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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

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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

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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

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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-

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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

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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