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TMI Blog2012 (4) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... Penal Code. The gist of the compliant is that the accused who are directors/promoters/signatories to the prospectus by deliberately inducing the public to invest funds in their company and thereafter misappropriating the funds and by ceasing to file returns with the office of complainant and the Stock Exchange and using the funds for their personal purposes have committed the offence of cheating and breach of trust. 3) The applicants who have been arraigned as accused persons in their capacity as directors of the said company have filed the present applications under section 482 of the Code. 4) Mr. B. J. Trivedi, learned advocate for the applicants in Miscellaneous Criminal Application No.2403 of 2005, invited attention to the allegations made in the first information report to submit that the entire first information report is based upon the fact that the company in question, that is, M/s. Komeon Communications Ltd. is a vanishing company. It was pointed out that it is the case of the first informant in the first information report that the company had not filed its annual accounts and balance-sheets from the year 1999-2000 till the lodging of the first information report on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Vir Prakash Sharma v. Anil Kumar Agarwal Anr., (2007) 7 SCC 373, for the proposition that the distinction between mere breach of contract and the offence of cheating is a fine one. It depends upon the intention of the accused at the time of inducement which may be judged by his subsequent conduct, but his subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is, at the time when the offence is said to be committed. To hold a person guilty of cheating it is necessary to show that he had fraudulent or dishonest intention at the time of making the promise. Reliance was placed upon the decision of the Supreme Court in the case of Suresh v. Mahadevappa Shivappa Danannava Anr., 2005 (3) SCC 670, to contend that the first information report itself was barred by delay inasmuch as the prospectus was issued on 17th July 1996, whereas the first information report in question has been lodged on 24th September 2003, that is after a period of more than seven years. Reliance was also placed upon the decision of the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the person practicing the deceit knows or believes to be false. It must also be shown that there existed a fraudulent and dishonest intention at the time of commission of the offence. It is trite law and common sense that an honest man entering into a contract is deemed to represent that he has the present intention of carrying it out but if, having accepted the pecuniary advantage involved in the transaction, he fails to pay his debt, he does not necessarily evade the debt by deception. Adverting to the facts of the present case, it was submitted that the allegation made in the first information report is to the effect that the applicants have collected ₹ 350 Lakhs from the public at the time of issuing prospectus and that the said amount has been misappropriated. It was argued that there is no basis for the allegation that the amount in question has been misappropriated by the applicants herein. Attention was invited to the communication dated 18th ebruary 2005, addressed by the company to the Manager Listing, Stock Exchange Ahmedabad, for compliance pursuant to clause-43 of the Listing Agreement, wherein it is stated that in terms of the prospectus dated 19.6.1996, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of inducement which may be judged by his subsequent conduct but for this subsequent conduct is not the sole test. 4.5) It was, accordingly, urged that the first information report which is merely based upon a report of the SEBI, listing various companies as vanishing companies, without making any due inquiry as to whether or not the offence in question has actually been committed, deserves to be quashed and set aside. 5) Mr. P.M. Thakkar, Senior Advocate, learned counsel for the applicant in Miscellaneous Criminal Application No.12430 of 2005 reiterated the submissions advanced by Mr. Trivedi. It was contended that insofar as the applicant herein is concerned, there is an additional factor in his favour, namely, that he was not a director at the relevant point of time. It was submitted that the applicant herein had resigned as Director of the Company from 26th December, 1996 and he had also requested the Company to send his resignation to the Registrar of Companies but unfortunately the Company did not bother to send his resignation to the Registrar of Companies as required under the Companies Act. Therefore, the petitioner had filed Form No.32 to the Registrar of Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rao Anr. v. M. Kishan Rao Anr, (2002) 6 SCC 174, for the proposition that power of quashing a criminal complaint and the proceeding initiated on its basis under section 482 of the Code of Criminal Procedure or Article 226 of the Constitution of India is to be exercised very sparingly and with circumspection and that too in the rarest of rare cases. The court in the facts of the present case found that on reading the complaint petition and the material produced by the complainant with it, in the light of the provisions of section 60, 63(1), 68 and 68-A of the Companies Act, it cannot be said that the allegations made in the complaint taken in entirety do not make out even prima facie, any of the offences alleged in the complaint petition and declined to quash the complaint. Reliance was also placed upon the decision of the Supreme Court in the case of Iridium India Telecom Limited v. Motorola Incorporated Ors., (2011) 1 SCC 74, for the proposition that in exercise of jurisdiction under section 482 of the Code, the court cannot go into the truth or otherwise of the allegations and appreciate the evidence, if any, available on record. Normally, the High Court would not interven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y him has alleged that M/s. Kome-On Communication Ltd. had been registered under the Companies Act on 3.2.1994, and the address of its registered office is A-903 Fairdeal House, Swatik Cross Roads, Navrangpura, Ahmedabad-9. The said company had defaulted in filing its annual accounts in accordance with the provisions of the Companies Act since 1999-2000. Moreover, in the year 1995, the company had recovered ₹ 350 Lakhs from the public at large and had also issued prospectus as per the SEBI Guidelines. False promises and assurances were given to the public and the directors/promoters and those who had signed the prospectus had, with bad intention induced the public to invest funds in their company and, thereafter, the company has either swallowed the funds or misappropriated the same, which is contrary to the statements made in the prospectus as well as the provisions of law and in contravention of their obligations, have vanished, and in this way, the directors/promoters of the company and the signatories to the prospectus have come together and hatched a conspiracy against the investors and have committed the offence under sections 406/420 of the Indian Penal Code as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 350 Lakhs through public issue vide prospectus dated 19.6.1996 by making false commitments in the prospectus issued by the company and, thereafter, misused the funds so collected. It is further stated that under section 156 of the Criminal Procedure Code, which empowers the police authority to investigate a cognizable offence which cannot be interfered with or controlled by the Judiciary and thus this Court may not under section 482 of the Code, interfere with the investigation of a cognizable offence. In his affidavit dated 12th December 2007, the second respondent has categorically averred that the first information report filed is not on the issue whether the company is vanishing or not. The first information report relates to the mis-statements made by the directors of the company in the prospectus relying upon which the public had been induced to subscribe shares in the company to the said prospectus of the company. The directors being signatories to the prospectus have induced the general public to subscribe to the shares in the company and have thereby committed the offence of cheating the public by not acting as per the statements and promises made in the prospectus. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were to be invested in plant and machineries and other assets as projected in the prospectus. It cannot be gainsaid that such investment would be in the nature of capital expenditure. The loans and advances, even according to the first informant are given towards capital expenditure. Under the circumstances, in the absence of any specific averments as regards the nature of capital expenditure in respect of which the loans and advances were given so as to substantiate his say that the same was for a purpose other than those specified in the objects of the company, it cannot be said that the same were advanced for purposes not authorised under the prospectus. Before this court also the learned counsel for the second respondent, even after taking instructions from the concerned officer was not in a position to point out that the loans and advances given by the company were towards capital expenditure was not authorised under the prospectus. The general refrain was that these are things which would be found out during the course of investigation. 11) Adverting to the allegations made in the first information report, primarily what has been alleged therein is that the applicants by m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made in the first information report and the averments made in the affidavits filed by the second respondent, taking the case of the second respondent at its highest, his case is that various amounts had been advanced by way of loans and advances for capital expenditure which was not authorised under the prospectus and no steps had been taken to recover the same. In this regard it may be pertinent to note that there is no assertion, either in the first information report or in the affidavits that the funds disbursed by way of loans and advances had been advanced by the directors/promoters/signatories to the prospectus, to their friends or relatives or that the said sums have travelled back to the applicants. Bald allegations are made that the funds have been misappropriated without making any verification in that regard. There is nothing on record to indicate that pursuant to SEBI placing the Company in the list of vanishing companies, the second respondent had made any inquiry in that regard to ascertain as to whether or not the Company was found at the address of its registered office and as to whether it was functioning. No attempt appears to have been made by the second respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 406 IPC, which defines criminal breach of trust and section 415, which defines cheating, held that an offence of cheating would be constituted when the accused has fraudulent or dishonest intention at the time of making promise or representation. A pure and simple breach of contract does not constitute an offence of cheating. The court was of the view that the High Court should have posed a question as to whether any act of inducement on the part of the appellant therein has been raised by the second respondent and whether the appellant had an intention to cheat him from the very inception. If the dispute between the parties was essentially a civil dispute resulting from a breach of contract on the part of the appellants by non-refunding the amount of advance the same would not constitute an offence of cheating. Similar is the legal position in respect of an offence of criminal breach of trust having regard to its definition contained in section 405 of the Indian Penal Code. In Alpic Finance Ltd. v. P. Sadasivan (supra), the Supreme Court has held that to deceive is to induce a man to believe that a thing is true which is false and which the person practicing the deceit knows or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursed to the applicants or their family members and that the said funds had actually travelled back to the applicants. If no steps have been taken to recover the amounts advanced by way of loan, the same may amount to failure on the part of the applicants to perform their duties under the Companies Act, attracting the penal provisions under the said Act, however, the same would not constitute an offence under the Indian Penal Code. Thus, on the allegations made in the first information report the offence under section 406 IPC is clearly not made out. 20) Section 415 of the Indian Penal Code defines cheating and section 420 deals with Cheating and dishonestly inducing delivery of property . It is settled legal position as held by the Supreme Court in the above referred decisions that an offence of cheating would be constituted when the accused has fraudulent or dishonest intention at the time of making promise or representation. A pure and simple breach of contract does not constitute an offence of cheating. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Vijaya Rao v. State of Rajasthan and another, (2005) 7 SCC 69, wherein it has been held that mere reference to the expressions mentioned in the provision would not disclose commission of an offence, when the ingredients constituting the offence in question are conspicuously lacking. Adverting to the facts of the present case, even if the allegations made in the first information report are taken at face value and accepted in their entirety, the same do not constitute any of the offences alleged. Under the circumstances, continuance of the proceedings would amount to an abuse of process of law warranting invocation of the inherent jurisdiction of this court under section 482 of the Code. 23) It has been contended on behalf of the second respondent that though loans and advances have been made to several parties, no effort has been made to recover the same or that the same have not been expended for the object of the company. In this regard, apart from the fact that there is nothing on record to indicate that the second respondent has made any inquiry as to how the loans and advances have been made, on behalf of the applicants it has been stated that the same have been made to v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by reference to fluctuations in the value of shares or debentures; shall be punishable with imprisonment for a term which may extend to five years, or with fine which may extend to one lakh rupees, or with both. 628. Penalty for false statement.-If in any return, report, certificate, balance-sheet, prospectus, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a statement- (a) which is false in any material particular, knowing it to be false; or (b) which omits any material fact knowing it to be material; he shall, save as otherwise expressly provided in this Act, be punishable with imprisonment for a term which may extend to two years, and shall also be liable to fine. 25) In the first information report it has been alleged that untrue statements are made in the prospectus; that on the basis of such untrue statements the public was induced to invest huge amounts of funds in the Company. Thus basically the offences alleged would fall under sections 63, 68 and 628 of the Companies Act. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Radhey Shyam Khemka v. State of Bihar (supra) on which reliance has been placed by the learned counsel for the second respondent, the Supreme Court after holding that the persons managing the affairs of such company cannot use the juristic entity and corporate personality of the company as a shield to evade themselves from prosecution for offences under the Penal Code, if it is established that primary object of the incorporation and existence of the Company is to defraud public, has held thus: 6. But, at the same time, while taking cognizance of alleged offences in connection with the registration, issuance of prospectus, collection of moneys from the investors and the misappropriation of the fund collected from the shareholders which constitute one offence or other under the Penal Code, court must be satisfied that prima facie an offence under the Penal Code has been disclosed on the materials produced before the court. If the screening on this question is not done properly at the stage of initiation of the criminal proceeding, in many cases, some disgruntled shareholders may launch prosecutions against the promotors, directors and those in charge of the management of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of an offence and not to inquire as to whether or not an offence has been committed. 29) Thus, it is apparent that the sole object in lodging the first information report was to set the machinery of criminal law in motion against the applicants without verifying the truth or otherwise of the allegations before levelling the same against the applicants herein and that the second respondent is solely depending upon the fishing inquiry which may be undertaken by the police in the course of its investigation, without being himself possessed of any knowledge or any material or documents forming basis for the allegations made in the first information report as regards misappropriation of the funds collected from the public. 30) In the light of the fact that the court has found that no offence as alleged in the first information report is made out against the applicants, it is not necessary to delve into the contention as to whether or not the applicant in Miscellaneous Criminal Application No.12430 of 2005 was a director at the relevant time when the offence is alleged to have been committed and as to whether in the light of the resignation tendered by him, his name was requ ..... 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