Dismissal of Complaint in a Contractual Dispute: An Analysis of the Supreme Court Ruling

Case title:

Prakash Aggarwal Vs. Ganesh Benzoplast Limited And Another

Date of Order:

APRIL 28, 2023

Bench:

Hon’ble Justice B.R. Gavai.

Parties:

Appellant- Prakash Aggarwal

Respondent(S)- Ganesh Benzoplast Limited And Another

SUBJECT:

• The current appeals are challenging a decision made by the High Court of Judicature at Bombay on April 26th, 2021. This decision dismissed Criminal Writ Petition Nos. 348, 349, and 357 of 2020, which were filed by the appellants seeking to cancel the summons issued to them by the trial court on March 22nd, 2017. 
• On the other hand, the High Court allowed Criminal Writ Petition Nos. 127, 128, 129, and 130 of 2020 filed by the complainant/respondent No.1, which upheld the same order of issuing the summons by the trial court on March 22nd, 2017.
• The appellants in this case are Prakash Aggarwal, Meera Goyal, and Suresh Chand Goyal. As directors of accused No. 1 Company, they were tasked with managing its day-to-day operations. However, they have been named as accused Nos. 2 to 4 in the original complaint.

IMPORTANT PROVISIONS-

Indian Penal Code, 1860

• Section 403 of the Indian Penal Code (IPC) deals with the offense of dishonest misappropriation of property. It states that anyone who dishonestly misappropriates or converts to his own use any property entrusted to him, or any property which he has control over, shall be punished with imprisonment for a term which may extend to two years, or with a fine, or with both.
• Section 406 of the IPC deals with the offense of criminal breach of trust. It states that anyone who, with intent to defraud or dishonestly misappropriate, entrusts or converts any property to his own use or to the use of any other person, or who intentionally or recklessly destroys, conceals or alters any document, shall be punished with imprisonment for a term which may extend to three years, or with a fine, or with both.
• Section 420 of the IPC deals with the offense of cheating and dishonestly inducing delivery of property. It states that anyone who cheats and thereby dishonestly induces any person to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment for a term which may extend to seven years, or with a fine, or with both.
• Section 120B of the IPC deals with the offense of criminal conspiracy. It states that anyone who is a party to a criminal conspiracy to commit an offense punishable with imprisonment. 

OVERVIEW-

• Ganesh Benzoplast Ltd., who is both the original complainant and respondent No. 1 in this case, obtained two Inter Corporate Deposit (ICD) facilities from Morgan Securities and Credits Pvt. Ltd, who is accused No. 1. These facilities were dated February 14th, 2000 and March 7th, 2000, and were for Rs. 50,00,000 each, to be repaid by May 15th, 2000 and June 5th, 2000 respectively.
• The ICD required a security cover of 200% of the ICD amount, which led the complainant/respondent No.1 to pledge 15,00,000 of its equity shares as security to accused No.1 Company. Each share had a value of Rs. 16, which amounted to a total of Rs. 2,40,00,000. This was executed through a Letter of Pledge (LoP) in favor of accused No.1 Company.
• Accused No.1 Company sent a notice to the complainant/respondent No.1 on May 3rd, 2000, requesting them to pledge more shares as the value of the shares that had been pledged previously had fallen to Rs. 1,24,50,000. 
• This decrease in value was due to a downturn in the financial market, which resulted in a shortfall of Rs. 75,50,000 from the agreed security cover of 200% of the ICD amount.
• The complainant/respondent No.1 was facing financial difficulties and was unable to repay the ICD amount on the due date of June 5th, 2000. They informed accused No.1 Company that the pledged shares could be sold to recover the due amount and that any excess amount could be returned to them. Accused No.1 Company then assured the complainant/respondent No.1 that any balance amount, if any, would be remitted to them as and when the shares were sold.
• It is worth noting that accused No.1 Company was regularly recovering the interest charged on the ICD until August 6th, 2001. During this time, the complainant/respondent No.1 was in constant contact with accused No.1 Company, requesting information about the sale of shares. 
• However, these requests were denied, with accused No.1 Company telling the complainant/respondent No.1 not to mix up the issue of selling shares with the issue of interest on the ICD.
• Accused No.1 Company had been regularly recovering the interest charged on the ICD until August 6th, 2001. During this time, the complainant/respondent No.1 had been trying to get information about the sale of the pledged shares, but accused No.1 Company refused to provide any details and asked the complainant/respondent No.1 to focus only on the issue of interest on the ICD. 
• On August 2nd, 2001, accused No.1 Company issued another notice to the complainant/respondent No.1 demanding repayment of the ICD amount of Rs. 50,00,000/-, as the value of the pledged shares had fallen to Rs. 44,25,000/-, failing which the pledged shares would be sold. On August 14th, 2001, the complainant/respondent No.1 proposed to repay Rs. 25,00,000/- in five monthly installments, but accused No.1 Company invoked the arbitration clause and appointed a sole arbitrator on the same day, claiming the outstanding amount due from the complainant/respondent No.1. 
• Meanwhile, accused No.1 Company sold the pledged shares for Rs. 24,67,631/- to Doogar and Associates Ltd., which was later renamed as Morgan Ventures Ltd. in 2004.
• Importantly, accused Nos. 2 to 4 were also Directors in this transferee Company. On February 11th, 2011, the complainant/respondent No.1 filed a criminal complaint against accused Nos.1 to 4, alleging fraud, cheating, and criminal breach of trust. 
• The Magistrate issued a process against all accused on September 11th, 2012, for offenses punishable under Sections 403, 406, 420, and 120-B of the Indian Penal Code, 1860.
• Following a proposal by complainant/respondent No.1 to repay Rs. 25,00,000/- in five monthly installments, accused No.1 Company invoked the arbitration clause and appointed a Sole Arbitrator to claim the outstanding amount. 
• During the arbitration proceedings, accused No.1 Company sold the pledged shares for Rs.24,67,631/- to Doogar and Associates Ltd., later renamed Morgan Ventures Ltd., where accused Nos. 2 to 4 were directors. Complainant/respondent No.1 filed a criminal complaint in 2011 against all accused, and the magistrate issued process against them for various offenses. 
• This order was challenged and remanded, leading to the issuance of process against accused Nos. 1 to 4. An arbitral award was passed in favour of accused No.1 Company in 2015. Accused Nos. 1 to 4 challenged the process issued against them, resulting in the process being quashed for accused No.1 Company and set aside for accused Nos. 2 to 4 under certain sections. 
• However, the process was confirmed for the offenses punishable under Section 406 read with Section 34 of the IPC. Both the complainant/respondent No.1 and accused Nos. 2 to 4 filed criminal writ petitions, leading to the High Court affirming the order of the trial court and confirming the issuance of process against accused Nos. 2 to 4 under Sections 406 and 420 read with Section 34 of IPC. Charges under Section 15-HA of the SEBI Act were dropped at the instance of the complainant/respondent No.1.

ISSUES RAISED-

• The interpretation of the Clause 9 of the ICDA regarding the lender's right to enforce its rights mentioned in the ICDA, Deed of Personal Guarantees, Corporate Guarantee, and LoP.
• The terms of Clause 5 and 8(5) of the LoP, which provide the Pledgee with the right to invoke the pledge, sell the shares, and adjust the outstanding amount against ICD dues.
• The allegation that accused No. 1 Company sold the shares to itself when the market price of the shares had fallen, and the complainant alleged that the accused waited for further fall in share price before selling them.

ARGUMENTS ADVANCED BY THE APPELLANT- 

• Shri Divan argued that even if the complaint is taken at face value, it does not reveal the elements of any offense. He explained that in addition to the Inter-Corporate Deposit Agreement (ICDA), the complainant/respondent No.1 had pledged the shares in question, and the accused No.1 company was authorized to invoke the pledge in case of default or other circumstances. 
• According to the Letter of Pledge (LoP), the accused No.1 company was also authorized to sell or dispose of the securities. Shri Divan further stated that as per the LoP, the accused No.1 company could have sold the shares to themselves.
• Furthermore, Shri Divan noted that the parties had already participated in arbitration proceedings regarding the same dispute, and an arbitral award had been issued. 
• The complainant/respondent No.1 had challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. Shri Divan argued that the dispute, if any, was purely civil in nature, and continuing the criminal proceedings would be an abuse of the legal process.

ARGUMENTS ADVANCED BY THE RESPONDENT-

• On the other hand, Dr. Singhvi argues that the complainant/respondent No.1 had advised the accused persons/appellants as early as 5th June 2000 to sell the shares, but they chose not to do so because the market price was higher. 
• He asserts that the accused persons/appellants' sale of the shares to a company in which accused Nos. 2 and 3 are directors at a very low price, demonstrates their dishonest intent. He asserts that the complainant/respondent No.1 first became aware of the illegal act committed by the accused persons/appellants in 2009, and therefore there is no delay in filing the complaint. 
• Dr. Singhvi contends that the trial court, the Revisional Court, and the High Court have all concurred that a case has been made out for the offence punishable under Section 406 of the IPC. Consequently, he argues that interfering with the concurrent findings of fact would not be permissible, and he requests the complaint to be dismissed.

JUDGEMENT ANALYSIS-

• A dematerialized participant has been given an irreversible instruction to place a lien in favor of the lender until the ICD and other outstanding dues are paid. Clause 9 of the ICDA states that if any installment of interest remains unpaid, or if there is a shortfall in the security pledged, the lender is entitled to enforce its rights under the ICDA, Deed of Personal Guarantees, Corporate Guarantee, and LoP. 
• The LoP states that the Pledgee may invoke the pledge at any time in the event of default or otherwise for as many shares as they deem fit, and the borrower is not entitled to any credit or adjustment. 
• The Pledgee has authorized the sale and disposal of the securities, and the borrower has agreed not to question the price at which the securities were sold. The only allegation is that the accused sold the shares to itself when the market price had fallen, in order to acquire more shares of the complainant.
• The first respondent in this case was aware of the sale of shares in 2001 but took no action until 2006 when they applied to BSE and NSE for information. The complaint was not filed until 2011, even though the respondent claimed to have learned of the fraudulent activity in 2009. However, there was no mention of this in the complaint. 
• The complaint also did not mention that the shares were sold at a lower price than the market price. The transactions were made through BSE and NSE, and a specific finding was given by the learned Arbitrator. The complainant turned a contractual dispute into a criminal case and there was an inordinate delay in filing the complaint. 
• The complaint did not disclose any of the elements of the offence and was an abuse of the legal process. Therefore, the appeals were allowed, the trial court and high court orders were quashed, and the complaint was dismissed. 
• However, the decision would not affect any proceedings under Section 34 of the Arbitration Act or any other proceedings.

CONCLUSION-

• Overall, the provisions in the ICDA and LoP allow the lender to enforce its security interest in the event of default by the borrower, including the right to sell the pledged securities to recover the outstanding dues. The borrower has agreed not to dispute the price at which the securities are sold by the lender.
• The conclusion of the text is that the appeals filed by the accused in a criminal case have been allowed, and the impugned judgment passed by the High Court and the order passed by the trial court have been quashed and set aside. 
• The complaint filed before the trial court under Sections 403, 406, 420 and 120B of the Indian Penal Code has been dismissed. The court found that the complainant had attempted to turn a purely contractual dispute into a criminal case and that there was an inordinate delay in lodging the complaint. 
• The court also observed that the complaint did not disclose any ingredients of the offense complained of, and hence, it was an abuse of process of law. 
• However, the court clarified that its observations would not affect the proceedings under Section 34 of the Arbitration Act or any other proceedings if taken recourse to by the appellants, if they are entitled in law.