Karnataka High Court
Manjunath. S vs The State Of Karnataka on 21 December, 2023
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 21ST DAY OF DECEMBER, 2023
BEFORE
THE HON'BLE MR. JUSTICE SACHIN SHANKAR MAGADUM
WRIT PETITION NO.26072 OF 2019 (GM-RES)
BETWEEN:
1 . MANJUNATH. S
AGED ABOUT 71 YEARS,
S/O LATE SRI. A. C. LINGAPPA,
NO.13, VIVEKANANDA ROAD,
8TH MAIN, 3RD STAGE,
4TH BLOCK, BASAVESHWARANAGARA,
BENGALURU-560 079.
(SENIOR CITIZEN NOT CLAIMED)
2 . HARISH PANDURANGACHAR
AGED ABOUT 54 YEARS,
S/O. SRI. S. G. PANDURANGACHAR,
RESIDING AT NO. 8, 8TH CROSS,
VIDYANARAYANA NAGAR, BENGALURU-560091.
3 . VEENA
AGED ABOUT 35 YEARS,
W/O SRI. HANUMANTH RAJU,
C/O LASER EVENTS PVT. LTD.,
NO.55, 2ND CROSS, NHCS LAYOUT,
3RD PHASE, 4TH BLOCK, BASAVESHWARANAGAR,
BENGALURU-560079.
...PETITIONERS
(BY SRI.KIRAN B S, ADVOCATE)
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AND:
1. THE STATE OF KARNATAKA
REPRESENTED BY SECRETARY TO THE
GOVERNMENT, HOME DEPARTMENT,
II FLOOR, VIDHANA SOUDHA,
DR. AMBEDKAR VEEDHI,
BENGALURU-560 001.
2. CENTRAL CRIME BRANCH
REPRESENTED BY ADGP
COTTONPET MAIN ROAD, SULTANPET, BAKSHI
GARDENS, CHIKKAPETE, BENGALURU-560 053.
3. SRI. MAHESH BABU D. V.
AGED ABOUT 59 YEARS,
S/O. VISHVANATH D.N,
NO.4, 1ST FLOOR, 5TH MAIN,
BEHIND MODI HOSPITAL, MAHALAKSHMIPURAM,
BENGALURU-560 086.
4. MS. MANASA BABU
AGED ABOUT 32 YEARS,
D/O SRI. MAHESH BABU,
NO.4, 1ST FLOOR, 5TH MAIN,
BEHIND MODI HOSPITAL, MAHALAKSHMIPURAM,
BENGALURU-560 086.
5. MR. DEEPAK PADMANABHAN
AGED ABOUT 40 YEARS,
CHARTERED ACCOUNTANT
(MEMBERSHIP NO. 215744)
NO.51/7/1, CHITRAKOOT, RATNA AVENUE,
RICHMOND ROAD, BENGALURU-560 025.
...RESPONDENTS
(BY SMT.ANUKANKSHA KALKERI, HCGP FOR R1 & R2;
SRI.SURENDRA.Y.S, ADVOCATE FOR R5;
R3 & R4 ARE SERVED)
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THIS W.P IS FILED UNDER ARTICLES 226 & 227 OF
THE CONSTITUTION OF INDIA PRAYING TO DIRECT THE
R-1 AND 2 FOR QUASHING OF THE FIR NO.0002 OF 2019
REGISTERED BY R-2 VIDE ANNX-A AND RESTRAIN
RESPONDENTS AND THEIR OFFICIALS/AGENTS/HENCMEN
FROM EITHER EXERCISING POWER UNLAWFULLY AND
WITHOUT JURISDICTION OR ADHERING TO ILLEGAL ACTS
FOR INFLICTING INJURIES AND WRONGFUL LOSSES TO
PETITIONERS.
THIS PETITION HAVING BEEN HEARD AND
RESERVED FOR ORDERS ON 19.12.2023, COMING ON FOR
PRONOUNCEMENT OF ORDERS THIS DAY, THE COURT
MADE THE FOLLOWING:
ORDER
The captioned writ petition is filed seeking quashing of the proceedings in FIR No.3002/2019 for the offence punishable under Sections 34, 120B, 406, 420 & 506 of IPC.
2. Petitioners are aggrieved by the registration of crime in No.0002/2019 for the offence punishable under Sections 34, 120B, 406, 420 and 506 of IPC. Based on a complaint lodged by respondent No.3, the Mahalakshmipuram Police have 4 registered a case in crime No.0002/2019.(CC.No.19184/2019).
3. The sum and substance of complaint is as under:
Third respondent in his complaint has alleged that respondent No.4, who is his daughter, has lent some monies to the company to which petitioners herein are the Directors. It is further alleged that in lieu of Rs.20 lakhs received by the company, the company has issued 20,000 shares of M/s. Laser Events Private Limited to respondent No.4. The grievance of respondents 3 and 4 is that the company has unauthorisedly transferred the shares of respondent No.4 and therefore, the petitioners who are the Directors of the Company have committed an offence punishable under the aforementioned Sections.5
4. The petitioners who are the Directors have filed the captioned petition seeking quashing of the proceedings.
5. The petitioners countering the claim of respondent No.3 have filed the captioned petition and have stoutly denied advancing of the alleged hand loan of Rs.20 Lakhs to the company. Petitioners claim that as per the Memorandum and Articles of Association of the Company, there is a prohibition to invite or accept deposits from persons other than its members, Directors or their relatives. Petitioners claim that respondents 3 and 4 are neither members, directors nor share holders of the company. Petitioners placing reliance on the bank statement which is placed on record at Annexure-C and which pertains to the period 2008 and 2009, contended that there is no inward remittance or receipt indicating receipt of private loan from any entity/individual. 6 Referring to the audit report for the period ending 31.3.2009, petitioners claim that respondent No.3 has fraudulently converted equity shares though company did not earn any foreign exchange during the relevant period.
6. The petitioners have further contended that the claim of respondent No.3 is neither supported by Board Resolution and General Body Resolutions to substantiate the claim that shares were issued to respondent No.4. The petitioners have further contended that even if allegations in the complaint are accepted in entirety, it does not satisfy the ingredients of the offences indicated in the FIR. It is also contended that the cognizance of the above said offences is bad in law as there is a express Bar under Section 439 of the Companies Act read with Section 5 and 41 of IPC and Section 5 of Cr.PC. On these set of 7 grounds, petitioners are seeking quashing of the proceedings pending in FIR.No.0002/2019.
7. Learned counsel appearing for the petitioners reiterating the averments made in the petition would vehemently argue and contend that respondent No.3 misusing his office as Accounts-Book Keeper has modified book entries to allot 20,000 shares to his daughter i.e., respondent No.4. The learned counsel would contend that petitioner No.3 having discovered fraudulent and erroneous issue of shares to respondent No.4 reported to the Board and first petitioner has registered a complaint in PCR.No.4104/2018 against respondent No.3. Learned counsel for the petitioners would further submit that the present complaint is as a counter blast to the complaint lodged by petitioners against respondent No.3. He would point out that respondent No.3 has filed a complaint vindictively and retributively to 8 protect himself against the criminal prosecution lodged by the company through its Directors and respondent No.3 has lodged the complaint only to cover up fraudulent book entries and misappropriation of funds by illegally transferring 20,000 shares in the name of respondent No.4 who is an Australian citizen.
8. Referring to Section 3(1) (iii) and Section 58A of the Companies Act, he would point out that private limited companies can either invite or accept deposits only from its members, directors or their relatives. The alleged deposit of Rs.20 lakhs by an NRI is impermissible and the alleged conversion into shares is also ipso facto bad in law. He would also point out that Regulation 3 of Foreign Exchange Management (Deposit) Regulations, 2000, prohibits acceptance of any deposit from an NRI without the RBI approval. Referring to Section 439 of the Companies Act, 2013 read with Sections 5 and 41 of 9 IPC and Section 5 of Cr.P.C., he would point out that the cognizance of the above said offence is bad in law. Learned counsel would further contend that the remedy for respondent No.4 is to seek remedy before the National Company Law Tribunal-Bengaluru Bench(for short "NCLT"). He would also seek quashing of the proceedings on the ground that even if the allegations in the complaint are accepted in entirety, the said allegations do not satisfy the ingredients of the offences indicated in the FIR.
9. Per contra, learned HCGP countering the arguments of the petitioners would contend that the matter requires trial and since charge sheet is filed, no indulgence is warranted at the hands of this Court at this juncture. He would further point out that there are sufficient materials on record to proceed against the petitioners and therefore, he would contend that 10 this is not a fit case which would warrant interference of this Court under Section 482 of Cr.P.C.
10. The complaint is lodged by respondent No.3 alleging that the company namely M/s.Laser Events Private Limited has transferred the shares of respondent No.4. Respondent No.3 has alleged in the complaint that the company has transferred 20,000 shares towards the hand loan of Rs.20 Lakhs received by the company from respondent No.4, while the petitioners who are the Directors of the above said company are disputing the receipt of alleged hand loan as well as issuance of shares. Petitioners who are the Directors of the above said company are placing reliance on the bank statements to substantiate that there are no inward remittance or receipts from any NRO/NRE/FCNR account. 11
11. The petitioners in the captioned petition are also placing reliance on audit report and the alleged issuance of shares in favour of Respondent No.4 is also seriously disputed for want of Board Resolution and General Body Resolutions. Petitioners are also questioning the launching of criminal proceedings on the ground that no share certificates are issued either to respondent No.3 or respondent No.4, which is a pre-requisite for establishing title over the shares of the company under Section 46(1) of the Companies Act. Therefore, the petitioners claim that the shares shown fraudulently in filings of Registrar of Companies as void and non est.
12. If these significant details are examined, several questions would emerge for consideration before this Court:
(i) Even if the allegations in the complaint are accepted, whether alleged loan/deposit can be 12 converted into shares without Board resolutions and agreement. The shares in private limited company are not traded publicly. The transfer of shares in a private limited company in India is governed by Companies Act. The transfer of shares is restricted to company's Articles of Association and the first step in the share transfer process is to obtain share transfer deed which is a legal document which is then followed by share certificate.
(ii) The Board of Directors of the company must approve the transfer of shares and pass a Board Resolution to that effect.
(iii) The transferor may also be required to execute an indemnity bond indemnifying the company against any loses that may arise from transfer of shares and the share transfer deed has to be adequately stamped at the rate applicable. 13
Therefore, in the context of disputes involving shares and share holder status, the aggrieved party has to seek recourse through the National Company Law Tribunal, which serves as a competent authority for matters falling within the ambit of corporate and company law. The adjudication process before the NCLT involves a comprehensive examination of corporate laws, contractual obligations and relevant legal precedents. In matters involving dispute over the misappropriation of shares, the crux lies within the realm of civil jurisprudence, rather than within the purview of criminal law. The Court/Tribunal armed with equitable principles, undertakes a rigorous examination of evidence and legal precedents to unravel the intricacies of the dispute.
(iv) Therefore, it is imperative for the aggrieved party to navigate the procedural intricacies by approaching the NCLT and not by launching a criminal 14 prosecution. These complex questions cannot be decided in a criminal case. Whether respondents 3 and 4 have been cheated cannot be decided in a criminal case as the adjudication of title over the shares demands invocation of civil proceedings and it is only the NCLT, which is competent to discern the nuances of dispute over the shares and it is also competent to evaluate the veracity of claims pertaining to share holders' status within the corporate edifice.
(v) Even if all the allegations in the complaint are taken at face value are true, the criminal Court lacks inherent jurisdiction to examine as to whether the complainant is cheated on account of transfer of shares by the company. The Apex Court in the case of Vesa Holdings (P) Limited .vs. State of Kerala1 has held that every breach of contract would not give 1 (2015) 8 SCC 293 15 rise to an offence of cheating. The Apex Court further held that only in those cases breach of contract would amount to cheating where there was any deception played at the very inception. The allegations in the FIR clearly discloses a contractual dispute.
(vi) The cognizance of the offence is found to be bad in law as there is express bar under Section 439 of the Companies Act read with Sections 5 and 14 of IPC and Section 5 of Cr.P.C. Section 439 (2) clearly bars Courts from taking cognizance of any offence. Section 5 of Cr.P.C. also bars from taking cognizance if offences covered under the Special Law and statute confers exclusive jurisdiction on NCLT.
(vii) Whether respondents 3 and 4 had lent monies to the company and whether the said monies could be converted into shares and can be transferred in favour of an individual and whether merely because the shares are reflected in the filings of the ROC would 16 confer a right in the shares of the company, are all disputed questions and involve complex issues and therefore, the complainant has to seek remedy through NCLT which serves as a competent authority as the above allegations in the complaint clearly fall within the ambit of corporate and company law.
13. In the light of the discussions made supra, if the proceedings are not quashed the same would lead to abuse of process.
14. The judiciary has never concealed its contempt for actions that abuse the court process. While litigants continue to misuse the criminal legal system, the High Courts and the Supreme Court have never shied away from using the inherent powers vested in them to quash such matters. In this context, I find it apt to quote from a judgment of the Supreme Court of India in the matter of Mohammed 17 Ibrahim and others vs. State of Bihar and another2:
"This Court has time and again drawn attention to the growing tendency of the complainants attempting to give the cloak of a criminal offence to matters which are essentially and purely civil in nature, obviously either to apply pressure on the accused, or out of enmity towards the accused, or to subject the accused to harassment. Criminal courts should ensure that proceedings before it are not used for settling scores or to pressurize parties to settle civil disputes. But at the same time, it should be noted that several disputes of a civil nature may also contain the ingredients of criminal offences and if so, will have to be tried as criminal offences, even if they also amount to civil disputes."
15. The Courts ruled similarly in the matters of Alpic Finance Ltd. vs. P Sadasivan & Anr.3, and All Cargo (I) Pvt. Ltd. & Ors. v. Dhanesh 2 (2009) 8 SCC 751 3 (2001) 3 SCC 513 18 Badarmal Jain & Anr.4. It is possible to characterize a breach of contract as a case of cheating provided the ingredients thereof are made out. In this context a reference to the judgment in the matter of Hridya Rajan Pd. Verma & others v. State of Bihar and another5, may be made. The judges were clear that the element of mens rea was essential for a criminal offence to be made out -
"In determining the question it has to be kept in mind that the distinction between mere breach of contract and the offence of cheating is a fine one. It depends upon the intention of the accused at the time of inducement which may be judged by his subsequent conduct but for this subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been 4 (2007) 14 SCC 776 5 AIR 2000 SC 2341 19 committed. Therefore, it is the intention which is the gist of the offence. To hold a person guilty of cheating it is necessary to show that he had fraudulent or dishonest intention at the time of making the promise. From his mere failure to keep up promise subsequently such a culpable intention right at the beginning, that is, when he made the promise cannot be presumed."
16. Courts have, on numerous occasions, refused to encourage criminal prosecution when it is found to be malafide or otherwise an abuse of the process of the court. High Courts have the inherent power under Section 482 of the [Indian] Code of Criminal Procedure 1973 to quash any offences where the ingredients of the offence alleged is not made out. In this context, the Supreme Court has in the matter of State of Haryana & Ors. v. Bhajan Lal & Anr.6, set out certain categories of cases which need to be quashed, including "where a criminal proceeding is 6 1992 Supp (1) SCC 335 20 manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge."
17. In numerous cases where disputes arise in relation to valuation, enforcement of exit/ buy-back provisions, contractual terms etc., the logical course of action would be to look at provisions of statute involved and policies/ circulars/ regulations issued thereunder along with provisions of contract law; instead parties try to use criminal law provisions pertaining to fraud, criminal breach of trust, criminal conspiracy and the like to pressurize the counterparties, impede their freedom and ability to travel.
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18. Thus, looking to the matter from all angles, this Court is of the considered view that prosecution for the aforesaid offence against the petitioners would amount to clear abuse of process of law. The FIR under the circumstances deserves to be quashed at the threshold.
19. Hence, I pass the following:
ORDER
(i) The Writ Petition is allowed.
(ii) The FIR dated 5.1.2019 registered in Crime No.0002/2019 for the offence punishable under Sections 34, 120B, 406, 420 and 506 of IPC. is hereby quashed and all criminal proceedings emanating therefrom also stand quashed.
Sd/-
JUDGE *alb/-