1993 (3) TMI 251 - SC - Companies Law

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? Held that - Appeal dismissed. That exercise cannot be performed either by the High Court or by this court. If accepting the allegations made and charges levelled on their face value the court had come to the conclusion that no offence under the Indian 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 the 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. 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 merits of the charges levelled against the appellants.

Summary

Issues:
1. Allegations of fraud and misappropriation of funds by managing director and directors of a public limited company.
2. Challenge to criminal proceedings under the Indian Penal Code versus provisions of the Companies Act.
3. Jurisdiction of criminal court in cases of fraud by company promoters.
4. Requirement of prima facie case for prosecution under the Indian Penal Code.

Analysis:
The judgment by the Supreme Court of India involved allegations of fraud and misappropriation of funds by the managing director and directors of a public limited company. The case was initiated based on a complaint by the Ministry of Industrial Development and Company Affairs, resulting in a charge-sheet by the Central Bureau of Investigation (CBI). The appellants were accused of collecting share money from investors under false pretenses, failing to repay shareholders, and transferring funds to another account. The charges included offenses under section 409 read with section 405 of the Indian Penal Code.

The primary issue raised was the challenge to the criminal proceedings under the Indian Penal Code as an abuse of the court's process, contending that the Companies Act provisions adequately address such situations. Reference was made to sections 69 and 73 of the Companies Act, emphasizing the protection of investors and penalties for non-compliance by company officers. However, the court deliberated on whether individuals misleading investors for personal gain could escape liability under the Indian Penal Code merely because of the corporate structure.

The judgment highlighted the evolving dynamics of company ownership, where shareholders often have limited knowledge of how their investments are utilized. It emphasized that the corporate veil should not shield individuals from prosecution if the primary purpose of the company is fraudulent. The court stressed the necessity of establishing a prima facie case under the Indian Penal Code, requiring proof of dishonest intent or misappropriation, even if not solely based on direct evidence but on circumstantial factors.

Furthermore, the court clarified that the High Court should not preempt the trial court's jurisdiction under section 482 of the Code of Criminal Procedure. The power to quash a prosecution for abuse of court process should not be misused to conduct a parallel trial based on investigation materials. The judgment concluded by dismissing the appeals and directing the trial court to proceed with the case in accordance with the law, refraining from expressing any opinion on the merits of the charges against the appellants.