Topics Covered in this article
The matter was before the Bihar High Court in 1985. The Judgement was delivered in 1993.
Today, we see a trend of civil suits being criminalized by the parties just so to meet the ends of Justice in one way or the other. Sometimes one of the parties in a dispute may initiate criminal proceedings so as to get a quick remedy or sometimes to pressurise the other side in reaching a settlement. But in certain cases which are purely commercial in nature, there may be more ingredients of a criminal offence than it meets the eye and such cases need to be addressed irrespective of them having a way out in civil laws too. The Indian Judiciary has never held back in quashing some of the orders where there was clear abuse of court process by the lower courts. Time and again, the Supreme Court and other High Courts of different states have set precedents to the matter that while deciding on the admissibility of a criminal proceedings to a case also having a root of action in a civil law, utmost care has to be taken to ensure that all the ingredients of a crime exist and not just mere instances which can be twisted and contoured to give them a shape of a criminal offence. The Criminal Procedure Code, 1973, under S.482, has given inherent powers to the High Court to quash the decisions of the trial courts if there is an abuse of court process. The case of Radhey Shyam Khemka And Anr. vs. State Of Bihar And Anr. , which I shall be discussing about, is one such instance where the Patna High Court, while maintaining the order passed by a trial court, has set out clear indications that a criminal prosecution cannot be quashed just because a penal action lies in some other statute.
Facts in brief
A prospectus was issued by a Public Limited Company(appellants) to invite subscriptions for preference and equity shares and it had mentioned that to categorically list the shares for the official quotation, an application had been filed to the Calcutta Stock Exchange(CSE). The investors made the payment for the shares. However, the application was rejected by the CSE. Even after the CSE rejected the application, the company withheld the money that had been collected by the investors for the shares. The investors were not notified about the rejection of application and neither was their money returned. A subsequent complaint was lodged to the CBI against that company by a secretary to the Government of India. After investigation, a charge sheet was filed by the CBI booking the company for an offence under S.409 of IPC. The matter went to trial and a plea to dismiss the case was filed by the company. The magistrate rejected the plea. The company (appellant) filed an application in High Court under Section 482 of the Criminal Procedure Code, 1973(Cr.PC) questioning the validity of the order. The High Court rejected the application.
Issues in the case
Whether the trial court’s decision of prosecuting the company under the IPC and not the Companies Act could be maintained or not.
Arguments advanced by the appellants
The main contention of the appellants was that there was abuse of court process by the trial court. They argued that the matter cannot be tried for an offence under IPC as the Companies Act deals with such situations. It was further argued that it keeps a check on the actions and behaviour of the directors and promoters of a company in case of default and protects the interests of the investors. Reference was made to Section 69 of the Companies Act which says “all moneys received from the applicants for shares have to be deposited and kept in an account and in event the shares are not issued the moneys so received have to be repaid with interest.” Section 73 of the Act says “All moneys received from applicants in pursuance to the prospectus, has to be kept in a separate bank account until the permission is granted and where permission is not granted, such money has to be repaid within time, in the manner specified and if default is made in complying with the same the company and every officer of the company who is in default is liable to be punished with a fine which may extend to Rs. 5,000”. Thus, it was argued that the case should be dealt with in a civil court under the Companies Act and not under IPC and by rejecting the plea to dismiss, the trial court had abused the court process.
In the modern times, shareholders have become mere providers of capital to the companies. There is no direct link between the shareholders and the promoters of the company so much so that sometimes the shareholders do not have any knowledge as to who is the promoter of the company they are investing their earnings and savings in. In certain cases the investors later find out that the promoters have formed a fraudulent company so as to defraud the public for their own improper benefits.
Time and again, several amendments have been made to the Companies Act so as to prevent such acts by the promoters/directors of the company and to protect the interests of the investors. However, it is imperative to note that if it is proved that the real intention of the company was to defraud the public and to embezzle with their money for their own benefit, then, the persons managing the affairs of the company cannot hide under the veil of “corporate entity” of the company and use that to protect themselves from being prosecuted for any offence under the IPC.
The Key distinction
When there is a matter of alleged offence against the promoters of the company for misappropriation of money in relation to the prospectus issued and the money collected in furtherance of that prospectus from investors, there has to be prima facie evidence of mala fide intention of the promoters on the materials provided to the court in order to constitute an offence under IPC. The key distinction between the acts that fall both under the IPC and other statutes is that for an act to constitute an offence under the IPC, it should be coupled with a mala fide intention while to constitute an offence under other statutes, mens rea is not necessary.
The necessity of proof of ‘mala fide’ intentions
In the instant case, it has to be proved that the directors/promoters of the company had mala fide intentions from the beginning and the act of collecting money from the investors for shares and withholding that money for misappropriation was done in furtherance of the same intention. There is no need of direct evidence to prove the ingredients of an offence under IPC- it can be proved from the circumstances of the case by showing that the promoters had mala fide intention or had developed the intention at a certain stage to defraud the investors.
During investigation, all the materials, circumstances and evidence collected to prove the charges need to be presented before the Magistrate in a trial court for a verdict as to whether the prosecution has established the necessary ingredients to prove that an act constitutes an offence under IPC or not.
In this case the prosecution against the appellants cannot be quashed merely because the investors have an option to take recourse of the Companies Act. It is the power of the Trial Court to examine the case on the basis of the materials presented to it by the prosecution and move forward in accordance with the provisions of law. Neither the High Court nor the Supreme Court can perform this duty.
Under Section 482 of CrPC, power has been given to the High Courts to quash the prosecution in case there is an abuse of process of Court but such a power cannot be exercised to pre-empt the trial court’s jurisdiction nor can be used to hold a parallel trial on the basis of collected materials just to give an opinion that if the trial proceeds whether the accused will be punished or not.
The High Court’s decision in dismissing the plea for quashing the prosecution against the appellants was quite appropriate. The Indian Judiciary has time and again set precedents in such cases where there is criminalization of civil suits. It has to be kept in mind that the cases, where criminal charges are made and proved against companies, do not become a way out for others who initiate criminal proceedings just for speedy justice or vengeance.
The High Court in this case held that there cannot be a parallel trial on the basis of collected materials just to give an opinion that- if the trial proceeds whether the accused will be punished or not. In State of Bihar v PP Sharma the Supreme Court held that after the investigating officer had collected evidence and presented them before the Magistrate and the materials are under judicial scrutiny, the High Court shall not quash the proceedings by using its inherent powers. In the instant case the evidence were submitted by the CBI and was for the Magistrate to decide on the merits of the case.
As it is seen in Indian Oil Corporation v. NEPC India Ltd. & Ors., there has been an increase in the number of civil suits being criminalized. The Courts have exercised their powers under S. 482 of Cr.PC to quash such frivolous law suits. There have been many cases where the High Court has quashed the proceedings just because the cases were civil in nature. In Sardar Trilok Singh v Satya Deo Tripathy a criminal prosecution against a truck seller was quashed because it was said to be an abuse of court process, the dispute being civil in nature. The Judgement in the case of State of Haryana & Ors. v. Bhajan Lal & Anr., highlights some categories of cases which should be quashed including those where criminal proceedings are deliberately initiated with a mala fide intention, either in spite or to take vengeance
But sometimes, the Courts are so eager to quash the proceedings that they overlook the actual grievances of the litigants. They quash the proceedings which on the surface appear to be civil in nature, but have ingredients that would constitute an offence under IPC. In this case, it was observed that the key rule to establish whether an act constituted an offence or not is to see whether there was a wrong intention coupled with the act i.e mens rea.
Proceedings cannot be quashed at an interlocutory stage: In State Of Punjab v Devinder Kumar, the Supreme Court held that High Court cannot arrive at a conclusion prior to the prosecution presenting the evidence and the prosecution be given enough time to produce the evidence before the High Court interferes in the matter.
Judiciary’s act of fair play: In PM Nalini v KM Mathew, it was held that criminal proceedings in Trial Court cannot be quashed by the High Court without hearing both the parties.
Recent Judgements and a way ahead:
In Hriday Ranjan Prasad Verma & Ors. v. State of Bihar & Anr.it was observed that “it is the intention which is the gist of the offence and 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.”
In a recent case of au. Kamal Shivaji Pokarnekar v. The State of Maharashtra, the Supreme Court held that “criminal prosecution cannot be quashed merely because the allegations appear to be civil in nature”
In Mohammed Ibrahim and others v. State of Bihar and another, and In Alpic Finance Ltd. v. P Sadasivan & Anr., the court laid emphasis that civil cases given the veil of criminal offences should be differentiated from civil cases actually having ingredients of an offence under IPC and they should be adequately dealt with to prevent abuse of court process.
There has been an ever increase in the number of frivolous criminal proceedings being initiated by parties sometimes just to meet the ends of justice while sometimes with other wrongful intentions. While the judiciary has never shied away from quashing such vexatious proceedings. It has become equally important to ensure that while doing away with such cases, the legitimate cases having an ingredient of offence under IPC are not overlooked. This case discussed herein, adds up to the list of cases where the High Court had held back from using its inherent powers by refusing to quash the prosecution. This case highlights a few important things that need to be kept in mind before quashing any prosecution under S.482 of the Cr.PC and implies an emphasis on the rights of the litigants to initiate criminal proceedings against corporate bodies, even when there is a way out in civil law if the ingredients of an offence under IPC are present typically on the face of the evidence. This judgment also sets an example that prosecution cannot be quashed merely because the nature of the case appears to be civil. Therefore, in its own way, the judgment has increased the brink for quashing of prosecution under S.482 by the High Courts and ensures that there is not mass quashing of criminal proceedings.
Also read Does Copyright laws protect ideas?
 Criminal Procedure Code 1973
 Radhey Shyam Khemka And Anr. Etc vs. State Of Bihar And Anr 1993 3 SCC 54
 Indian Penal Code 1860
 Criminal Procedure Code 1973
 Companies Act,1956
 Companies Act,1956
 Companies Act, 1956
 Criminal Procedure Code 1973
 State of Bihar v PP Sharma AIR 1991 SCC 1260
 Indian Oil Corporation v. NEPC India Ltd. & Ors., AIR 2006 SC 2780
 Sardar Trilok Singh v Satya Deo Tripathy (1979) 4 SCC 396
 State of Haryana & Ors. v. Bhajan Lal & Anr., 1992 Supp (1) SCC 335
 State Of Punjab v Devinder Kumar (1983) 2 SCC 384
 PM Nalini v KM Mathew 1991 SCC (Cri) 221
 Hriday Ranjan Prasad Verma & Ors. v. State of Bihar & Anr (2000) 4 SCC 168 para 15
 Kamal Shivaji Pokarnekar v. The State of Maharashtra 2019 SCC OnLine SC 182 para 15
 Mohammed Ibrahim and others v. State of Bihar (2009) 8 SCC 751 para 16, 17
 In Alpic Finance Ltd. v. P Sadasivan & Anr., (2001) 3 SCC 513