Karnataka High Court
Manjunath. S vs The State Of Karnataka on 21 December, 2023
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 21ST DAY OF DECEMBER, 2023
BEFORE
THE HON'BLE MR. JUSTICE SACHIN SHANKAR MAGADUM
WRIT PETITION NO.26072 OF 2019 (GM-RES)
BETWEEN:
1 . MANJUNATH. S
AGED ABOUT 71 YEARS,
S/O LATE SRI. A. C. LINGAPPA,
NO.13, VIVEKANANDA ROAD,
8TH MAIN, 3RD STAGE,
4TH BLOCK, BASAVESHWARANAGARA,
BENGALURU-560 079.
(SENIOR CITIZEN NOT CLAIMED)
2 . HARISH PANDURANGACHAR
AGED ABOUT 54 YEARS,
S/O. SRI. S. G. PANDURANGACHAR,
RESIDING AT NO. 8, 8TH CROSS,
VIDYANARAYANA NAGAR, BENGALURU-560091.
3 . VEENA
AGED ABOUT 35 YEARS,
W/O SRI. HANUMANTH RAJU,
C/O LASER EVENTS PVT. LTD.,
NO.55, 2ND CROSS, NHCS LAYOUT,
3RD PHASE, 4TH BLOCK, BASAVESHWARANAGAR,
BENGALURU-560079.
...PETITIONERS
(BY SRI.KIRAN B S, ADVOCATE)
2
AND:
1. THE STATE OF KARNATAKA
REPRESENTED BY SECRETARY TO THE
GOVERNMENT, HOME DEPARTMENT,
II FLOOR, VIDHANA SOUDHA,
DR. AMBEDKAR VEEDHI,
BENGALURU-560 001.
2. CENTRAL CRIME BRANCH
REPRESENTED BY ADGP
COTTONPET MAIN ROAD, SULTANPET, BAKSHI
GARDENS, CHIKKAPETE, BENGALURU-560 053.
3. SRI. MAHESH BABU D. V.
AGED ABOUT 59 YEARS,
S/O. VISHVANATH D.N,
NO.4, 1ST FLOOR, 5TH MAIN,
BEHIND MODI HOSPITAL, MAHALAKSHMIPURAM,
BENGALURU-560 086.
4. MS. MANASA BABU
AGED ABOUT 32 YEARS,
D/O SRI. MAHESH BABU,
NO.4, 1ST FLOOR, 5TH MAIN,
BEHIND MODI HOSPITAL, MAHALAKSHMIPURAM,
BENGALURU-560 086.
5. MR. DEEPAK PADMANABHAN
AGED ABOUT 40 YEARS,
CHARTERED ACCOUNTANT
(MEMBERSHIP NO. 215744)
NO.51/7/1, CHITRAKOOT, RATNA AVENUE,
RICHMOND ROAD, BENGALURU-560 025.
...RESPONDENTS
(BY SMT.ANUKANKSHA KALKERI, HCGP FOR R1 & R2;
SRI.SURENDRA.Y.S, ADVOCATE FOR R5;
R3 & R4 ARE SERVED)
3
THIS W.P IS FILED UNDER ARTICLES 226 & 227 OF
THE CONSTITUTION OF INDIA PRAYING TO DIRECT THE
R-1 AND 2 FOR QUASHING OF THE FIR NO.0002 OF 2019
REGISTERED BY R-2 VIDE ANNX-A AND RESTRAIN
RESPONDENTS AND THEIR OFFICIALS/AGENTS/HENCMEN
FROM EITHER EXERCISING POWER UNLAWFULLY AND
WITHOUT JURISDICTION OR ADHERING TO ILLEGAL ACTS
FOR INFLICTING INJURIES AND WRONGFUL LOSSES TO
PETITIONERS.
THIS PETITION HAVING BEEN HEARD AND
RESERVED FOR ORDERS ON 19.12.2023, COMING ON FOR
PRONOUNCEMENT OF ORDERS THIS DAY, THE COURT
MADE THE FOLLOWING:
ORDER
The captioned writ petition is filed seeking
quashing of the proceedings in FIR No.3002/2019 for
the offence punishable under Sections 34, 120B, 406,
420 & 506 of IPC.
2. Petitioners are aggrieved by the
registration of crime in No.0002/2019 for the offence
punishable under Sections 34, 120B, 406, 420 and
506 of IPC. Based on a complaint lodged by
respondent No.3, the Mahalakshmipuram Police have
registered a case in crime
No.0002/2019.(CC.No.19184/2019).
3. The sum and substance of complaint is as
under:
Third respondent in his complaint has alleged
that respondent No.4, who is his daughter, has lent
some monies to the company to which petitioners
herein are the Directors. It is further alleged that in
lieu of Rs.20 lakhs received by the company, the
company has issued 20,000 shares of M/s. Laser
Events Private Limited to respondent No.4. The
grievance of respondents 3 and 4 is that the company
has unauthorisedly transferred the shares of
respondent No.4 and therefore, the petitioners who
are the Directors of the Company have committed an
offence punishable under the aforementioned
Sections.
4. The petitioners who are the Directors have
filed the captioned petition seeking quashing of the
proceedings.
5. The petitioners countering the claim of
respondent No.3 have filed the captioned petition and
have stoutly denied advancing of the alleged hand
loan of Rs.20 Lakhs to the company. Petitioners claim
that as per the Memorandum and Articles of
Association of the Company, there is a prohibition to
invite or accept deposits from persons other than its
members, Directors or their relatives. Petitioners
claim that respondents 3 and 4 are neither members,
directors nor share holders of the company.
Petitioners placing reliance on the bank statement
which is placed on record at Annexure-C and which
pertains to the period 2008 and 2009, contended that
there is no inward remittance or receipt indicating
receipt of private loan from any entity/individual.
Referring to the audit report for the period ending
31.3.2009, petitioners claim that respondent No.3 has
fraudulently converted equity shares though company
did not earn any foreign exchange during the relevant
period.
6. The petitioners have further contended that
the claim of respondent No.3 is neither supported by
Board Resolution and General Body Resolutions to
substantiate the claim that shares were issued to
respondent No.4. The petitioners have further
contended that even if allegations in the complaint are
accepted in entirety, it does not satisfy the ingredients
of the offences indicated in the FIR. It is also
contended that the cognizance of the above said
offences is bad in law as there is a express Bar under
Section 439 of the Companies Act read with Section 5
and 41 of IPC and Section 5 of Cr.PC. On these set of
grounds, petitioners are seeking quashing of the
proceedings pending in FIR.No.0002/2019.
7. Learned counsel appearing for the
petitioners reiterating the averments made in the
petition would vehemently argue and contend that
respondent No.3 misusing his office as Accounts-Book
Keeper has modified book entries to allot 20,000
shares to his daughter i.e., respondent No.4. The
learned counsel would contend that petitioner No.3
having discovered fraudulent and erroneous issue of
shares to respondent No.4 reported to the Board and
first petitioner has registered a complaint in
PCR.No.4104/2018 against respondent No.3. Learned
counsel for the petitioners would further submit that
the present complaint is as a counter blast to the
complaint lodged by petitioners against respondent
No.3. He would point out that respondent No.3 has
filed a complaint vindictively and retributively to
protect himself against the criminal prosecution
lodged by the company through its Directors and
respondent No.3 has lodged the complaint only to
cover up fraudulent book entries and misappropriation
of funds by illegally transferring 20,000 shares in the
name of respondent No.4 who is an Australian citizen.
8. Referring to Section 3(1) (iii) and Section
58A of the Companies Act, he would point out that
private limited companies can either invite or accept
deposits only from its members, directors or their
relatives. The alleged deposit of Rs.20 lakhs by an
NRI is impermissible and the alleged conversion into
shares is also ipso facto bad in law. He would also
point out that Regulation 3 of Foreign Exchange
Management (Deposit) Regulations, 2000, prohibits
acceptance of any deposit from an NRI without the
RBI approval. Referring to Section 439 of the
Companies Act, 2013 read with Sections 5 and 41 of
IPC and Section 5 of Cr.P.C., he would point out that
the cognizance of the above said offence is bad in law.
Learned counsel would further contend that the
remedy for respondent No.4 is to seek remedy before
the National Company Law Tribunal-Bengaluru
Bench(for short "NCLT"). He would also seek
quashing of the proceedings on the ground that even
if the allegations in the complaint are accepted in
entirety, the said allegations do not satisfy the
ingredients of the offences indicated in the FIR.
9. Per contra, learned HCGP countering the
arguments of the petitioners would contend that the
matter requires trial and since charge sheet is filed, no
indulgence is warranted at the hands of this Court at
this juncture. He would further point out that there
are sufficient materials on record to proceed against
the petitioners and therefore, he would contend that
this is not a fit case which would warrant interference
of this Court under Section 482 of Cr.P.C.
10. The complaint is lodged by respondent
No.3 alleging that the company namely M/s.Laser
Events Private Limited has transferred the shares of
respondent No.4. Respondent No.3 has alleged in the
complaint that the company has transferred 20,000
shares towards the hand loan of Rs.20 Lakhs received
by the company from respondent No.4, while the
petitioners who are the Directors of the above said
company are disputing the receipt of alleged hand
loan as well as issuance of shares. Petitioners who
are the Directors of the above said company are
placing reliance on the bank statements to
substantiate that there are no inward remittance or
receipts from any NRO/NRE/FCNR account.
11. The petitioners in the captioned petition are
also placing reliance on audit report and the alleged
issuance of shares in favour of Respondent No.4 is
also seriously disputed for want of Board Resolution
and General Body Resolutions. Petitioners are also
questioning the launching of criminal proceedings on
the ground that no share certificates are issued either
to respondent No.3 or respondent No.4, which is a
pre-requisite for establishing title over the shares of
the company under Section 46(1) of the Companies
Act. Therefore, the petitioners claim that the shares
shown fraudulently in filings of Registrar of Companies
as void and non est.
12. If these significant details are examined,
several questions would emerge for consideration
before this Court:
(i) Even if the allegations in the complaint are
accepted, whether alleged loan/deposit can be
converted into shares without Board resolutions and
agreement. The shares in private limited company
are not traded publicly. The transfer of shares in a
private limited company in India is governed by
Companies Act. The transfer of shares is restricted
to company's Articles of Association and the first step
in the share transfer process is to obtain share
transfer deed which is a legal document which is then
followed by share certificate.
(ii) The Board of Directors of the company
must approve the transfer of shares and pass a Board
Resolution to that effect.
(iii) The transferor may also be required to
execute an indemnity bond indemnifying the company
against any loses that may arise from transfer of
shares and the share transfer deed has to be
adequately stamped at the rate applicable.
Therefore, in the context of disputes involving
shares and share holder status, the aggrieved party
has to seek recourse through the National Company
Law Tribunal, which serves as a competent authority
for matters falling within the ambit of corporate and
company law. The adjudication process before the
NCLT involves a comprehensive examination of
corporate laws, contractual obligations and relevant
legal precedents. In matters involving dispute over
the misappropriation of shares, the crux lies within the
realm of civil jurisprudence, rather than within the
purview of criminal law. The Court/Tribunal armed
with equitable principles, undertakes a rigorous
examination of evidence and legal precedents to
unravel the intricacies of the dispute.
(iv) Therefore, it is imperative for the aggrieved
party to navigate the procedural intricacies by
approaching the NCLT and not by launching a criminal
prosecution. These complex questions cannot be
decided in a criminal case. Whether respondents 3
and 4 have been cheated cannot be decided in a
criminal case as the adjudication of title over the
shares demands invocation of civil proceedings and it
is only the NCLT, which is competent to discern the
nuances of dispute over the shares and it is also
competent to evaluate the veracity of claims
pertaining to share holders' status within the
corporate edifice.
(v) Even if all the allegations in the complaint
are taken at face value are true, the criminal Court
lacks inherent jurisdiction to examine as to whether
the complainant is cheated on account of transfer of
shares by the company. The Apex Court in the case
of Vesa Holdings (P) Limited .vs. State of Kerala1
has held that every breach of contract would not give
(2015) 8 SCC 293
rise to an offence of cheating. The Apex Court further
held that only in those cases breach of contract would
amount to cheating where there was any deception
played at the very inception. The allegations in the
FIR clearly discloses a contractual dispute.
(vi) The cognizance of the offence is found to
be bad in law as there is express bar under Section
439 of the Companies Act read with Sections 5 and 14
of IPC and Section 5 of Cr.P.C. Section 439 (2) clearly
bars Courts from taking cognizance of any offence.
Section 5 of Cr.P.C. also bars from taking cognizance
if offences covered under the Special Law and statute
confers exclusive jurisdiction on NCLT.
(vii) Whether respondents 3 and 4 had lent
monies to the company and whether the said monies
could be converted into shares and can be transferred
in favour of an individual and whether merely because
the shares are reflected in the filings of the ROC would
confer a right in the shares of the company, are all
disputed questions and involve complex issues and
therefore, the complainant has to seek remedy
through NCLT which serves as a competent authority
as the above allegations in the complaint clearly fall
within the ambit of corporate and company law.
13. In the light of the discussions made supra,
if the proceedings are not quashed the same would
lead to abuse of process.
14. The judiciary has never concealed its
contempt for actions that abuse the court process.
While litigants continue to misuse the criminal legal
system, the High Courts and the Supreme Court have
never shied away from using the inherent powers
vested in them to quash such matters. In this
context, I find it apt to quote from a judgment of the
Supreme Court of India in the matter of Mohammed
Ibrahim and others vs. State of Bihar and
another2:
"This Court has time and again drawn
attention to the growing tendency of the
complainants attempting to give the cloak of a
criminal offence to matters which are essentially
and purely civil in nature, obviously either to
apply pressure on the accused, or out of enmity
towards the accused, or to subject the accused
to harassment. Criminal courts should ensure
that proceedings before it are not used for
settling scores or to pressurize parties to settle
civil disputes. But at the same time, it should be
noted that several disputes of a civil nature may
also contain the ingredients of criminal offences
and if so, will have to be tried as criminal
offences, even if they also amount to civil
disputes."
15. The Courts ruled similarly in the matters of
Alpic Finance Ltd. vs. P Sadasivan & Anr.3, and
All Cargo (I) Pvt. Ltd. & Ors. v. Dhanesh
(2009) 8 SCC 751
(2001) 3 SCC 513
Badarmal Jain & Anr.4. It is possible to characterize
a breach of contract as a case of cheating provided
the ingredients thereof are made out. In this context a
reference to the judgment in the matter of Hridya
Rajan Pd. Verma & others v. State of Bihar and
another5, may be made. The judges were clear that
the element of mens rea was essential for a criminal
offence to be made out -
"In determining the question it has to be
kept in mind 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 for this
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 the time
when the offence is said to have been
(2007) 14 SCC 776
AIR 2000 SC 2341
committed. Therefore, it is the intention which is
the gist of the offence. 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. From his mere failure to
keep up promise subsequently such a culpable
intention right at the beginning, that is, when he
made the promise cannot be presumed."
16. Courts have, on numerous occasions,
refused to encourage criminal prosecution when it is
found to be malafide or otherwise an abuse of the
process of the court. High Courts have the inherent
power under Section 482 of the [Indian] Code of
Criminal Procedure 1973 to quash any offences where
the ingredients of the offence alleged is not made out.
In this context, the Supreme Court has in the matter
of State of Haryana & Ors. v. Bhajan Lal & Anr.6,
set out certain categories of cases which need to be
quashed, including "where a criminal proceeding is
1992 Supp (1) SCC 335
manifestly attended with mala fide and/or where the
proceeding is maliciously instituted with an ulterior
motive for wreaking vengeance on the accused and
with a view to spite him due to private and personal
grudge."
17. In numerous cases where disputes arise in
relation to valuation, enforcement of exit/ buy-back
provisions, contractual terms etc., the logical course
of action would be to look at provisions of statute
involved and policies/ circulars/ regulations issued
thereunder along with provisions of contract law;
instead parties try to use criminal law provisions
pertaining to fraud, criminal breach of trust, criminal
conspiracy and the like to pressurize the
counterparties, impede their freedom and ability to
travel.
18. Thus, looking to the matter from all angles,
this Court is of the considered view that prosecution
for the aforesaid offence against the petitioners would
amount to clear abuse of process of law. The FIR
under the circumstances deserves to be quashed at
the threshold.
19. Hence, I pass the following:
ORDER
(i) The Writ Petition is allowed.
(ii) The FIR dated 5.1.2019 registered in Crime
No.0002/2019 for the offence punishable under
Sections 34, 120B, 406, 420 and 506 of IPC. is hereby
quashed and all criminal proceedings emanating
therefrom also stand quashed.
Sd/-
JUDGE
*alb/-
