Using Criminal Prosecution To Extract Dues For Which A Civil Remedy Is Available Is Unacceptable: Jharkhand High Court

A bench comprising Justice Gautam Kumar Choudhary of the Jharkhand High Court, while allowing a criminal miscellaneous petition, has recently ruled that criminal prosecution, in any case, cannot be permitted as an arm twisting measure to settle and extract dues for which efficacious civil remedy is available.

In this case, the Criminal miscellaneous petition was preferred for quashing of the entire criminal proceeding and the order passed by the J. M. 1st Class, Jamshedpur whereby summons were issued against the petitioners after finding a prima facie case under Sections 420, 406 & 120B of the Indian Penal Code.

The complainant is a partnership firm engaged in the business of trading and transporting limestone with its headquarters in Sonari, Jamshedpur, and the first petitioner is a company registered under the Companies Act, 1956 with its headquarters in New Delhi.The second petitioner is the company's C.M.D., and the third petitioner is the company's Director.

It was alleged that on 22.05.2015, the first petitioner, through other petitioners, persuaded the opposite party to enter into a contract for the supply of limestone lumps and issued a purchase order in the office of the opposite party No.2, located at Sonari, Jamshedpur, for the supply of 4000 MT of the grade 10-40 MM lime stones worth Rs.67,00,000/-.

The agreed-upon payment method was that the material cost would be paid 60 days after the issuance of the Railway receipt. The opposing party accepted the said purchase order and delivered 3690.87 MT of limestone ordered by the accused persons worth Rs.64,92,862.55/- by railway rake from Paradip Port to the petitioners' Kalinga Nagar site.

In accordance with the said purchase order, the opposing party issued a bill for the supply of the material after 60 days from the date of R/R issuance, but the petitioners did not pay any amount against the said bill.

After much persuasion, the petitioners paid the opposing party a paltry sum of Rs.6,00,000/- in June 2016. It was also claimed that the opposing party demanded the balance payment of Rs.58,92,862/- on several occasions through emails and phone calls with all of the petitioners, but no payment had been made to date, following which, the opposing party sent a request letter with bank details, but no payment was made by the petitioners, therefore the complaint case was filed.

The counsel for the petitioners, Mr. S.R. Soren submitted that Court had overlooked the fact that petitioner No.1 being a registered company under the Companies Act, as such, cannot be made as an accused in a criminal proceeding for the acts of its agents or servants and the mens rea of such agents or servants cannot be attributed to the company.

In support of this contention, he placed reliance on the State of Maharashtra vs. Messrs Syndicate Transport Co. (P) Ltd. [AIR 1964 BM. 195], and Ravindranath Bajpe vs. Mangalore Special Economic Zone Ltd. & Ors. [Criminal Appeal No.1047- 1058/2021, decided on September 27, 2021] wherein it was held that the criminal proceedings cannot be kick-started against the directors and other management personnel of a company in absence of specific allegations and their role in the crime.

The Supreme Court in passing this order re-affirmed its earlier judgments in Sunil Bharti Mittal v. Central Bureau of Investigation [(2015) 4 SCC 609] and Maksud Saiyed vs. State of Gujarat & Others [(2008) 5 SCC 668] which provided that :-

a. Unless the statute specifically provides, vicarious liability of the directors cannot be automatically imputed where company is the offender;

b. If a company commits an offense involving mens rea (guilty intent), it would normally be the intent and action of that individual who acted on behalf of the company

He further submitted that a corporate body is included in the definition of “person” under Section 11 of IPC, however, there are certain offenses which could be committed by an individual human being and a corporate body could not, therefore, be capable of committing such offenses.

Mr. Soren said that the certain offenses are to be punished only with imprisonment and it would not be possible to impose a punishment of imprisonment on corporate bodies.

The sum and substance of the argument made by Mr. Soren was that order of cognizance is bad in law on the ground that the order taking cognizance has no territorial jurisdiction as the entire financial transaction took place at Paradip Port, Orissa. It was also submitted by the counsel that the Director of Company cannot be impleaded unless a specific role is attributed to him in view of the settled law.

Cognizance has been taken against the Company which is impermissible and the role of Director over the petitioner in the present case has not been stated. Part payment of the amount goes to show that there was no dishonest intention and criminality involved in the case

Agreeing with the argument made by the learned APP, Justice Choudhary said, “I find force in the argument made by the learned APP and the counsel on behalf of the opposite party, that there is no legal bar to hold a corporate entity to be liable for a criminal act, in the facts and circumstance of a particular case.”

Justice Choudhary made reliance on Standard Chartered Bank & Others v. Directorate of Enforcement, (2005) 4 SCC 530, in which it was held that there is no dispute that a company is liable to be prosecuted and punished for criminal offenses. As in the case of torts, the general Rule prevails that the corporation may be criminally liable for the acts of an officer or agent, assumed to be done by him when exercising authorized powers, and without proof that his act was expressly authorized or approved by the corporation. In the statutes defining crimes, the prohibition is frequently directed against any “person” who commits the prohibited act, and in many statutes the term “person” is defined. Even if the person is not specifically defined, it necessarily includes a corporation. It is usually construed to include a corporation so as to bring it within the prohibition of the statute and subject it to punishment. In most of the statutes, the word “person” is defined to include a corporation. In Section 11 of the Penal Code, 1860, “person” is defined thus:

“11. The word ‘person’ includes any company or association or body of persons, whether incorporated or not.”

Further relying on Iridium India Telecom Ltd. v. Motorola Inc. & Others, (2011) 1 SCC 74, wherein it was argued by Mr. Jethmalani that in most countries that follow the rule of law, companies can no longer avoid criminal prosecution by claiming they didn't intend to commit a crime, which is true in both England and the United States, where it is clear that a corporation can be held responsible for intentional criminal acts, Justice Choudhary stated that "the legal proposition advanced on behalf of the petitioner cannot be acceded to that corporate entity cannot be held criminally liable."

Noting that the matter for consideration in the present case was whether materials brought on record during enquiry is sufficient to make out an offence of cheating or criminal breach of trust, he stated, “In order to make out a case of cheating, there should be material to make out a prima facie case that the accused had fraudulent or dishonest intention at the time of making the promise. Deception is the essence of the offence of cheating. Mere breach of contract is not criminal, unless it was at the same time dishonest. intention at the time of making the promise. Deception is the essence of the offence of cheating. Mere breach of contract is not criminal, unless it was at the same time dishonest and was manifested by some overt act.”

He also relied on Hridaya Ranjan Prasad Verma v. State of Bihar & Others, (2000) 4 SCC 168 where it was held that mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed, and it is the intention which is the gist of the offence. From his mere failure to keep up a promise subsequently such a culpable intention right at the beginning, that is, when he made the promise cannot be presumed.

Justice Choudhary noted that "In case of criminal breach of trust, the pivotal ingredient is entrustment of property followed by misappropriation. Deception since inception is not a fundamental ingredient of the offence, as it may arise later when the property so entrusted is misappropriated. There is a difference between misappropriation and the mere non-fulfillment of legal obligation. In every criminal breach of trust a breach of contract is implicit."

"The determining factor to impute criminality in a particular case," he further noted, "is whether the proceeded against had acted dishonestly. The distinction between cheating and breach of contract lies in the intention of the accused at the time when the inducement was made."

He then relied on State of Gujarat v. Jaswantlal Nathalal, (1968) 2 SCR 408, wherein it has been held that:

“The term “entrusted” found in Section 405 IPC governs not only the words “with the property” immediately following it but also the words “or with any dominion over the property” occurring thereafter—see Velji Raghvaji Patel v. State of Maharashtra [(1965) 2 SCR 429]. Before there can be any entrustment there must be a trust meaning thereby an obligation annexed to the ownership of property and a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another or of another and the owner. But that does not mean that such an entrustment need conform to all the technicalities of the law of trust — see Jaswantrai Manilal Akhaney v. State of Bombay [(1956) SCR 483, 498-500]. The expression “entrustment” carries with it the implication that the person handing over any property or on whose behalf that property is handed over to another, continues to be its owner. Further the person handing over the property must have confidence in the person taking the property so as to create a fiduciary relationship between them. A mere transaction of sale cannot amount to an entrustment”.

“From the above exposition of law,” Justice Choudhary noted “there should be some entrustment of property to the accused wherein the ownership is not transferred to the accused; and in case of sale of movable property, although the payment may be deferred the property passes in the goods on delivery as per Sections 20 and 24 of the Sales of Goods Act, 1930.”

He further noted that, “in case of sale of goods the property passes to the purchaser from the seller when the goods are delivered. Once the property in the goods passes to the purchaser, it cannot be said that the purchaser was entrusted with the property of the seller. Without entrustment of property, there cannot be any criminal breach of trust. Thus, prosecution of cases on charge of criminal breach of trust, for failure to pay the consideration amount in case of sale of goods is flawed to the core. There can be civil remedy for the non-payment of the consideration amount, but no criminal case will be maintainable for it.”

Justice Choudhary was of the view that the allegations made in the complaint, even if they are taken at their face value and accepted in their entirety do not prima facie constitute any offence of cheating, criminal breach of trust or of criminal conspiracy.

Labelling the case as ‘yet another instance of a purely civil dispute regarding non-payment of sale amount being given a criminal colour to launch criminal prosecution against the petitioners,’ Justice Choudhary held that, “In any case criminal prosecution cannot be permitted as an arm twisting measure to settle and extract dues for which efficacious civil remedy is available. It has been reiterated in Vijay Kumar Ghai v. State of W.B., (2022) 7 SCC 124 that any effort to settle civil disputes and claims, which do not involve any criminal offence, by applying pressure through criminal prosecution should be deprecated and discouraged.”

Case Title: M/s Mideast Integrated Steels Ltd. (MESCO Steel Ltd.) vs. State of Jharkhand Cr.M.P. No. 1744 of 2022

Citation: 2023 LiveLaw (Jha) 8

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