Special Courts Established Under Companies Act, 2013 Can't Retrospectively Try Offences Committed Under 1956 Act: Karnataka High Court

The Karnataka High Court has quashed a criminal prosecution initiated in 2015 by the Serious Fraud Investigation Office (SFIO) against the accused involved in the merger initiated by Kingfisher Airlines Limited (KFAL) to acquire Deccan Aviation Limited (DAL) by providing fraudulent documents to its shareholders, stakeholders thereby violating various provisions of the Companies Act and the Income Tax Act.

A single judge bench of Justice Hemant Chandangoudar allowed the petition filed by Srividya C G and others who were charged along with fugitive Vijay Mallya (Not before the court in this proceedings) and quashed the case registered under Sections 36 read with Sections 448 and 447 of the Companies Act, 2013, and Section 68 read with Section 628 of the Companies Act, 1956.

The bench on going through the records and referring to the relevant provisions said that the offences were allegedly committed under the Companies Act, 1956. It held that the investigation of the offences alleged against the petitioner commenced after the enactment of the Act, 2013.

The bench said “The cognizance taken by the learned judge of the special court, established under the Companies Act of 2013, lacks legal authority. Section 435 clearly states that the Special Court can only try the offences under this Act with imprisonment of two or more years, which means the Act, 2013, and not the offences under the Act, 1956. 

Case Background:

It was stated that the Ministry of Corporate Affairs, based on the Registrar of Companies report dated 27.05.2015 highlighting irregularities by Kingfisher Airlines Limited, assigned the investigation to SFIO under Section 212(1)(c) of the Act, 2013, and the SFIO submitted a report dated 30.08.2017 under Section 212(12) of the Act, 2013.

It was said that when the Government of India had introduced the 5/20 Rules, requiring airline companies to have five years of domestic commercial operation and a fleet of 20 aircraft to fly overseas. KFAL, not meeting the requirements, aimed to acquire Deccan Aviation Limited (DAL), controlled by accused No.10, and the accused No.5 collaborated with other accused to cheat, produce fraudulent documents, cause loss to shareholders and stakeholders of DAL, and violate various provisions of the Companies Act and the Income Tax Act.

The court noted that in the pre-merger stage, the accused decided on an artificial de-merger, creating two non-existing undertakings to fulfil the condition for the demerger.

In the merger stage, a scheme of arrangement under Sections 391(2), 394 of the Act, 1956, was presented to de-merge the airline business from KFAL and merge it with DAL. The fabricated documents aimed to avoid taxation of capital gain. Post-merger, KFAL incurred losses, which were not transferred to the accused No.2 - Company, but retained by KFAL, renamed as Kingfisher Training and Aviation Services Limited (accused No.1). This was done to portray the accused No.2 - Company as profitable venture to secure additional finance, it was stated.

It was noted that after the merger, accused No.5 and his associates manipulated asset valuation and goodwill to control the allocation of shares. In the post-merger stage, accused No.5 gained control of DAL, and renamed KFAL, allowing him to secure additional finance based on the brand value of the resultant entity.

Petitioner submissions

The petitioners primarily argued that the Special Court constituted under Section 435 of Act, 2013 lacked jurisdiction to take cognizance of the offence alleged to have been committed and made penal under the provisions of Act, 1956, since the Special Court constituted can try an offender, who is said to have committed an offence, which is made penal under the provisions of Act, 2013.

It was stated that under Section 2(29)(iii) of the Companies, 2013, the `Court' means any Court established by the State Government under Section 9(1) of the Cr.PC, and the Special court under Section 435 of the Act, 2013 established by the Central Government to provide speedy trial of the offences under the Act. Therefore, the contention of the SFIO irrespective of the quantum of punishment, the Court of Sessions had the jurisdiction under Section 2(29) of the Act, 2013 without any substance.

Further, the scheme of arrangement prepared by KFAL and DAL was sanctioned by this Court in Co.P No.45/2008 after considering the swap ratio, and the merger sanctioned by the High Court cannot be sought to be reopened through criminal proceedings, it was said.

SFIO Submissions

SFIO opposed the petitions saying the investigation was to be conducted under the new Act, and accordingly, the investigation was conducted by SFIO as stated under Section 212 of the Act, 2013, which deals with the investigation into the affairs of the company by SFIO.

It said that the sanction was obtained under the new Act, and a complaint was submitted under the new Act before the Special Court established under Section 435 of the Act, 2013, and cognizance thereof was taken of the offence as per the new Act, 2013.

Findings:

The bench on going through the records and referring to the relevant provisions said that the offences were allegedly committed under the Companies Act, 1956. It held that 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 into the 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 Court said.

Then it said “Section 435 clearly states that the Special Court can only try the offences under this Act with imprisonment of two or more years, which means the Act, 2013, and not the offences under the Act, 1956. For the other offences with imprisonment less than two years or offences punishable under previous company law i.e., Act, 1956, the proviso states that, they shall be tried by the Judicial Magistrate of the First Class.”

Rejecting the contention of SFIO the court held that 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.

It held that the alleged offences were committed during the period when the Companies Act of 1956 was in effect and the initiation of legal proceedings under Section 36, was in conjunction with Sections 447 and 448 of the 2013 Act and lacked legal authority.

The Court said that the petitioners cannot be prosecuted for actions that were not deemed punishable under the provisions of the 1956 Act and that such action violates Article 20(1) of the Constitution of India, which safeguards against retrospective criminalization.

It also clarified that professionals providing services to the company were not liable under Section 68 of the Companies Act, 1956, if their opinions are within their commercial discretion and they could only face prosecution if they colluded with an officer who was in default under section 5 of the Act, 1956 to fraudulently induce shareholders into agreements.

Accordingly, it allowed the petitions.

Appearance: Senior Advocates C V Nagesh, Udaya Holla, Amit K Desai, Satish Maneshinde, Sanjog Parab, Advocates S Mahesh, Amar Correa for petitioners.

Senior Advocate Prabhuling K Navagdi for Respondent.

Citation No: 2024 LiveLaw (Kar) 202

Case Title: SRIVIDYA C G AND SERIOUS FRAUD INVESTIGATION OFFICE

Case No: WRIT PETITION NO. 4380 OF 2018 (GM-RES) C/W WRIT PETITION NO. 3624 OF 2018 (GM-RES), WRIT PETITION NO. 3625 OF 2018 (GM-RES), WRIT PETITION NO. 3632 OF 2018 (GM-RES), WRIT PETITION NO. 3642 OF 2018 (GM-RES), WRIT PETITION NO. 3829 OF 2018 (GM-RES), WRIT PETITION NO. 3943 OF 2018 (GM-RES), WRIT PETITION NO. 4381 OF 2018 (GM-RES), WRIT PETITION NO. 4671 OF 2018 (GM-RES), WRIT PETITION NO. 6074 OF 2018 (GM-RES), WRIT PETITION NO. 11889 OF 2018 (GM-RES

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