2024 (12) TMI 1589 - HC - Companies Law

Maintainability of second petition - applicability of Section 447 of Companies Act 2013 on the basis of continuous offence and transactions made as per the complaint even after enforcement of the Act 2013 - Invocation of jurisdiction of this Court for quashing of complaint case - offence was committed during the period from year 2006 - requirement of registration of offence u/s 186(7) and punishment to petitioner u/s 186(13) of Companies Act 2013. Maintainability of second petition - HELD THAT - Considering the submissions made by learned counsel for the petitioner in response to the objection raised by learned counsel for the respondent and looking to the legal position and also on perusal of earlier order of High Court in 2025 (3) TMI 1250 - MADHYA PRADESH HIGH COURT it is clear that the present petitioner was not a party in the said petition and he was not the petitioner in the same. From the order and the facts considered therein it is clear that the quashing of the complaint case was solely on the ground that the ex post facto application of penal provision is proper or not. The High Court while dismissing the petition observed that at the relevant point of time it was not proper for the Court to enter into the factual aspect of the matter because Court was of the opinion that prima facie only on the basis of inter-departmental communication if any summary is prepared that summary note cannot be considered the opinion and it has no legal sanctity prima facie. The Court at that time refused to enter into the factual aspect of the matter and observed that it can be unveiled only after conducting the trial. It is clear from the order of High Court that the points raised before this Court in the present petition have not been discussed and no opinion was given by the Court on this aspect which has been argued before this Court. Accordingly in view of the legal position the objection raised by learned counsel for the respondent about maintainability of this petition is not sustainable and accordingly it is rejected and therefore this petition is held maintainable. Applicability of the provisions of Section 447 of Act 2013 - HELD THAT - The submission made at the behest of the respondent is not convincing that it is a continuous offence even after the year 2013 and therefore Section 447 has rightly been applied. From the allegations made it is clear that the Investigating Officer did take note of transactions made from 30.11.2000 to 25.07.2006 and also the transactions of Financial Year 2003-04 and Financial Year 2005-06 and further transactions made upto the year 2017-18. The allegations made in the FIR do confirm that it is not a continuous offence inasmuch as the transactions made in different years. The definition of Financial Year under the old Companies Act 1956 is prescribed in Section 2(17) wherein it is provided that the period in respect of which any profit or loss account of the body corporate laid before it in annual general meeting is made up whether that period is a year or not. Moreso as per the Financial Year as defined under Section 2(41) of Act 2013 it is clear that the period ending on 31st of March of every year. Thus it can profitably be held that it is not a continuous offence. The prosecution in the case at hand is not sustainable in the eyes of law and such proceedings can be quashed by this court exercising the power provided under Section 482 of CrPC. Exercise of power/inherent jurisdiction by this court at this stage to quash the complaint - HELD THAT - It is a settled principle of law that if on the basis of allegations contained in FIR the court finds considering the same to be true at its face value the offence registered is not formulated and prosecution can be considered to be malicious prosecution same can be quashed. Conclusion - i) A second petition under Section 482 Cr.P.C. is maintainable if it raises new grounds or involves different parties and facts not previously considered. ii) Section 447 of the Companies Act 2013 cannot be applied retrospectively to offences committed prior to its enactment. iii) Transactions occurring in different financial years are discrete offences and cannot be aggregated as a continuing offence to extend applicability of penal provisions retrospectively. iv) Specific provisions under Sections 185 186 and 188 govern loans investments and related party transactions and offences under these sections should be prosecuted under their respective penal provisions rather than Section 447. v) The Court may exercise its inherent jurisdiction under Section 482 Cr.P.C. to quash proceedings where the complaint does not prima facie disclose an offence or where prosecution is malicious or an abuse of process. The proceedings of Complaint pending in the Court of XVIII District Additional Sessions Judge Bhopal are hereby quashed - petition allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the petition under Section 482 of the Code of Criminal Procedure (Cr.P.C.) for quashing the complaint case is maintainable, especially in light of a prior petition on the same matter which was dismissed and affirmed by the Supreme Court.

2. Whether Section 447 of the Companies Act, 2013 (the Act of 2013), which penalizes fraud, can be applied retrospectively to alleged offences committed prior to its enactment, specifically for acts occurring between 2006 and 2013.

3. Whether the allegations in the complaint, if taken at face value, disclose an offence under Section 447 or whether the offences fall under other specific provisions of the Act of 2013, such as Sections 185, 186, and 188, which regulate loans, investments, and related party transactions.

4. Whether the offence alleged constitutes a continuing offence justifying application of Section 447 for acts spanning before and after the enactment of the Act of 2013.

5. Whether the Court should exercise its inherent jurisdiction under Section 482 Cr.P.C. to quash the complaint at this stage or leave the matter for trial.

6. Whether the prosecution is malicious or an abuse of the process of the Court warranting quashing of the complaint.

Issue-wise Detailed Analysis:

1. Maintainability of the Petition under Section 482 Cr.P.C.

The respondent contended that the present petition is not maintainable as a similar petition was earlier dismissed by the High Court and that dismissal was affirmed by the Supreme Court, which granted liberty to raise objections before the trial court. The petitioner countered that the earlier petition did not involve him and did not consider the specific grounds now raised, particularly regarding the applicability of Sections 185, 186, and 188 versus Section 447. The petitioner relied on Supreme Court precedents, including the decision in Anil Khadkiwala vs. State, which held that a second petition under Section 482 is maintainable if it raises new grounds or facts not previously considered.

The Court examined the prior order and found that the present petitioner was not a party to the earlier petition and that the points now raised were not argued or decided previously. Consequently, the Court rejected the objection to maintainability and held the petition maintainable.

2. Retrospective Application of Section 447 of the Companies Act, 2013

The petitioner argued that Section 447, which criminalizes fraud, was introduced only by the 2013 amendment and cannot be applied retrospectively to offences committed before its enactment. The petitioner relied on constitutional protections under Article 20(1), which prohibits conviction for offences not in existence at the time of commission, and on the principle lex prospicit non respicit (law looks forward, not backward). The petitioner also cited the Karnataka High Court's ruling in Srividya C.G. vs. Serious Fraud Investigation Office, which held that offences committed under the Companies Act, 1956 cannot be prosecuted under the 2013 Act retrospectively.

The respondent contended that the offence was continuous, extending beyond 2013, and thus Section 447 applies to the entire period, including post-2013 transactions.

The Court analyzed the nature of the alleged offence and financial transactions spanning various financial years from 2000 to 2018. It held that these transactions are discrete and not a continuous offence as defined under the law. The Court relied on Supreme Court precedents, including Udai Shankar Awasthi vs. State of Uttar Pradesh, which clarified the concept of continuing offence, and the Income Tax case of Commissioner of Income Tax vs. Vatika Township Pvt. Ltd., which reaffirmed the principle against retrospective application of penal provisions unless expressly stated by legislature.

The Court concluded that Section 447 cannot be applied retrospectively to transactions prior to 2013 and that offences committed before the 2013 Act must be tried under the old Companies Act provisions.

3. Applicability of Sections 185, 186, and 188 versus Section 447

The petitioner contended that the allegations in the complaint, even if taken at face value, fall within the ambit of Sections 185, 186, and 188, which regulate loans to directors, investments, and related party transactions, and that Section 447, which penalizes fraud, is not applicable. The complaint alleged irregularities such as loans to related parties at below-market interest rates, transfer of substantial funds to related entities, and wrongful gain to related parties causing loss to the company and shareholders.

The Court examined the relevant provisions:

• Section 185 prohibits loans to directors and related parties except under specified conditions and prescribes penalties for contravention.
• Section 186 regulates loans and investments by companies, including limits, approvals, disclosures, and penal provisions for defaults.
• Section 188 governs related party transactions requiring board and shareholder approvals, with penalties for unauthorized contracts.

The Court noted that these provisions provide specific mechanisms and penalties for the alleged irregularities and that the complaint's allegations relate primarily to breaches of these provisions rather than fraud as defined under Section 447. The Court emphasized that the definition of fraud under Section 447 is specific and includes intent to deceive or cause wrongful gain or loss.

The respondent argued that the conduct went beyond these provisions and amounted to fraud, justifying application of Section 447. However, the Court held that the question of whether fraud is made out is a matter for trial and cannot be decided at this stage. Nevertheless, the Court found that the complaint does not prima facie disclose an offence under Section 447 for the period prior to 2013.

4. Nature of Offence: Continuing or Discrete

The respondent's submission that the offence is continuing and thus Section 447 applies to the entire period was analyzed in light of the Supreme Court's guidance on continuing offences. The Court found that the transactions occurred in discrete financial years and are not a continuous wrong. Each financial year's transactions are distinct, and the offence committed in prior years cannot be aggregated with post-2013 transactions to extend the applicability of Section 447 retrospectively.

5. Exercise of Power under Section 482 Cr.P.C. at this Stage

The respondent contended that the Court should not interfere at this stage and that the trial Court should determine the applicability of Section 447 and the presence of fraud. The Court acknowledged this principle but noted that the power under Section 482 can be exercised to prevent abuse of process or malicious prosecution when the complaint does not disclose a prima facie offence.

Applying the yardstick from the Supreme Court's landmark decision in State of Haryana vs. Ch. Bhajan Lal, the Court considered whether the allegations, even if accepted, disclose an offence under Section 447. It found that the complaint does not prima facie constitute fraud for the period prior to 2013 and that the prosecution under Section 447 is thus unsustainable.

6. Malicious Prosecution and Abuse of Process

The Court found that the retrospective application of Section 447 to pre-2013 transactions is illegal and tantamount to malicious prosecution. The Court invoked the principles from Bhajan Lal, which allow quashing where there is mala fide or abuse of process. The Court concluded that the complaint case is liable to be quashed on this ground.

Significant Holdings:

"The present petitioner was not a party in the earlier petition and the points raised before this Court in the present petition have not been discussed and no opinion was given by the Court on this aspect which has been argued before this Court. Accordingly, in view of the legal position, the objection raised by learned counsel for the respondent about maintainability of this petition, in my opinion, is not sustainable and accordingly it is rejected and therefore, this petition is held maintainable."

"Each and every offence committed in different Financial Years, on the face of allegations made in the complaint, the offence committed after enforcement of the Act, 2013 cannot be consolidated and tried under Section 447 of Act, 2013. Ergo, the Financial Year prior to Act, 2013 can be treated differently to that of Financial Year as defined in the Act, 2013."

"A legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past."

"Trying offence by the respondent under Section 447 applying the same retrospectively, is apparently illegal and it can be considered to be a malicious prosecution."

"If on the basis of allegations contained in FIR, the court finds considering the same to be true at its face value, the offence registered is not formulated and prosecution can be considered to be malicious prosecution, same can be quashed."

"The proceedings of Complaint Case No. SC/12/2021 pending in the Court of XVIII District & Additional Sessions Judge, Bhopal are hereby quashed."

The Court established the core principles that:

• A second petition under Section 482 Cr.P.C. is maintainable if it raises new grounds or involves different parties and facts not previously considered.
• Section 447 of the Companies Act, 2013 cannot be applied retrospectively to offences committed prior to its enactment.
• Transactions occurring in different financial years are discrete offences and cannot be aggregated as a continuing offence to extend applicability of penal provisions retrospectively.
• Specific provisions under Sections 185, 186, and 188 govern loans, investments, and related party transactions, and offences under these sections should be prosecuted under their respective penal provisions rather than Section 447.
• The Court may exercise its inherent jurisdiction under Section 482 Cr.P.C. to quash proceedings where the complaint does not prima facie disclose an offence or where prosecution is malicious or an abuse of process.