Case laws Companies Act Radhey Shyam Khemka Vs State of Bihar

Case laws Companies Act

Radhey Shyam Khemka Vs State of Bihar

PETITIONER:
RADHEY SHYAM KHEMKA AND ANR. ETC.

Vs.

RESPONDENT:
STATE OF BIHAR AND ANR. ETC.

DATE OF JUDGMENT26/03/1993

BENCH:
SINGH N.P. (J)
BENCH:
SINGH N.P. (J)
ANAND, A.S. (J)

CITATION:
1993 SCR (2) 699 1993 SCC (3) 54
JT 1993 (2) 523 1993 SCALE (2)266
ACT:
Code of Criminal Procedure, 1973:
Section 482–Quashing of criminal proceedings against
officers of company High Court not to usurp the jurisdiction
of Trial Court–Not to hold a parallel trial–Remedy
available under the provisions of the Companies Act–No bar
to initiate criminal proceedings.

 

HEADNOTE:
The appellant, a Public Limited Company issued prospectus
Inviting public subscriptions of equity shares and
preference shares. The prospectus stated that application
was being made to the Stock Exchange for enlisting the
shares of the Company for official quotation. Though the
application was rejected by the Stock Exchange, the share
money collected from different investors was held by the
appellants and the share holders were neither informed of
the rejection by the Stock Exchange nor paid back the share
money. Further, the money was transferred to another
account of the Company. The Secretary, Industrial
Development and Company Affairs lodged a complaint with the
CBI against the Company.
CBI started investigations and submitted a charge-sheet
against the appellant along with some others for trial for
the offence under s.409 IPC. The Special Judicial
Magistrate, CBI cases, rejected the prayers made before it
discharge the appellants. The validity of the said order
was challenged by the appellants by filing an application
under S.482 Cr. P.C. and the High Court rejected the same.
Hence these appeals. It was contended that the provisions
of the Companies Act took care of the investors by putting
restrictions on the misbehavior of the promoters and the
Directors of the Company for any lapse on their part In such
matters and they could not be summoned to stand trial for
offenses under the Penal Code.
Dismissing the appeals, this Court,
700
HELD:1.1. The modern share-holder in many companies has
simply become supplier of capital. The savings and earnings
of individuals are being utilised by persons behind such
corporate bodies, but there is no direct contact between
them. The promoters of such companies are not even known to
many investors in shares of such companies. In some cases
later it transpires to the investors that the promoters had
the sole object to form a bogus company and foist it off on
the public to the latter’s detriment and for their own
wrongful gain. In this process, the public becomes victim
of the evil design of the promoters who enrich themselves by
dishonest means without there being any real intention to do
any business. [703 D-G]
1.2.From time to time amendments have been introduced in
the Companies Act to safeguard the interest of the share-
holders and to provide regulatory and penal provisions for
misuse of the power by those who are in charge of the
management of such companies. The persons managing the
affairs of such company cannot use the juristic entity and
corporate personality of the company as a shield to evade
themselves from prosecution for offenses under the Penal
Code, if it is established that the primary object of the
incorporation and existence of the company is to defraud
public. [703 G-H; 704 A-B]
2.1.While taking cognizance of alleged offenses in
connection with the registration, issuance of prospectus,
collection of moneys from the investors and the
misappropriation of the fund collected from the shareholders
which constitute one or the other offence under the Penal
Code, court must be satisfied that prima facie an offence
under the Penal Code has been disclosed on the materials
produced before the court. [704 C]
2.2.In the present case, the prosecution has to prove that
the appellants as promoters or directors had dishonest
intention since the very beginning while collecting the
moneys from the applicants for the shares and debentures or
that having collected such moneys they dishonestly
misappropriated the same. [704 G]
2.3.The prosecution pending against the appellants cannot
be quashed only on the ground that it was open to the
applicants for shares to take recourse to the provisions of
the Companies Act. [705 D]
3.The power under section 482 Cr. P.C. has been vested
in the High Court to quash a prosecution which amounts to
abuse of the process of
701
the court. But that power cannot be exercised by the High
Court to hold a parallel trial, only on the basis of the
statements and documents collected during investigation or
enquiry, for the purpose of expressing an opinion whether
the accused concerned is likely to be punished if the trial
is allowed to proceed. [705 G-H]
4.It will be for the trial court to examine whether on
the materials produced (in behalf of the prosecution it is
established that the appellants had issued the prospectus
inviting applications in respect of shares of the Company
with a dishonest intention or having received the moneys
from the applicants they had dishonestly retained or
misappropriated the same. That exercise cannot be performed
either by the High Court or by this Court. [705 E-F]

 

JUDGMENT:
CRIMINAL APPELLATE JURISDICTION: Criminal Appeal Nos. 375 &
376 of 1985.
From the Judgment and Order dated 17.5.1983 of the Patna
High Court in Criminal Misc. Nos. 1931/83 and 9240 of 1982.
S.N. Misra, Manish Misra and P.C. Kapur for the Appellants.
Mrs. K. Amareswari, C.V.S. Rao, A.D.N. Rao and S.N. Jha for
the Respondents.
The Judgment of the Court was delivered by
N.P. SINGH. J The appellants on the relevant date, were
managing director and directors of a Public Limited Company
registered as M/s Bihar Cable and Wire Industries Limited
(hereinafter referred to as “the Company”). A case was
instituted by the Central Bureau of Investigation
(hereinafter referred to as “the CBI”) against the
appellants and others on basis of a complaint made by the
then Deputy Secretary, Ministry of Industrial Development
and Company Affairs, Government of India. It was alleged
that after the registration of the company aforesaid as a
Public Limited Company, the appellants as managing director
and directors issued prospectus inviting public
subscriptions of 42,000 equity shares and 3,000 preference
shares. It was given out by the appellants to the investors
that application was being made to the Calcutta Stock
Exchange for enlisting the shares of the company for
official quotation. Such application which was made on
behalf of the company was rejected by the stock
702
exchange. In spite of the rejection the share money
collected from different investors was held by the
appellants and none of the share-holders were either
informed or were repaid. It was also alleged that money
lying in the bank, on account of the share applications,
were transferred to another account of the Company. The
circumstances were pointed out in the complaint made to the
CBI as to how the acts of the appellant, clearly indicated
their dishonest intentions to convert the share application
money for their own benefit, and as such they had committed
the offence under section 409 read with section 405 of the
Penal Code.
After investigation of the allegations made in the complaint
aforesaid the CBI submitted a chargesheet against the
appellants along with some others for their trial for the
offence under section 409 of the Penal Code. When the
Special Judicial Magistrate, CBI Cases, Patna, rejected the
prayer of the appellants to discharge them, validity of that
order was questioned by filing an application under section
482 of the Code of Criminal Procedure. The High Court
rejected the said application.
The criminal proceeding pending against the appellants has
been challenged saying that it amounted to an abuse of the
process of court because instead of invoking the different
provisions of the Companies Act which are meant to cover
such situations and to protect the interest of share-
holders, a prosecution has been launched- against the
appellants before a Criminal Court for offences under the
Penal Code. It was pointed out that in view of section 69
of the Companies Act all moneys received from the applicants
for shares have to be deposited and kept in an account and
in event the shares are not issued the moneys so received
have to be repaid with interest. Reference was also made to
section 73 of the Act which requires every company intending
to offer shares or debentures to the public for
subscriptions by the issue of prospectus has to make an
application before such issue to one or more recognised
stock exchanges, for permission for shares or debentures
intended to be so offered to be dealt with in the stock
exchange. All moneys received from applicants in pursuance
to the prospectus, has to be kept in a separate bank account
until the permission is granted and where permission is not
granted, such money has to be repaid within time, in the
manner specified and if default is made in complying with
the same the company and every officer of the company who is
in default is liable to be punished with a fine which may
extend to Rs. 5,000. In other words, the provisions of the
Companies Act
703
take care of the investors and they put restrictions on the
misbehavior of the promoters and the directors of the
Company and for any lapse on their part in such matters,
they cannot be summoned to stand trial for offenses under
the Penal Code.
It is true that the Companies Act contains provisions
regarding the issuance of prospectus, applications for
shares and allotment thereof and provides different checks
over the misuse of the fund collected from the public for
issuance of shares or debentures. But can it be said that
where persons issue prospectus and collect moneys from
public assuring them that they intend to do business with
the public money for their benefit and the benefit of such
public, but the real intention is to do no business other
than collecting the moneys from the public for their
personal gain, still such persons are immune from the
provisions of the Penal Code?
Originally the concept of a company implied association of
persons for some common object having a juristic entity
separate from those of its members. In due course the gap
between the investors in such companies and those in charge
of management was widened. A situation has reached today
that in bulk of the companies in which many individuals have
property rights as share-holders and to the capital of which
they have directly or indirectly contributed, have no idea
how their contributions are being utilised. It can be said
that modern share-holder in many companies has simply become
supplier of capital. The savings and earnings of in-
dividuals are being utilised by persons behind such
corporate bodies, but there is no direct contact between
them. The promoters of such companies are not even known to
many investors in shares of such companies. It is a matter
of common experience that in some cases later it transpires
to the investors that the promoters had the sole object to
form a bogus company and foist it off on the public to the
latter’s detriment and for their own wrongful gain. In this
process the public becomes victim of the evil design of the
promoters who enrich themselves by dishonest means without
there being any real intention to do any business. From
time to time amendments have been introduced in the
Companies Act to safeguard the interest of the share-holders
and to provide regulatory and penal provisions for misuse of
the power by those who are in charge of the management of
such companies. But,if the promoters or those in charge of
managing affairs of the company are found to have committed
offenses like cheating, criminal breach of trust, criminal
misappropriation or alike, then whether the only
704
remedy to which the investor is entitled is to pursue under
and in accordance with the provisions of the Companies Act?
The persons managing the affairs of such company cannot use
the juristic entity and corporate personality of the company
as a shield to evade themselves from prosecution for
offenses under the Penal Code, if it is established that
primary object of the incorporation and existence of the
company is to defraud public.
But, at the same time, while taking cognizance of alleged
offenses in connection with the registration, issuance of
prospectus, collection of moneys from the investors and the
misappropriation of the fund collected from the share-
holders which constitute one offence or other under the
Penal Code, court must be satisfied that prima facie an
offence under the Penal Code has been disclosed on the
materials produced before the court. If the screening on
this question is not done properly at the stage of
initiation of the criminal proceeding, in many cases, some
disgruntled share-holders may launch prosecutions against
the promoters, directors and those in charge of the
management of the company concerned and can paralyse the
functioning of such company. It need not be impressed that
for prosecution for offenses under the Penal Code the
complainant has to make out a prima facie case against the
individuals concerned, regarding their acts and omissions
which constitute the different ingredients of the offenses
under the Penal Code. It cannot be overlooked that there is
a basic difference between the offenses under the Penal Code
and acts and omissions which have been made punishable under
different Acts and statutes which are in nature of social
welfare legislations. For framing charges in respect of
those acts and omissions, in many cases, mens rea is not an
essential ingredient; the concerned statute imposes a duty
on those who are in charge of the management, to follow the
statutory provisions and once there is a breach of
contravention, such persons become liable to be punished.
But for framing a charge for an offence under the Penal
Code, the traditional rule of existence of mens rea is to be
followed.
In the facts of the present case itself, the prosecution has
to prove that the appellants as promoters or directors, had
dishonest intention since very beginning while collecting
the moneys from the applicants for the shares and debentures
or that having collected such moneys they dishonestly
misappropriated the same. The ingredients of the different
offenses under the Penal Code need not be proved only by
direct evidence; they
705
can be shown from the circumstances of a particular case
that the intention of the promoters or the directors was
dishonest since very inception or that they developed such
intention at some stage, for their wrongful gain and causing
wrongful loss to the investors. All the circumstances and
the materials to prove such a charge have to be collected
during investigation and enquiry and ultimately have to be
produced before the court at the stage of trial for a
verdict as to whether the ingredients of offence in question
have been established on behalf of the prosecution.
The complaint made by the Deputy Secretary to the Government
of India to the CBI mentions different circumstances to show
that the appellants did not intend to carry on any business.
In spite of the rejection of the. application by the Stock
Exchange, Calcutta, they retained the share moneys of the
applicants with dishonest intention. Those allegations were
investigated by the CBI and ultimately chargesheet has been
submitted. On basis of that chargesheet cognizance has been
taken. In such a situation the quashing of the prosecution
pending against the appellants only on the ground that it
was open to the applicants for shares to take recourse to
the provisions of the Companies Act, cannot be accepted. It
is a futile attempt on the part of the appellants, to close
the chapter before it has unfolded itself. It will be for
the trial court to examine whether on the materials produced
on behalf of the prosecution it is established that the
appellants had issued the prospectus inviting applications
in respect of shares of the Company aforesaid with a
dishonest intention, or having received the moneys from the
applicants they had dishonestly retained or misappropriated
the same. That exercise cannot be performed either by the
High Court or by this Court. If accepting the allegations
made and charges leveled on their face value, the Court had
come to conclusion that no offence under the Penal Code was
disclosed the matter would have been different. This court
has repeatedly pointed out that the High Court should not
while exercising power under section 482 of the Code usurp
the jurisdiction of the trial court. The power under
section 482 of the Code has been vested in the High Court to
quash a prosecution which amounts to abuse of the process of
the court. But that power cannot be exercised by the High
Court to hold a parallel trial, only on basis of the
statements and documents collected during investigation or
enquiry, for purpose of expressing an opinion whether the
accused concerned is likely to be punished if the trial is
allowed to proceed.
706
The appeals are accordingly dismissed. The trial court
should proceed with the case in accordance with law. We
make it clear that we have not expressed any opinion on the
merit of. charges leveled against the appellants.
G.N.
Appeals dismissed.
707

 

 

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