2010 (8) TMI 171 - SC - Indian Laws

Whether there is investment by the petitioner or not when he was appointed as a director when he resigned and whether the alleged incident has taken place during his directorship Whether there is a prima facie case against him and whether he has participated in the proceeding or not as in charge and managing affairs keeping in view the various decisions and pass orders in accordance with law? Held that - Appeal allowed. In the instant case the appellant ceased to be a director of the company from December 27 1997 whereas the alleged offences if any were committed during the periods from May 24 1998 to September 17 1999. Admittedly there are no allegations against the appellant in the first information report. The company had invited investment from the depositors to invest in the business/benefit funds after receiving due approval of the scheme from the Reserve Bank of India. Therefore in any event the element of cheating as alleged cannot be made out by any stretch of imagination. Even assuming that there could have been a vicarious liability thrust on the appellant; even then there cannot be any such vicarious liability in absence of any allegations and material to show that the appellant was in charge of or responsible for the conduct of the company s business which had given rise to the offence. From any angle of the matter the appellant cannot be compelled to face the criminal trial in this case. The inherent power should not be exercised to stifle the legitimate prosecution but at the same time no person be compelled to face criminal prosecution if basic ingredients of the alleged offence against him are altogether absent. Thus the impugned judgment of the High Court is set aside and the appeal is allowed and the proceedings initiated against the appellant on the basis of the complaint registered.

Summary

Issues Involved:
1. Validity of the appellant's resignation as a director.
2. Allegations of cheating under Section 420 of IPC.
3. Applicability of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
4. Vicarious liability of the appellant.
5. Quashing of the criminal proceedings against the appellant.

Detailed Analysis:

1. Validity of the appellant's resignation as a director:
The appellant submitted his resignation on December 8, 1997, and it became effective from December 27, 1997, upon filing Form No. 32 with the Registrar of Companies. The court acknowledged that the appellant had ceased to be a director from this date, and thus, was not responsible for any activities of the company after his resignation.

2. Allegations of cheating under Section 420 of IPC:
The complaint alleged that the company invited deposits and later failed to honor interest warrants, leading to a financial loss for the respondent. However, the court found that the appellant had resigned before the alleged offenses occurred. The court emphasized that for an offense under Section 420 IPC, there must be dishonest or fraudulent intention at the time of inducement, which was not established in this case. The court cited several precedents, including Him Lal Hari Lal Bhagwati v. CBI, Uma Shankar Gopalika v. State of Bihar, and S. V. L. Murthy v. State, to support the requirement of proving dishonest intention.

3. Applicability of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978:
The FIR also alleged violations under Sections 3, 4, 5, and 6 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The court noted that the company was operating under a license from the Reserve Bank of India and was engaged in legitimate business. The court held that the mere financial distress and subsequent liquidation of the company did not make its activities unlawful under the said Act.

4. Vicarious liability of the appellant:
The court discussed that unlike special statutes like the Negotiable Instruments Act, 1881, which impose vicarious liability on officers, the Indian Penal Code does not have such provisions. The court stated that there was no material to show that the appellant was involved in the alleged offenses or was responsible for the conduct of the company's business at the relevant time.

5. Quashing of the criminal proceedings against the appellant:
The court found that the High Court had erred in not quashing the proceedings against the appellant. The complainant had withdrawn the charges against the appellant, acknowledging that his name was included inadvertently. The court emphasized that the inherent power to quash proceedings should be exercised to prevent miscarriage of justice. The court set aside the High Court's judgment and quashed the proceedings against the appellant.

Conclusion:
The Supreme Court allowed the appeal and quashed the criminal proceedings against the appellant, holding that there were no allegations or material to support the charges against him, and he had ceased to be a director before the alleged offenses occurred.