One Investor Cannot Accuse Another Investor Of Cheating If Business Runs Into Losses: Karnataka High Court

The Karnataka High Court has held that an investor of a company cannot file case for cheating against another investor if he loses his money because the company suffered business losses.

A Single Judge Bench of Justice M Nagaprasanna made the observation, while allowing the plea of petitioners who were charged for offences punishable under Sections 420, 468, 406, 403, 418 read with Section 34 of IPC.

As per the allegations, the complainant paid Rs.1.29 crores to petitioner-Thomas Sebastian for commencement of a company, however, the company never took off.

Based on the said allegation, a crime was registered before the jurisdictional police. The investigation was conducted and a 'B' report filed in favor of the petitioners. The complainant filed a protest memo, in response to which, the Magistrate rejected the 'B' report and took cognizance of the offences.

The petitioners' case was that the complainant made investment in the company and the company took off, but it ran into losses. Since the company ran into losses in the normal business circumstance, criminal law could not be set into motion, that too for forgery or cheating.

The Bench noted that petitioner-Thomas Sebastian and the complainant had decided to start a joint venture company. Accordingly, both of them had made their respective investments. But the company ran into losses and the complainant could not recover the invested amount.

It further observed that the complainant sought to set criminal law into motion on an issue that was purely contractual between the parties.

“If the business has run into losses, where the investment of both the accused and the complainant was made it cannot be said that offence of cheating would ensue against the petitioners, who bonafide invest in the company and due to business losses the company comes down," the court said.

Referring to the protest memo filed in response to the 'B' report filed by the police, it was added, “The protest memo narrates that they are wanting to challenge the 'B' report by filing a protest petition. No such petition comes about. The protest memo is taken on record and the learned Magistrate rejects the 'B' report and takes cognizance of the aforesaid offences against the petitioners. The procedure adopted by the learned Magistrate would run foul of the judgment rendered by the Coordinate Bench of this Court in the case of Dr. Ravikumar v. Mrs. K.M.C. Vasantha and Another."

Accordingly, the court allowed the petitions, saying “In the light of the violation of procedure in rejecting the 'B' report and taking of cognizance apart from the fact that the very criminal law that is set into motion was on breach of contract or understanding between the petitioners and the complainant, further proceedings if permitted to continue would become an abuse of the process of the law and ultimately result a miscarriage of the justice.”

Advocates Aditya Krishna Pandey and Jaysham Jayasimha Rao appeared for Petitioners

HCGP KP Yashodha appeared for State

Citation No. 2023 LiveLaw (Kar) 463

Case Title: Ann Nimmi Sebastian v. State of Karnataka and Anr.

Case No: CRIMINAL PETITION NO. 9212 OF 2021 C/W CRIMINAL PETITION NO. 4676 OF 2022

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