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Karnataka High Court · body

2015 DIGILAW 1287 (KAR)

M PITCHAIAH v. K S PERIYASWAMY

2015-11-26

RATHNAKALA

body2015
ORDER : The petitioners herein are arraigned as accused persons in a private complaint filed by respondent herein in respect of the offence punishable under Section 447 of the Companies Act, 2013; cognizance is taken by the Court against the accused persons. 2. The complaint allegation is to the effect that the complainant is a share holder of M/s. BEML Ltd. Company, Bengaluru. The President of India is a major share holder holding 54.03% equity shares by investing public money. He appoints the Board of Directors under the Companies Act, Articles of Association and Memorandum of Association of BEML Ltd. Company (for short ‘Company’). The board of directors of the company recommended 25% of the dividend to the share holders of the company for the financial year 201213, though the company incurred loss to the extent of 122.00 Crores for the financial year 201213. It is contrary to the Section 205 of the Companies Act, 1956 and Section 123 of the Companies Act, 2013 (Hereinafter called as ‘Act’). In the 49th AGM held on 13.09.2013, it was questioned by the share holders, but there was no suitable reply. Dividend warrant was sent. The complainant has sent protest to the Company Secretary through Email. He had returned the dividend mount to the Company Secretary through registered speed post.1st accused is the company, 2nd accused is the Chairman and General Manager, Accused Nos.3 to 14 & 16 are the Directors, Accused No.15 is the Company Secretary and Accused No.17 is the BGM of accused No.1 are responsible to the alleged offence. 3. Learned Magistrate/Special Court (Economic Offences) Bengaluru, after recording sworn statement of the complainant, has taken cognizance for the offence punishable under Section 447 of the Act of 2013 and issued summons. 4. Sri. K. G. Raghavan, learned senior counsel appearing for the petitioners submits that on bare perusal of the complaint, it discloses that no offence is made out and no violation is committed against mandate of the Section 205 of the Act of 1956 and Section 123 of the Act of 2013. It is alleged in the complaint that Section 123 of the Act of 2013 is contravened but, said provision was brought into effect only from 01.04.2015 and not applicable to the case on hand, since dividend was declared in the AGM held on 13.09.2013. It is alleged in the complaint that Section 123 of the Act of 2013 is contravened but, said provision was brought into effect only from 01.04.2015 and not applicable to the case on hand, since dividend was declared in the AGM held on 13.09.2013. Equivalent provision quoted by the complainant to the Section 123 of the Act of 2013 is Section 205(1) of the Act of 1956. The complaint averments lack specification as to the company not having made profit during the previous financial year as per annual accounts of 2012-13. Opening balance of profit & loss of the Company is Rs.363.18 Crores; Amount transferred to the General Reserves for the year ended 201213 is Rs.36.32 Crores; the proposed dividend of Rs.10.41 Crores is declared from out of the profit for the previous year not transferred to reserve; after the dividend was declared the balance amount was transferred to the General Reserve. Declaration of the dividend is by the shareholders of the AGM as per Article 125 of the Articles of Association and the Directors of the Company cannot be fastened with liability of the declaration of dividends. There is no criminal intent on the part of the petitioners to commit fraud by declaring dividend. Neither Section 205A(3) of the Act of 1956, nor companies (Declaration of dividend out of Reserves) Rules, 1975, is violated. It is not the case of the complainant that the company suffered losses successively over the previous years preceding year 201213. The learned Magistrate mechanically, without application of mind has taken cognizance. Out of total subscribed 41,900 shares of the company, the complainant holds a minuscule of 100 shares. No shares of the company are held by its subsidiaries. No shares of the company are reserved for issue under options and contracts/communications for the sale of shares/disinvestment. The complainant had represented one Mr. K Subramani Shastry in WP No.33756/2011(GMResPIL). Previously he was employee and was dismissed from his service for proven acts of misconduct. The above writ petition was filed seeking for a probe by the CBI into the alleged illegal export of iron ore by the then CMD and 1st petitioner company and others. The said writ petition was dismissed. This Court while dismissing the writ petition had observed that the petition is pursued purely out of personal motive. Token cost of Rs.5,000/was also imposed while dismissing the petition. The said writ petition was dismissed. This Court while dismissing the writ petition had observed that the petition is pursued purely out of personal motive. Token cost of Rs.5,000/was also imposed while dismissing the petition. The act of petitioners is a malafide one in filing the present complaint. No sanction is taken for prosecuting the petitioners 1 to 14 and they are appointed by the President of India and are removable by the President of India. The provisions of Section 197 of Cr.P. apply and the sanction ought to have been taken to prosecute the petitioners. For the acts of the company, its directors or officers cannot be held liable for the absence of any averment in the complaint that they are involved in the alleged crime or unless Statute specifically provides for holding other vicariously responsible for the alleged act. The proceedings against the petitioners are pure abuse process of law and the same is liable to be quashed. 5. In reply, Sri. K.S. Periyaswamy, Partyinperson submits that there is no dispute to the fact that on 29.05.2013, the company informed the Stock Exchanges that the Board of Directors of the Company in the meeting held on 29.05.2013 have recommended dividend @ Rs.2.50/per share (25%) for the year 201213. As per 49th Annual Report 201213, Profit/Loss before tax was Rs.12,233.54 Lakhs. The company’s paidup share capital is Rs.41.64 Crores. As per the statement of Chairman recorded in the said meeting, the company incurred a loss of Rs.122 Crores, the Board of Directors recommended dividend of Rs.2.50/per share i.e., 25% on the paidup capital of the company which would absorb Rs.12.18 Crores including payment of tax on dividend. As per Section 205 of the Act of 1956, the dividend to be paid only out of profits. As per Section 205A (3) of the Act of 1956, when company declares dividend out of the accumulated profits earned by the company in previous years and transferred by it to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be made by the Central Government in this behalf, if the declaration is not in accordance with such rules, such declaration shall not be made except with the previous approval of the Central Government. In view of the judgment of the Apex Court reported in 1998 Crl.L.J 2826 (SC), in the case of Mohd. In view of the judgment of the Apex Court reported in 1998 Crl.L.J 2826 (SC), in the case of Mohd. Hadi Raja Vs. State of Bihar, sanction under Section 197 of Cr.P.C is not a prerequisite to prosecute a company and its directors though it is owned by Government. Hence, the protection under Section 197 of Cr.P.C. is not applicable to the accused persons. Accused Nos.2 to 5 and 7 to 15 attended the Board Meeting and have signed the minutes of the meeting dated 29.05.2013. Accused Nos.16 and 17 are the signatories to the dividend warrant, because of their direct role they have committed the fraud, punishable under Section 447 of the Act of 2013, which has come into force w.e.f. 12.09.2013. Case for prosecution is made out the accused Nos.2 to 17 from the complaint averments. The Principles laid down by the Apex Court in the judgment reported in 2013 AIR SCW 660, in the case of Raghuvanshi Vs. Ajay Arora is, that while considering the case for quashing of the criminal proceedings, the court should not “kill a stillborn child”, and appropriate prosecution should not be stifled unless there are compelling circumstances to do so. Petitions are liable to be rejected. 6. At the end of all, the complainant is at prosecuting the accused persons under Section 447 of the Act of 2013. Opening words of the said provision reads thus: Section 447. Punishment for fraud: Without prejudice to any liability including repayment of any debt under this Act or other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable…………. But fraud by itself is not defined in the Act of 1956 or 2013, neither IPC touches upon fraud directly. However, by various judicial pronouncements, having regard to the subject matter of the case therein, fraud is vividly defined. Dictionary meaning of Fraud is also of wide range. However, according to the complainant, violation of Section 125 of the Act of 1956/Section 123 of the Act of 2013 amounts to an offence punishable under Section 447 of the Act of 2013. Without coming out with the details of fraudulent acts, action is sought in respect of the offence of fraud. Fraud in common parlance as understood is deceit for the advantage of one and disadvantage of the other. Without coming out with the details of fraudulent acts, action is sought in respect of the offence of fraud. Fraud in common parlance as understood is deceit for the advantage of one and disadvantage of the other. Though the complaint runs into pages, nowhere it is made out that participation of accused persons in the General Body meeting of 29.05.2013 amounts to fraud. The entire allegation centres around on the resolution whereby dividend is declared on the profit of the previous financial year. As per the complaint averments itself, it was a resolution arrived at in the general body meeting of the share holders. That being so, it is out of logic to attribute criminality against the accused named in the complaint in respect of the resolution passed in the meeting. That apart, the complaint allegation is vague, ambiguous and bald in not making out culpability of the petitioners in reference to the resolution. By way of affidavit filed by the Company Secretary, it is shown that the accused 7 to 14 are the part time nonofficial directors, 2nd accused is the Chairman/Managing Director, Mining and Constructions, accused No.3 is ExdirectorGeneral, accused No.16 is the Director (Finance) and they are appointed by the Hon’ble President of India and they cannot be removed except by order of the President of India. Another interesting feature of the complaint is, action is sought in respect of violation of Section 123 of the Act of 2013 which provision is given effect to from 01.04.2014 whereas allegation pertains to the resolution of the meeting dated 29.05.2013. If section 123 of the Act of 2013 is given up what remains for consideration is Section 205 of the Act of 1956 Mischievously, Sub Section 1 of Section 205 of the Act of 1956 is quoted in the complaint as the provision which is violated. But on a perusal of the entire Section 205, it admits declaration of dividend out of the profits of the company for any previous financial year. But on a perusal of the entire Section 205, it admits declaration of dividend out of the profits of the company for any previous financial year. The proviso to Section 205(1) of the Act of 1956 reads thus: a) if the company has not provided for depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960), it shall, before declaring or paying dividend for any financial year provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years; b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960), is equal to the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of subsection (2) or against both; c) the Central Government may, if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation: Provided further that it shall not be necessary for a company to provide for depreciation as aforesaid where dividend for any financial year is declared or paid out of the profits of any previous financial year or years which falls or fall before the commencement of the Companies (Amendment) Act, 1960 (65 of 1960). It is not the case of the complainant that the company had not earned profit in the previous year as shown by the petitioners. Undisputed documents would show that, proposed dividend of Rs.10.41 Crores is declared from out of the profit of previous year not transferred to reserve. It is not the case of the complainant that the company had not earned profit in the previous year as shown by the petitioners. Undisputed documents would show that, proposed dividend of Rs.10.41 Crores is declared from out of the profit of previous year not transferred to reserve. At the stage of arguments before this Court, the complainant is alleging that for declaring dividend out of the profit of the previous year, prior approval of the Central Government is necessary. Section 205A of the Act of 1956 and also relevant rules is violated. But that was not allegation in the complaint on which cognizance is taken by the Court. 7. The Apex Court in the case of Satish Mehra Vs. State (NCT of Delhi) and Another, reported in (2012) 13 SCC 614 has observed at para21 thus: 21. “A criminal trial cannot be allowed to assume the character of a fishing and roving enquiry. It would not be permissible in law to permit a prosecution to linger, limp and continue on the basis of a mere hope and expectation that in the trial some material may be found to implicate and the accused. Such a course of action is not contemplated in the system of criminal jurisprudence that has been evolved by the courts over the years. A criminal trial, on the contrary, is contemplated only on definite allegations, prima facie, establishing the commission of offence by the accused which fact has to be proved by leading unimpeachable and acceptable evidence in the course of the trial against the accused…………….” 8. It is the settled proposition of law that the complaint failing to disclose prima facie case is liable to be quashed. When the complaint allegation and relevant factors when taken together fail to disclose the commission of an offence, it is the duty of the Court to interfere and stop the investigation (As per State of West Bengal and Others Vs. Swapan Kumar Guha and Others, reported in (1982) 1 SCC 561 ). 9. Question of sanction under Section 197 of Cr.P.C. is raised by the petitioners seeking impunity from prosecution relying on the observation made by the Apex Court in the case of Mohd. Hadi Raja Vs. Swapan Kumar Guha and Others, reported in (1982) 1 SCC 561 ). 9. Question of sanction under Section 197 of Cr.P.C. is raised by the petitioners seeking impunity from prosecution relying on the observation made by the Apex Court in the case of Mohd. Hadi Raja Vs. State of Bihar and another, reported in 1998 Crl.L.J. 2826, on the ground that they are public servants within the meaning of Section 197 of Cr.P.C and cannot be removed without the orders of the Hon’ble President of India. But the later part of the above judgment doest not flow from observation made in midst of the discussion of the order. After survey of its earlier judgments, it was finally held in that case that it will not be just and proper to bring the officers of the ‘public sector undertakings’ within ambit of Section 197 by liberally construing the provisions of Section 197. Such exercise of liberal construction will not be confined to the permissible limit of interpretation of a statute by a Court of law but will amount to legislation by the Court. 10. The complainant is a dismissed employee of BEML. The Division Bench of this Court headed by the then Hon’ble Chief Justice, while dismissing the writ petition filed against BEML of which complainant had represented the petitioners as his counsel observed that litigation is purely pursued out of personal motives. The Apex Court in State of Haryana and Others Vs. Bhajan Lal and Others reported in 1992 Supp (1) SCC 335, listed 7 categories of cases by way of illustrations wherein power of the High Court under Article 226 of Constitution of India/482 of Cr.P.C. can be exercised either to prevent abuse of process of the Court or otherwise to secure the ends of justice. Following are the said illustrations: (1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety do not prima facie constitute any offence or make out a case against the accused; (2) Where the allegations made in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offence, justifying an investigation by police officers under Section 156(1) of the Code except under an order of a Magistrate within the purview of Section 155(2) of the Code. (3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused. (4) Where, the allegations in the FIR do not constitute a cognizable offence but constitute only a noncognizable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under Section 155(2) of the Code. (5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused. (6) Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party. (7) Where a criminal proceeding is manifestly attended with malafide 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. The case on hand fits in both 1st category and also 7th category in not making out prima facie even after accepting the facts alleged in its entirety and also for being malicious prosecution with personal motive. Even if the petitioners have violated the provisions under Section 205 of the Act of 1956 then also offence under Section 447 of the Act of 2013, cannot be brought home for the sole reason, that fraud is not to be seen from the alleged act. The Apex Court in the case of National Small Industries Corporation Limited Vs. Harmeet Singh Paintal and Another, reported in (2010) 3 Supreme Court Cases 330, on a thorough examination of Section 5 and 291 of the Act of 1956 with the definition clause of Section 2 of the Act, listed persons who are considered to be responsible to the company for its conduct of the business. Harmeet Singh Paintal and Another, reported in (2010) 3 Supreme Court Cases 330, on a thorough examination of Section 5 and 291 of the Act of 1956 with the definition clause of Section 2 of the Act, listed persons who are considered to be responsible to the company for its conduct of the business. On a scrupulous survey of earlier judgment in respect of liability under Section 141 of Negotiable Instruments Act, following principle was laid down: 39……………… (i) The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction. (ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the Company. (iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with the averments in the petition containing that the accused were in charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with. (iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred. (v) If the accused is a Managing Director or a Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with. (vi) If the accused is a Director or an officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in the complaint. (vii) The person sough to be made liable should be in charge of and responsible for the conduct of business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases. (vii) The person sough to be made liable should be in charge of and responsible for the conduct of business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases. Though in the present case, the allegation is in respect of offence punishable under Section 447 of the Act of 2013, above principles would apply to the prosecution under the Company’s Act also with same force. The complaint allegation is silent as to how and in which capacity each of the accused is vicariously liable to the alleged offence. As per law laid down by the Apex Court in the case of Maksud Saiyed Vs. State of Gujarat and Others, reported in (2008) 5 SCC 668 , when the offence is by a Company, the Court taking cognizance has to examine, whether the Directors are personally liable for the offence. Even if the statute provides for vicarious liability of an offence, it is obligatory on the part of complainant to make requisite allegations which would attract the provisions constituting vicarious liability. But such averments are not to be seen from the present complaint. 11. The learned Magistrate while taking cognizance of the matter except epitomizing the complaint averments has not given independent application of his mind. As per Maksud Saiyed(supra), the Magistrate has to carefully scrutinize the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused. By a line of judicial pronouncements, it is fairly well settled that this Court under the extraordinary jurisdiction under Section 482 of Cr.P.C. quashing on going investigations/complaint or other proceedings to prevent abuse of process of law. For the discussion supra, the petitions are allowed. The proceedings in C.C.NO.214/2013, on the file of Special Court (Economic Offences), Bangalore, is quashed. In view of the disposal of the main petitions, IA No.2/2015 and IA No.2/2014 do not survive for consideration, accordingly, stand disposed of.