person to actual or
possible injury.

The main intent of a fraudulent person is, in almost every case, his/her own advantage. A
conclusive test to the fraudulent character of a deception for criminal purpose is whether the
author of the deceit derived any advantage from it which he would not have had if the truth
had been known.
This definition of fraud encompasses scams on the Net. Sections relating to cheating (415 to
420), such as cheating by impersonation (Section 416) and cheating with knowledge that
wrongful loss may ensue to a person whose interest the offender is bound to protect (Section
418) may be applied according to the facts of a case.
Fraud is defined as "any behavior by which one person intends to gain a dishonest advantage
over another". In other words , fraud is an act or omission which is intended to cause
wrongful gain to one person and wrongful loss to the other, either by way of concealment of
facts or otherwise.
Fraud is defined u/s 421 of the Indian Penal Code and u/s 17 of the Indian Contract Act. Thus
essential elements of frauds are:
1. There must be a representation and assertion;
2. It must relate to a fact;
3. It must be with the knowledge that it is false or without belief in its truth; and
4. It must induce another to act upon the assertion in question or to do or not to do certain act.

Companies Act, 2013

Chapter 14 Inspection, Inquiry and Investigation
Section 211. Establishment of Serious Fraud Investigation Office

211. Establishment of Serious Fraud Investigation Office.(1) The Central Government

shall, by notification, establish an office to be called the Serious Fraud Investigation Office to
investigate frauds relating to a company:
Provided that until the Serious Fraud Investigation Office is established under sub-section
(1), the Serious Fraud Investigation Office set up by the Central Government in terms of the
Government of India Resolution No. 45011/16/2003-Adm-I, dated 2nd July, 2003 shall be
deemed to be the Serious Fraud Investigation Office for the purpose of this section.
(2) The Serious Fraud Investigation Office shall be headed by a Director and consist of such
number of experts from the following fields to be appointed by the Central Government from
amongst persons of ability, integrity and experience in,
(i) banking;
(ii) corporate affairs;
(iii) taxation;
(iv) forensic audit;
(v) capital market;
(vi) information technology;
(vii) law; or
(viii) such other fields as may be prescribed.
(3) The Central Government shall, by notification, appoint a Director in the Serious Fraud
Investigation Office, who shall be an officer not below the rank of a Joint Secretary to the
Government of India having knowledge and experience in dealing with matters relating to
corporate affairs.
(4) The Central Government may appoint such experts and other officers and employees in
the Serious Fraud Investigation Office as it considers necessary for the efficient discharge of
its functions under this Act.
(5) The terms and conditions of service of Director, experts, and other officers and employees
of the Serious Fraud Investigation Office shall be such as may be prescribed.

'Corporate Fraud'

Activities undertaken by an individual or company that are done in a dishonest or illegal

manner, and are designed to give an advantage to the perpetrating individual or company.
Corporate fraud schemes go beyond the scope of an employee's stated position, and are
marked by their complexity and economic impact on the business, other employees and
outside parties.
There is so many types of corporate fraud :
ACCOUNT TAKE OVER FRAUD- An account takeover can happen when a fraudster
or computer criminal poses as a genuine customer, gains control of an account
and then makes unauthorised transactions. Any account could be taken over by
fraudsters, including bank, credit card, email and other service providers.

APPLICATION FRAUD- Application fraud is when fraudsters open an account using fake or
stolen documents in someone elses name. The account could be anything from a phone
contract or credit card account to a loan or a mortgage. It happens when identity theft has
occurred.
PLASTIC CARD FRAUD- Plastic card fraud involves the compromise of any personal
information from credit, debit or store cards.
The personal information stolen from a card, or the theft of a card itself, can be used to
commit fraud. Fraudsters might use the information to purchase goods in your name or obtain
unauthorised funds from an account. Plastic card fraud can also include card not present
fraud, such as the use of a card online, over the phone or by mail order, and counterfeit card
fraud.
PAYMENT FRAUD- Online shopping continues to gain momentum, and we book airline
travel, deposit checks, and pay bills from our phones. But one thing remains constant:
wherever money flows, payment fraud is likely to follow.
As cybercriminals become increasingly more sophisticated, e-commerce sites, financial
institutions, and other businesses need a way to develop trust in the growing number of Card
Not Present (CNP) purchases, payment processes (EFT, e-wallet) and other online
transactions.
INVESTMENT FRAUD- Investment frauds target individuals. The fraudsters
use convincing arguments to make people part with their savings. These types of fraudsters
usually want you to invest your money in a company or an opportunity which seems to be
offering very high rates of return.
And there are many other types of fraud that came under the purview of corporate fraud

In Companies Act, 1956 Section- 237 (b) (ii) the term fraud means-If a Company constitutes
to carry on business and to incur debts at a time when there is no knowledge of the Director
no reasonable prospect of the creditor ever receiving payment of those debts, it is in general a
proper inference that the company is carrying on business with intent to defraud. In re
(William .C) Leitch. Bros Ltd., (1932) 2 Ch 71. The term defraud and fraudulent purpose
connote the actual dishonesty involving , according to the current notions of fair trading
amongst commercial men, real moral blame. In re Patrick and Lyon 1933 Ch 786. However,
much the court may disapprove of a personal conduct it must consider whether he has guilty
of dishonesty. Misfeasance results from an act or conduct in the nature of a breach of trust or
an act on resulting in loss to the company. Misconducts of promoters and directors as
understood in the Companies Act means not misconduct of every kind but such as has
produced pecuniary loss to the company by misapplication of assets or other act.