Agreement Between Companies, Case Against Directors Cannot Survive Without Impleading Firm: Calcutta High Court Quashes Cheating Case

The Calcutta High Court’s Circuit Bench at Jalpaiguri has recently quashed criminal cases against the MD and Director of Lanco Infratech Limited, who had been accused of inter alia cheating, by one of their industrial oxygen suppliers, who alleged that in the course of business, the accused had failed to return back empty cylinders, thereby misappropriating approx. Rs 38 lakhs worth of oxygen cylinders.

In allowing the petitioners’ application, a single-bench of Justice Siddhartha Ray Chowdhury held:

Upon considering facts and circumstances of the case, I am of the view that the criminal proceeding being C.R. Case No. 11 of 2019 is attended with malafide as the complainant initiated the proceeding suppressing the material fact knowing fully well that the company and the accused persons no. 2 and 3 being the alter ego of the company had no authority to deal with the fund of the company to transfer the same. That apart the agreement was entered into by and between the companies. Therefore, at all any offence was committed, it was committed by the company. Therefore, criminal proceeding cannot be allowed to survive without the company being arrayed as an accused.

Opposite party no 2/Complainant/respondent’s firm used to supply industrial oxygen cylinders to the petitioners’ firm, which they would use, and return back when they became empty.

It was argued that in breach of their agreement, Lanco had failed to return multiple oxygen cylinders, and refused to acknowledge even receiving them, thereby misappropriating a sum of approx. 38 lakhs.

It was submitted that the Trial Court had convinced the petitioner to pay a sum of approx. Rs 29 lakhs instead of 38 lakhs, and that initially the petitioners had paid a sum of 12 lakhs, with an assurance of paying the remainder once the criminal case had been withdrawn.

It was argued that an out of court settlement was arrived at, and recorded by the trial court, but the accused failed to honour the terms of settlement, by refusing to speak to the complainants or even heed their requests of honouring the terms of settlement.

Thereafter, under Section 202 CrPC, the trial court issued warrant of arrest against the petitioners, under various sections of the IPC, for the offences of cheating, and causing wrongful loss.

It was argued by the petitioners that the trial court had failed to appreciate the mandate of 202 CrPC, and had not held any enquiry into the issue, even though the petitioners contended that the complainant had supressed material facts regarding the case before filing the criminal complaint, thereby abusing the legal process.

Petitioners counsel argued that by an order of the National Company Law Tribunal (“NCLT”), the petitioners firm fell into moratorium under Section 14 of the Insolvency & Bankruptcy Act , 2016 (“IBC”) at the instance of one of their creditors, and an interim resolution professional (“IRP”) was appointed.

Counsel argued that due to the aforesaid moratorium, the petitioners company was prevented from dealing with any legal right or interest, thereby rendering them incapable of complying with the terms of settlement which had been agreed with the complainant.

Petitioners claimed that the aforesaid facts were known to the complainants, since their firm was a corporate creditor to the petitioners firm, and after the initiation of insolvency proceedings, had lodged a claim of approx. Rs 17 lakhs before the IRP.

Petitioners’ counsel argued that they were legally prevented from acting on their assurance in the terms of settlement with the complainant firm, and that there was no mens rea in the company or its alter ego, the directors, of wanting to cheat the complainants firm.

On the other hand, counsel submitted that the criminal complaint filed by the supplier firm was coloured with mala fides, supressing the material fact about the agreement being entered into between the two companies, and not by the directors in their individual capacities, as well as about the ongoing Section 14 moratorium.

Counsel for the opposite party/respondent submitted that the embargo under Section 14 IBC would not apply to a criminal proceeding, and that a payment of only Rs 12 lakhs out of the approx. 29 lakhs agreed settlement, was an inducement to cheat by the petitioners, an argument which was reiterated by the State counsel.

Upon hearing the arguments of the parties, the Court held that from the facts and circumstances of the case, it could not be concluded that the petitioners had a dishonest or fraudulent intention, since they had paid the sum of 12 lakhs on 27^th July 2017, and the IBC proceedings were initiated on the 7^th of August 2017.

Court believed that if the petitioners indeed wished to defraud the complainants, then they would not have even paid the sum of 12 lakhs, the payment of which ruled out any mens rea on part of the petitioners.

That apart, the Court noted that the complaint itself was mired with mala fides, since it was a commercial dispute, civil in nature, which had been ‘imbibed with the colour of criminality.’

Court held that despite being a corporate creditor to the petitioner’s firm, the complainant had failed to disclose the fact that it had lodged its claim before the IRP during the insolvency resolution process.

Court concluded, that if at all any criminal act had been committed, it was by the company, and not by its directors in their individual capacity, who were merely alter egos of the company, and held that the present criminal proceedings could not be sustained without adding the petitioners’ firm as an accused in the proceedings.

Accordingly, the Court quashed the criminal proceedings against the petitioners.

Citation: 2023 LiveLaw (Cal) 274

Case: G. Venkatesh Babu & Anr. V The State Of West Bengal & Anr.

Case No: CRR 82 of 2021

Click Here To Read/Download Judgment