2024 (4) TMI 1280 - HC - Companies Law

Challenge to proceedings before the LIX Additional City Civil and Sessions Judge Special Court under the Companies Act 2013 Bengaluru City - offenses punishable under Sections 36 read with Section 448 and 447 of the Companies Act 2013 and Section 68 read with Section 628 of the Companies Act 1956 - compliance with Sections 202 and 204 of the Cr.PC before issuing the process or not - reopening of scheme of arrangement under Sections 391 to 394 of the Act 1956 approved by this Court - offence under Section 68 of Act 1956. Whether the learned Judge of the Special Court established under Section 435 of the Companies Act 2013 can take cognizance of an offence committed under the provisions of the Act 1956? - HELD THAT - Admittedly the offences were allegedly committed under the Act 1956. The investigation of the offences alleged against the petitioner commenced after the enactment of the Act 2013. The offence punishable under Section 68 of the Act 2013 was triable by a Magistrate of First Class. The SFIO conducted an investigation in exercise of the power under Section 212 of the Act 2013 - The SFIO after investigation filed a complaint before the Special Court established under Section 435 of the Act 2013 presided by a Single Judge holding office as Sessions Judge appointed by the Central Government in concurrence with the Chief Justice of the High Court. The Special Court established under Section 435 is vested with the jurisdiction to try the offences under this Act i.e. Act 2013 and the jurisdiction is not extended to the offences under the Act 1956. The Special Court established is made available only to try the offences under the Act 2013 and therefore the jurisdiction of the Special Court cannot be extended retrospectively to try the offences under the Act 1956 and the jurisdiction of the Special Court is restricted to the Companies Act 2013 by deliberately omitting the usage of the expression previous Company Law in Section 435(1) as opposed to the proviso to Section 435(1) which states that all other offences shall be tried as the case may be by the Magistrate to try any offence under this Act or under any previous Company Law - The cognizance of the offence under Section 68 of the Act 1956 can be taken only on a complaint in writing by the person/s as enumerated in Section 621 of the Act 1956 and the jurisdiction to take cognizance was vested with the Magistrate as stated under Section 622 of the Act 1956. In view of the specific provisions contained in the Act 1956 and the Act 2013 the contention of the SFIO that the change of the forum of trial is only procedural and as such the cognizance taken by the Special Court does not stand vitiated for want of authority is unacceptable. Whether the learned Judge of the Special Court has complied with Sections 202 and 204 of the Cr.PC before issuing the process? - HELD THAT - The essence of forming an opinion before issuing a process under Section 204 of the Criminal Procedure Code is to ensure that there is sufficient basis or prima facie evidence to proceed against the accused. It entails a careful consideration of the available facts and evidence to determine whether there are reasonable grounds to believe that the accused has committed the alleged offense. This process safeguards against the arbitrary issuance of processes and helps ensure that legal proceedings are initiated only when there is a reasonable likelihood of establishing guilt during the trial. In this case the learned judge of the special court failed to form an opinion before issuing the process to determine whether there is a prima facie case to proceed against the accused. Consequently the order issuing the process violates Section 204 of the Cr.PC. Additionally the learned judge s decision to take cognizance of the offences under the Act 2013 also indicates a lack of consideration of the complaint averments and materials presented before him. Thus the order passed by the Learned Judge issuing the process is rendered invalid. Whether the scheme of arrangement under Sections 391 to 394 of the Act 1956 approved by this Court and alleged to have been obtained by fraud can be reopened by filing a complaint before the Special Court? - HELD THAT - While sanctioning the scheme of arrangement this court accepted the valuation of the business assessed by an independent body. Additionally the shareholders and unsecured creditors approved the scheme by requisite majority. Therefore the merger process alleged to have been obtained fraudulently cannot be reopened by launching criminal prosecution - In the absence of any material to substantiate that the scheme of arrangement was obtained by suppression of material facts except stating that the projection used for share swap ratio was skewed in favor of shareholders of erstwhile KFAL and only two methods which were in favor of erstwhile KFAL were used the initiation of criminal prosecution against the petitioners accused will be an abuse of the process of the law. The present case admittedly is a complaint case and the report submitted by the SFIO would be deemed to be a report filed by the Police under Section 173 Cr.P.C only for the purpose of framing of charge. Therefore the learned Judge of the Special Court contrary to the guidelines issued by the Apex Court issued an arrest warrant without issuing summons at the first instance to secure the presence of the accused - it is evident that the cognizance taken by the learned judge of the special court established under the Companies Act of 2013 lacks legal authority. Furthermore since this court has already approved the scheme of arrangement the matter of whether the merger process was tainted by fraud cannot be revisited through the initiation of criminal prosecution. Therefore allowing the criminal proceedings to proceed would constitute an abuse of legal process. Offence under Section 68 of Act 1956 or not - HELD THAT - The allegations do not constitute an offence under Section 68 of the 1956 Act against the petitioners especially professionals acting within their commercial discretion. Conclusion - i) The Special Court under the 2013 Act lacks jurisdiction to try offences under the 1956 Act; such offences must be tried by Magistrates of First Class. ii) The Special Court failed to comply with Section 204 Cr.PC before issuing process rendering the order invalid. iii) The sanctioned scheme of arrangement cannot be reopened by criminal prosecution absent evidence of fraud; the appropriate remedy is a civil challenge to the sanction order. iv) The allegations do not constitute an offence under Section 68 of the 1956 Act against the petitioners especially professionals acting within their commercial discretion. The impugned proceedings on the file of 59th Additional City Civil and Sessions Judge and Special Court under the Companies Act 2013 stands quashed - petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

- Whether the Special Court constituted under Section 435 of the Companies Act, 2013 (hereinafter "the 2013 Act") has jurisdiction to take cognizance of offences committed under the Companies Act, 1956 (hereinafter "the 1956 Act").

- Whether the Special Court complied with the mandatory procedural requirements under Sections 202 and 204 of the Code of Criminal Procedure (Cr.PC) before issuing process against the accused.

- Whether a scheme of arrangement sanctioned by the High Court under Sections 391 to 394 of the 1956 Act, alleged to have been obtained by fraud, can be reopened by initiating criminal proceedings before the Special Court.

- Whether the allegations against the accused constitute an offence under Section 68 of the 1956 Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdiction of the Special Court under the 2013 Act to try offences under the 1956 Act

Relevant Legal Framework and Precedents:

The 1956 Act defines "Court" under Section 2(11) as a Magistrate of First Class. Section 621(1) of the 1956 Act restricts cognizance of offences to complaints filed by specified persons (Registrar, shareholder, or Central Government authorized person). Section 622 states that only a Magistrate of First Class can try offences under the 1956 Act. The 2013 Act defines "Court" under Section 2(29) as a Court of Sessions having jurisdiction to try offences under this Act or any previous Companies law. Section 435 of the 2013 Act establishes Special Courts for speedy trials of offences punishable under the 2013 Act with imprisonment of two years or more. The proviso to Section 435(1) states that offences under previous Companies law or those punishable with less than two years imprisonment shall be tried by the Magistrate of First Class. Section 465 of the 2013 Act saves pending prosecutions under the repealed enactment. Section 212(16) of the 2013 Act allows investigations initiated under the 1956 Act to continue as if the 2013 Act had not been passed.

Supreme Court precedents (SEBI vs. Classic Credit Ltd., Nar Bahaddur Bhandari, Kapur Chand Pokhraj) establish that procedural amendments are generally retrospective unless expressly stated otherwise, and changes in forum for trial are procedural and presumed retrospective. However, if the new forum is expressly limited to causes of action arising after its creation, retrospective operation is excluded.

Court's Interpretation and Reasoning:

The Court noted that the offences were committed during the period when the 1956 Act was in force. Cognizance under Section 68 of the 1956 Act was taken on 28.12.2017, before the repeal provisions of the 2013 Act (effective 30.01.2019) came into effect. Therefore, jurisdiction to try offences under the 1956 Act lay with a Magistrate of First Class, not the Special Court constituted under Section 435 of the 2013 Act.

The Court distinguished the definition of "Court" under Section 2(29) of the 2013 Act, which includes Sessions Courts established under Section 9 of the Cr.PC, from the Special Court under Section 435 of the 2013 Act, which is constituted by the Central Government. Since the Special Court is a creation under the 2013 Act with limited jurisdiction, it cannot be equated with the Sessions Court under Cr.PC for offences under the 1956 Act.

The Court held that the Special Court's jurisdiction is confined to offences under the 2013 Act punishable with imprisonment of two or more years. The proviso to Section 435(1) restricts offences under previous Companies law to Magistrates of First Class. Therefore, the Special Court cannot take cognizance of offences under the 1956 Act.

The contention by SFIO that the change of forum is procedural and retrospective was rejected because Section 435(1) deliberately omits the expression "previous Companies law" for offences triable by the Special Court, limiting its jurisdiction to the 2013 Act.

Key Evidence and Findings:

The complaint was filed by SFIO under provisions of the 2013 Act, but the offences alleged pertain to the 1956 Act. The cognizance was taken before the repeal provisions came into force. The SFIO investigation was initiated under the 2013 Act but related to offences under the 1956 Act.

Application of Law to Facts:

The Court applied the statutory provisions and Supreme Court precedents to conclude that the Special Court under the 2013 Act lacks jurisdiction to try offences under the 1956 Act. The Magistrate of First Class alone has jurisdiction over such offences.

Treatment of Competing Arguments:

The SFIO argued that the change of forum is procedural and retrospective, and Section 2(29) of the 2013 Act includes Sessions Courts for offences under previous Companies law. The Court rejected this, emphasizing the distinction between Sessions Courts under Cr.PC and Special Courts under the 2013 Act, and the express limitation in Section 435(1).

Conclusion:

The Special Court under Section 435 of the 2013 Act cannot take cognizance of offences under the 1956 Act. Such offences must be tried by Magistrates of First Class as per the 1956 Act.

Issue 2: Compliance with Sections 202 and 204 of Cr.PC before issuing process

Relevant Legal Framework and Precedents:

Section 202 Cr.PC mandates an inquiry or investigation before issuing process, especially when the accused resides outside the jurisdiction. Section 204 Cr.PC requires the Court to form an opinion that sufficient grounds exist to proceed. The Supreme Court in Sunil Bharathi Mittal vs. CBI held that a Magistrate must apply mind and record reasons before issuing process. In Cheminova India Ltd. vs. State of Punjab, the Court emphasized protection against harassment by conducting inquiries before taking cognizance.

Section 212(15) of the 2013 Act deems the SFIO investigation report as a police report under Section 173 Cr.PC but only for framing charges, not for taking cognizance or issuing process.

Court's Interpretation and Reasoning:

The Court held that the Special Court failed to form an opinion under Section 204 Cr.PC before issuing process, violating mandatory procedure. The Court also noted that since the complaint was filed by a public servant (SFIO officer) authorized by the Central Government, the requirement of inquiry under Section 202(1) Cr.PC does not arise.

However, the failure to apply judicial mind before issuing process renders the order invalid. The Court emphasized that issuing process without proper scrutiny and reasoned opinion is contrary to settled law and safeguards against arbitrary prosecution.

Key Evidence and Findings:

The order issuing process lacked recorded reasons or formation of opinion on the existence of a prima facie case. The SFIO investigation report was filed but the Special Court did not independently assess the sufficiency of evidence.

Application of Law to Facts:

The Court applied the principles from the cited precedents to invalidate the process issuance for non-compliance with Section 204 Cr.PC.

Treatment of Competing Arguments:

The petitioners contended non-compliance with Sections 202 and 204 Cr.PC. The respondent SFIO argued that the complaint by an authorized public servant negated the need for inquiry under Section 202. The Court accepted this but held that Section 204 compliance remains mandatory.

Conclusion:

The issuance of process without forming an opinion on the sufficiency of evidence under Section 204 Cr.PC is invalid. The Special Court erred in this regard.

Issue 3: Reopening of scheme of arrangement sanctioned by the High Court under Sections 391-394 of the 1956 Act through criminal proceedings

Relevant Legal Framework and Precedents:

Sections 391 to 394 of the 1956 Act provide a comprehensive and exclusive code for schemes of arrangement, including mergers and demergers. The High Court's sanction of a scheme under these provisions is statutorily binding on dissenting creditors and shareholders (J K (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd.). The Court's jurisdiction in sanctioning schemes is supervisory, not appellate (Mihir H Mafatlal v. Mafatlal Industries Ltd.). Courts should not interfere with commercial wisdom unless there is a clear violation of law (Hindustan Lever Employees Union v. Hindustan Lever Ltd., Wartsila India Ltd. v. Janak Mathuradas). Criminal proceedings cannot be used to revisit or reopen such sanctioned schemes unless there is evidence of fraud or suppression of material facts (Dilip S Dahanukar v. Padam Kumar Khaitan, Hamza Haji v. State of Kerala).

Court's Interpretation and Reasoning:

The Court observed that the scheme of arrangement in question was sanctioned by the High Court after due process, including approval by shareholders and creditors, and valuation by independent bodies. The objections raised by the Regional Director were considered but not pressed. The Court held that it cannot sit in appeal over the commercial wisdom of the parties or the valuation methods adopted.

The Court emphasized that if the scheme was obtained by fraud, the appropriate remedy is to challenge the sanction order before the Court that granted it, not through criminal prosecution. The mere allegation that valuation methods favored one party or that projections were skewed does not amount to fraud warranting criminal proceedings.

Key Evidence and Findings:

The scheme was approved by requisite majorities of shareholders and creditors. Independent valuers conducted the valuation. The Court sanctioned the scheme after considering objections. The SFIO did not produce material demonstrating suppression of facts to invalidate the scheme.

Application of Law to Facts:

The Court applied the settled principles that the scheme sanction order is final and binding, and criminal proceedings cannot be used to revisit it absent cogent evidence of fraud.

Treatment of Competing Arguments:

The petitioners argued that the scheme cannot be reopened via criminal proceedings. The SFIO alleged fraudulent inducement and concealment of material facts. The Court found the SFIO's allegations insufficient to override the binding effect of the sanctioned scheme.

Conclusion:

The scheme of arrangement sanctioned by the High Court cannot be reopened by criminal prosecution. Allegations of fraud must be addressed by challenging the sanction order through appropriate civil remedies.

Issue 4: Whether the allegations constitute an offence under Section 68 of the 1956 Act

Relevant Legal Framework and Precedents:

Section 68 of the 1956 Act penalizes fraudulent inducement of persons to invest money by knowingly or recklessly making false or misleading statements or concealing material facts. The offence requires inducement to enter into agreements relating to shares or debentures.

Supreme Court decisions (C.B.I. v. K Narayanrao, Shiv Kumar Jatia v. State of NCT of Delhi) clarify that professionals cannot be criminally prosecuted for opinions or valuation methods within their commercial discretion unless colluding in fraud. Liability under Section 68 extends to "any person" involved in fraudulent inducement, not limited to officers in default.

Court's Interpretation and Reasoning:

The Court held that the offence under Section 68 applies to any person knowingly or recklessly involved in fraudulent inducement, including professionals if colluding with officers in default. However, mere professional opinion or choice of valuation method does not constitute an offence.

The Court found no material to show that the petitioners, particularly professionals, colluded to fraudulently induce shareholders. The mere use of certain valuation methods or failure to verify information does not amount to criminal conduct.

The Court also noted that prosecuting petitioners for acts not punishable under the 1956 Act violates Article 20(1) of the Constitution, which prohibits retrospective criminalization.

Key Evidence and Findings:

The SFIO alleged concealment of material facts, false valuations, and fraudulent inducement of shareholders and banks. The petitioners contended that their actions were within professional discretion and the scheme was sanctioned by the Court. No evidence of collusion or fraudulent intent was demonstrated.

Application of Law to Facts:

The Court applied the legal principles to conclude that the allegations do not satisfy the essential elements of Section 68 offences against the petitioners, especially professionals.

Treatment of Competing Arguments:

The petitioners argued lack of mens rea and professional discretion in valuation. The SFIO alleged fraudulent inducement and concealment. The Court sided with the petitioners, emphasizing absence of evidence of collusion or fraudulent intent.

Conclusion:

The allegations do not constitute an offence under Section 68 of the 1956 Act against the petitioners. Professionals cannot be held liable for mere valuation opinions unless linked to fraudulent conspiracy.

3. SIGNIFICANT HOLDINGS

"The Special Court established under Section 435 of the Companies Act, 2013 is vested with the jurisdiction to try offences under this Act, i.e., Act, 2013, and the jurisdiction is not extended to the offences under the Act, 1956."

"The cognizance of the offence under Section 68 of the Act, 1956, can be taken only on a complaint in writing by the person/s as enumerated in Section 621 of the Act, 1956, and the jurisdiction to take cognizance was vested with the Magistrate, as stated under Section 622 of the Act, 1956."

"The issuance of process without forming an opinion on the sufficiency of evidence under Section 204 of the Cr.PC is invalid."

"The scheme of arrangement sanctioned by this Court under Sections 391 to 394 of the Companies Act, 1956, is statutorily binding on dissenting shareholders and creditors and cannot be reopened by criminal proceedings unless there is cogent evidence of fraud."

"Professionals providing services to the company are not liable under Section 68 of the Companies Act, 1956, if their opinions are within their commercial discretion and without collusion in fraud."

"Allowing criminal proceedings to proceed in the absence of jurisdiction and without compliance of mandatory procedural safeguards would constitute an abuse of the process of law."

Final determinations:

- The Special Court under the 2013 Act lacks jurisdiction to try offences under the 1956 Act; such offences must be tried by Magistrates of First Class.

- The Special Court failed to comply with Section 204 Cr.PC before issuing process, rendering the order invalid.

- The sanctioned scheme of arrangement cannot be reopened by criminal prosecution absent evidence of fraud; the appropriate remedy is a civil challenge to the sanction order.

- The allegations do not constitute an offence under Section 68 of the 1956 Act against the petitioners, especially professionals acting within their commercial discretion.

- The impugned proceedings and complaint filed by SFIO stand quashed and dismissed.