2011 (3) TMI 1456 - HC - Companies Law

Default in payment of hire charges allegation of cheating - criminal suit - It is alleged that there was default in payment of hire charges and the complainant company invoked the arbitration clause and obtained arbitration award. But while executing the award, they found that the machinery was hypothecated with the IDBI which had the first charge over the machinery. The allegation is that petitioners Nos. 1 to 3 have fraudulently represented and deceived the company that there was no charge over the machinery and the fourth petitioner issued a no lien certificate. Held that - Whether the complainant had knowledge of the previous charge and whether the petitioner had fraudulent intention for cheating are the matters for trial. In such view of the matter, this court finds no reason, much less valid reason to interfere with the proceedings at this stage.

Summary

Issues:
Petition to quash criminal proceedings under sections 420, 468, and 471 of the Indian Penal Code based on alleged fraudulent representation and deception by directors of a company leading to financial loss to the complainant finance company.

Analysis:
The petitioners sought to quash criminal proceedings initiated by a finance company against them for alleged offenses under sections 420, 468, and 471 of the Indian Penal Code. The complainant company extended financial assistance through a hire purchase agreement involving machinery from a company where the petitioners were directors. The petitioners were accused of fraudulent representation and deception regarding the machinery's lien status, leading the complainant to suffer financial loss. The petitioners argued that the complainant should have known about existing charges on the property as per the Companies Act, 1956. They cited legal precedents emphasizing the need for purchasers to conduct due diligence on property titles and the limited scope of accused submissions at the stage of framing charges.

The respondent, representing the complainant company, contended that the petitioners' actions were dishonest from the outset, attracting the offense of cheating under the Indian Penal Code. They argued against a detailed inquiry at this stage, asserting that the petitioners' conduct indicated the commission of alleged offenses. The respondent emphasized the importance of allowing the trial to proceed without interference, considering the seriousness of the allegations and the financial impact on the complainant.

The court examined the facts, including the hire purchase agreement, default in payments, invocation of arbitration, and the discovery of prior charges on the machinery. It reiterated the legal requirement of fraudulent or dishonest intent for cheating under the Indian Penal Code. The court considered the petitioners' submission regarding the deemed notice of existing charges to the complainant under the Companies Act, 1956. Additionally, the court addressed the argument that the dispute was civil in nature, emphasizing the need for a trial to determine the fraudulent intent and criminality alleged by the complainant.

Ultimately, the court dismissed the criminal original petition, stating that the issues of complainant knowledge and fraudulent intent were trial matters. The court found no valid reason to interfere with the ongoing proceedings at that stage. The decision highlighted the importance of allowing the trial to proceed to ascertain the truth behind the allegations and determine the petitioners' culpability in the alleged fraudulent activities.