1964 (5) TMI 31 - SC - Companies Law

Power to pay certain commissions and prohibition of payment of all other commissions, discounts, etc. and Directors, etc. not to hold place of profit

Summary

Issues Involved:
1. Validity of the underwriting agreement.
2. Alleged fraudulent and dishonest inducement to pay commission.
3. Competency of directors to canvass for the sale of shares.
4. Sufficiency of evidence for the charge of cheating.
5. Consideration of alternative charges.

Issue-wise Detailed Analysis:

1. Validity of the Underwriting Agreement:
The High Court determined that the underwriting agreement between the company and Messrs. Chatterji and Co. was genuine and not "sham or fictitious." The articles of association authorized Messrs. Eastland Trust, the managing agents, to appoint underwriters and pay them a commission of ten percent on the sale of shares. The High Court found that Messrs. Eastland Trust had indeed started functioning as managing agents from the date of the company's incorporation and had the authority to appoint underwriters. Therefore, the appointment of Messrs. Chatterji and Co. as underwriters was legal and proper.

2. Alleged Fraudulent and Dishonest Inducement to Pay Commission:
The High Court held that although the underwriting agreement was genuine, the appellants, particularly Lahiri and Sharma, exploited this agreement for personal gain. The evidence indicated that Lahiri, Sharma, and others were actually selling the shares and receiving the commission, while Chatterji acted merely as a "conduit pipe." The High Court inferred that the illegal acts committed by the appellants were in furtherance of their common intention to cheat the company of the share commission. However, the Supreme Court found a lack of evidence of any specific representation that deceived the company into paying the commission.

3. Competency of Directors to Canvass for the Sale of Shares:
The High Court's view that directors were incompetent to act for the purpose of canvassing for the sale of shares was deemed unsustainable by the Supreme Court. The Supreme Court clarified that there was nothing in the underwriting agreement preventing the directors from acting as agents for Chatterji and Co. in canvassing the sale of shares. The underwriting agreement allowed the underwriters to appoint agents, and it was no concern of the company how the underwriter procured the purchasers.

4. Sufficiency of Evidence for the Charge of Cheating:
The Supreme Court found that the charge of cheating was not substantiated by the evidence. The charge was based on the premise that the underwriting agreement was fictitious, which the High Court had already found to be genuine. There was no evidence of any specific representation made to the company that deceived it into paying the commission. The vouchers submitted by Messrs. Chatterji and Co. claiming payment of underwriting commission were not produced, and only the receipts for payment were available. The Supreme Court emphasized that mere deception was not sufficient to establish the offense of cheating; there must be evidence of inducement and the specified mens rea.

5. Consideration of Alternative Charges:
The State's counsel contended that the appellants could be convicted of the offense of criminal breach of trust under section 409 read with section 34 of the Indian Penal Code. However, the Supreme Court noted that the High Court had acquitted the appellants of this charge, and no appeal was filed by the State against this decision. Therefore, the Supreme Court held that it would not be justified in entertaining the plea of the State to convict the appellants on this charge at this stage.

Conclusion:
The Supreme Court allowed the appeal and acquitted the appellants of the offense under section 420 read with section 34 of the Indian Penal Code. The fine, if paid, was ordered to be refunded. The judgment emphasized the lack of evidence for the charge of cheating and clarified the legal position regarding the competency of directors to canvass for the sale of shares.