Holding

A criminal prosecution for fraud cannot be quashed merely because the Companies Act offers civil remedies, and Section 482 cannot be used to conduct a parallel trial; the trial court must determine the existence of a prima facie case.

Summary

The appellants, promoters and directors of a public limited company, issued a prospectus inviting public subscription for shares, claimed that the application to list the shares on a stock exchange was rejected, yet retained the money collected from investors and transferred it to another company account. A complaint was lodged with the CBI, which filed a charge‑sheet under Section 409 read with Section 405 of the Indian Penal Code for dishonest misappropriation of the share money. The appellants sought quashing of the criminal prosecution under Section 482 of the Code of Criminal Procedure, arguing that the Companies Act provided adequate civil remedies and that the corporate personality should shield them from criminal liability. The Supreme Court held that the existence of remedies under the Companies Act does not bar a criminal prosecution where a prima facie case of fraud under the Penal Code is disclosed, and that the High Court cannot usurp the trial court’s jurisdiction by using Section 482 to conduct a parallel trial. Consequently, the appeals were dismissed and the trial court was directed to proceed with the criminal trial.

Issues considered

Whether a criminal prosecution under the Indian Penal Code can be quashed on the ground that the Companies Act provides civil remedies for investors.
Whether Section 482 of the Code of Criminal Procedure empowers the High Court to quash a prosecution by effectively conducting a parallel trial.
Whether promoters and directors can invoke the corporate personality of a company as a shield against criminal liability for fraudulent misappropriation of share application money.

Legislation cited

Subjects

criminal prosecutioncorporate personalitySection 482Companies Actshare prospectus fraudmisappropriation of fundsquashing of criminal proceedings

Judgment

RADHEY SHYAM KHEMKA AND ANR. ETC. A
v.
STATE OF BIHAR AND ANR. ETC.

MARCH 26, 1993
B
(DR. A.S. ANAND AND N.P. SINGH, JJ.)

Code of Criminal Procedure, 1973:

Section 48i-Quashing of crimintil proceedings against officers of com-
panrfligh Court not to usu!p the jurisdiction of Trial COUit-Not to hold a C
parallel trial-Remedy available under the provisions of the Companies
Act-No bar to initiate criminal proceeding,,,

The appellant, a Public Limited Company issued prospectus inviting
public subscriptions or equity shares and prererence shares. The prospec- D
. tus stated that application W..s being made to the Stock Exchange ror
enlisting the shares or the Company for official quotation. Though the
application was rejected by the Stock Exchange, the share money collected
from different investors was held by the appellants and the share holders
were neither informed or the rejection by the Stock Exchange nor paid back
the share money. Further, the money was transferred to another account E
of the Company. The Secretary, Industrial Development and Company
Affairs lodged a complaint with the CBI against the Company.

CBI started investigations and submitted a charge-sheet against the
appellant along with some others for trial for the offence under s.409 !PC. F
The Special Judicial Magistrate, CBI cases, rejected the prayers made
before it discharge the appellanis. The validity or the said .order was
challenged by the appellants by filing an application under S.482 Cr. P.C.
and the High Court rejected the same. Hence these appeals. It was con•
tended that the provisions of the Companies Act took care or the investors
by putting restrictions on the misbehaviour or the promoters and the G
Directors of the Company for any lapse on their part in such matters jiDd
they could not be summoned to stand trial for offences under the Penal
Code.

Dismissing the appeals, this Court, H
699
700 SUPREME COURT REPORTS [1993] 2 S.C.R. _,.,,' ... \.
A HELD: 1.1. The modern share-holder in many companies has simply
become supplier or capital. The savings and ~arnings of individuals are
being utilised by persons behind such corporate bodies, but there is no direct r
contact between them. The promoters or such companies are not even known l
to many investors in shares or such companies. In some cases later it

B
transpires to the investors that the promoters had the sole object to form a
bogus company and foist it off on the public to the latter's detriment and for
~ -J
their own wrongful gain. In this process, the public becomes victim orthe evil
design or the promoters who enrich themselves by dishonest means without
there being any real intention to do any business. (703 D-G]

C 1.2. From time lo time amendments have been introduced in the
Companies Act lo safeguard the interest or the share-holders and to
provide regulatory and penal provisions for misuse or the power by those
who are in charge or the management or such companies. The persons
managing the affairs ~f such company cannot use the juristic entity and
D corporate personality of the company as a shield lo evade themselves from
prosecution for offences under the Penal Code, ir it is established that the ·
primary object of the incorporation and existence or the company is lo
defraud public. (703 G-H; 704 A-BJ

2.1. While taking cognizance of alleged offences in connection with
E the registraiion, issuance or prospectus, collection of moneys from the
investors and the misappropriation of the fund collected from the share- .
holders which constitute one or the other offence ·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. (704 CJ
-,
F 2.2. In the present case, the prosecution has to prove that the
appellants as promoters or directors h&d dishonest intention since the
very beginning while collecting the moneys from the applicants for the
shares and debentures or that having collected such moneys they
dishonestly misappropriated the same. (704 G)
G
2.3. The prosecution pending against the appellants cannot_ be
quashed only on the ground that it was open to the applicants for shares
to take recourse to the provisions of the Companies Act. (705 D)

3. The power under section 482 Cr. P.C. has been vested in the High
H Court to quash a prosecution which amounts to abuse or the process or
RADHEYSHYAM v. STATEOFBIHAR [SINGH, l.J 701

the court. But that power cannot be exercised by the High Court to hold a A
parallel trial, only on the basis of the statements and documents collected
during investigation or enquiry, for the purpose of expressing an opinion
whether the accused concerned is likely to be punished if the trial is
allowed to proceed. (705 G-H)
'
4. It will be for the trial court to examine whether on the materials B
produced un behalf of the prosecution it is established that the appellants
had issued the prospectus inviting applications in respect of shares of the
Company "ith a dishonest intention or ha,·ing received the moneys from
the applicants they had dishonestly retained or misappropriated the same.
That exercise cannot be performed either by the High Court or by this C.
Court. (705 E-F]

CRIMINAL APPELLATE JURISDICTION: Criminal Appeal Nos.
375 & 376 of 1985.

From the Judgment and Order dated 17.5.1983 of the Patna High D
Court in Criminal Misc. Nos. 1931/83 and 9240 of 1982.

S.N. Misra, Manish Misra and P.C. Kapur for the Appellants.

Mrs. K. Amareswari, C.V.S. Rao, A.D.N. Rao and S.N. Jha for the
;;/ Respondents. E
The Judgment of the Court was delivered by

N.P. SINGH. J The appellants on the relevant date, were managing
director and directors of a Public Limited Company registered as Mis
Bihar Cable and Wire Industries Limited (hereinafter referred to as "the F
Company"). A case was instituted by the Central Bureau of Investigation
(hereinafter referred to as "the CBI") against the appellants and others on
basis of a complaint made by the then Deputy Secretary, Ministry of
Industrial Development and Company Affairs, Government of India. It was
alleged that after the registration of the company aforesaid as a Public G
Limited Company, the appellants as managing director and directors is-
sued prospectus inviting public subscriptions of 42,000 equity shares and
3,000 preference shares. It was given out by the appellants to the investors
that application was being made to the Calcutta Stock Exchange for
enlisting the shares of the company for official quotation. Such application
which was made on behalf of the company was rejected by the stock H
702 SUPREME COURT REPORTS [1993] 2 S.C.R.

A exchange. In spite of the rejection the share money collected from different
investors was held by the appellants and none of the share-holders were
either informed or were repaid. It was also alleged that money lying in the
bank, on account of the share applications, were transferred to another
account of the Company. The circumstances were pointed out in the
complaint made to the CBI as to how the acts of the appellant> clearly
B
indicated their dishonest intentions to convert the share application money
for their own benefit, and as such they had committed the offence under
section 409 read with section 405 of the Penal Code.

After investigation of the allegations made in the complaint aforesaid
C the CBI submitted a chargesheet against the appellants along with some
others for their trial for the offence under section 409 of ihe Penal Code.
When the Special Judicial Magistrate, CBI Cases, Patna, rejected the
prayer of the appellants to discharge them, validity of that order was
questioned by filing an application under section 4S2 of the Code of
D Criminal Procedure. The High Court rejected the said application.

The criminal proceeding pending against the appellants has been
challenged saying that it amounted to an abuse of the proce55 of court
because instead of invoking the different provisions of the Companies Act
which are meant to cover such situations and to protect the interest of ,
E share-holders, a prosecution has been launched· against the appellants
before a Criminal Court for offences under the Penal Code. It was pointed
out that in view of section 69 of the Companies Act 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
F repaid with interest. Reference was also made to section 73 of the Act
~bich requires every company intending to offer shares or debentures to
the public for subscriptions by the issue of prospectus has to make an
application before such issue to one or more recognised stock exchanges,
for permission for shares or debentures intended to be so offered to be
dealt with in the stock exchange. All moneys received from applicants in
G 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
H extend to Rs. 5,000. In other words, the provisions of the Companies Act
RAD HEY SHYAM v. STATE OF BIHAR [SINGH, J.] 703

take care of the investors and they put restrictions on the misbehaviour of A
the promotors and the directors of the Company and for any lapse on their
part in such matters, they cannot be summoned to stand trial for offences
under the Penal Code.

It is true that the Companies Act contains provisions regarding the
issuance of prospectus, applications for shares and allotment thereof and
B
provides different checks over the misuse of the fund collected from the
public for issuance of shares or debentures. But can it be said that :ovhere
persons issue prospectus and collect moneys from public assuring them
that they intend to do business with the public money for their benefit and
the benefit of such public, but the real intention is to do no business other c
than collecting the moneys from the public for their personal gain, still such
persons are immune from the provisions of the Penal Code?

Originally the concept of a company implied association of persons
for some common object having a juristic entity separate from those of its D
members. In due course [he gap between the investors in such companies
and those in charge of management was widened. A situation has reached
today that in bulk of the companies in which many individuals have
property rights as sharecholders and to the capital of which they have
directly or indirectly contributed, have no idea how their cqntributions are
being utilised. It can be said that modern share-holder in many companies E
has simply become supplier of capital. The savings and earnings of in-
dividuals are being utilised by persons behind such_ corporate bodies, but
there is no direct contact between them. The promotors of such companies
are not even known to many investors in shares of such companies. It is a
matter of common experi~nce that in some cases later it transpires to the F
fovestors that the .promotors had the sole object to form a bogus company
and foisl it off on the public to the latter's detriment and for their own
wrongful gain. In this process the public becomes victim of the evil design
of the promotors who enrich themselves by dishonest means without there
being any real intention to do any business. From time to time amendments G
have been imroduced in the Companies Act to safeguard the interest of
the share-holders and lo provide regulatory and penal provisions for
misuse of the power by those who are in charge of the management of such
companies. But, if the promotors or those in charge of managing affairs of
the cOmp~ny are found to have committed offences like cheating, criminal
breach of trust, criminal misappropriation or. alike, then whether the only H
704 SUPREME COURT REPORTS [1993] 2 S.C.R. _~ ~

A remedy to which the investor is entitled is to pursue under and in accord-
ance with the proivisions of the Companies Act? 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 prosecu-
tion for offences under the Penal Code, if it is established that primary
object of the incorporation and existence of the company is to defraud
B
public.

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
C from the share-holders 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
D share-holders may launch prosecutions against the promotors, directors
and those in charge of the managi.:ment uf the company cunccrneU and can
paralyse the functioning of such company. It need not be impressed that
for prosecution for offen~es under the Penal Code the complainant has to
make out a pri111a facie case against the individuals concerned, regarding
their acts and omissions which constitute the different ingredients of the .\;:__
E offences under the Penal Code. It cannot be overlooked that there is a
basic difference between the offences under the Penal Code and acts and
omissions which have been made punishable under different Acts and
statutes which are in nature of social welfare legislations. For framing
charges in respect of those acts and omissions, in many cases, niens rea is
-
F not an essential ingredient; the concerned statute imposes a duty on those
who are in charge of the management, to follow the statutory provisions
and once there is a breach of contravention, such persons become liable
to be punished. But for framing a charge for an offence under the Penal
Code, the traditional rule of existence of mens rea is to be followed.

G In the facts of the present case itself, the prosecution has to prove
that the appellants as promotors or directors, had dishonest intention since
very beginning while collecting the moneys from the applicants for the
shares and debentures or that having collected such moneys they dishonest-
ly misappropriated the same. The ingredients of the different offences
H under the Penal Code need not be proved only by direct evidence; they
RAD HEY SHYAM v. STATE OF BIHAR [SINGH, J.] 705

can be shown from the circumstances of a particular case that the intention A
of the promotors or the directors was dishonest since very inception or that
they developed such intention at some stage, for their wrongful gain and
causing wrongful loss to the investors. All the circumstances and the
materials to prove such a charge have to be collected during investigation
and enquiry and ultimately have to be produced before the court at the
stage of trial for a verdict as to whether the ingredients of offence in
B
. question have been established on behalf of the prosecution.

The complaint made by the Deputy Secretary to the Government of
India to the CBI mentions different circumstances to show that the appel-
lants did not intend to carry on any business. In spite of the rejection ot C
the- application by the Stock Exchange, Calcutta, they retained the share
moneys of the applicants with dishonest intention. Those allegations were
investigated by the CBI and ultimately chargesheet has been ]Ubmitted. On
basis of that chargesheet cognizance has been taken. In such a situation
the quashing of the prosecution penaing against the appellants only on the D
ground that it was open to the applicants for shares to take recourse to the
provisions of the Companies Act, cannot be accepted. It is a futile attempt
on the part of the appellants, to close the chapter before it has unfolded
itself. It will be for the trial court to examine whether on the materials
produced on behalf of the prosecution it is established that the appellants E
had issued the prospectus inviting applications in respect of shares of the
Company aforesaid with a dishonest intention, or having received the
moneys from the applicants they had dishonestly retained or misap-
propriated the same. That exercise cannot be performed either by the High
Court or by this Court. If accepting the allegations made and charges
levelled on their face value, the Court had come to conclusion that no F
offence under the Penal Code was disclosed the matter would have been
different. This court has repeatedly pointed out that the High Court should
not while exercising power under section 482 of the Code usurp the
jurisdiction of the trial court. The power under section 482 of the Code
has been vested in the High Court to quash a prosecution which amounts G
to abuse of the process of the court. But that power cannot be exercised
by the High Court to hold a parallel trial, only on basis of the statements
and documents collected during investigation or enquiry, for purpose of
expressing an opinion whether the accused concerned is likely to be
punished if the trial is allowed to proceed. H
706 SUPREME COURT REPORTS (1993] 2 S.C.R.

A The appeals are accordingly dismissed. The trial court should
proceed with the case in accordance with law. We make it clear that we
have not expressed any opinion on the merit of charges levelled against the
appellants.

G.N. Appeals dismissed.

~·---