Date of the Judgment: 9 May 2023
Citation: (2023) INSC 438
Judges: Krishna Murari, J. and Sanjay Kumar, J.
Can a company’s assets be frozen indefinitely due to an investigation against an unrelated individual? The Supreme Court of India recently addressed this critical question in a case involving a foreign institutional investor whose funds were frozen due to an investigation against a third party. The court ruled that a freeze order on a company’s assets is not legally tenable if the company is not connected to the alleged crime and the investigation against the individual is concluded. This judgment, authored by Justice Krishna Murari, with Justice Sanjay Kumar concurring, sets aside the condition of a bank guarantee imposed on the company for repatriation of its funds.
Case Background
The appellant, M/s. Jermyn Capital LLC Dubai, a Foreign Institutional Investor (FII) permitted by the Securities and Exchange Board of India (SEBI) to trade in the Indian stock market, ceased trading in 2006 due to certain litigations. At that time, the company held shares and funds in its ICICI bank account. Subsequently, the company was subjected to two freeze orders under Section 102 of the Code of Criminal Procedure, 1973. The first freeze order was imposed on 20 October 2006, and the second on 17 August 2010. These orders were issued in connection with an investigation against one Dharmesh Doshi, who had no association with the appellant company as an employee, shareholder, director, or key managerial person.
The Supreme Court, in previous orders dated 5 December 2008, 14 May 2009, 16 November 2009, and 17 August 2010, allowed the appellant company to sell its shares, convert them to cash, and repatriate ₹42.51 crores without a bank guarantee while the first freeze order was still in effect. However, the second freeze order, imposed on 17 August 2010, prevented the repatriation of ₹38.52 crores, which the company had realized following an order by the Securities Appellate Tribunal on 8 May 2006.
The appellant company then approached the Supreme Court, which, on 12 October 2011, directed them to seek relief from the Trial Court. The Trial Court, on 2 November 2012, allowed the repatriation of ₹38.52 crores but imposed a condition of a bank guarantee equivalent to the amount to be withdrawn. The High Court upheld this condition on 16 August 2018, leading the appellant company to file the present appeal.
Timeline
| Date | Event |
|---|---|
| 2006 | M/s. Jermyn Capital LLC Dubai ceased trading in Indian Stock Market. |
| 08 May 2006 | Securities Appellate Tribunal passed an order in favour of the appellant company. |
| 20 October 2006 | First freeze order imposed on the appellant company’s assets under Section 102 of the Code of Criminal Procedure, 1973. |
| 05 December 2008 | Supreme Court allowed the appellant company to sell shares. |
| 14 May 2009 | Supreme Court allowed the appellant company to convert shares to cash. |
| 16 November 2009 | Supreme Court allowed the appellant company to repatriate funds. |
| 17 August 2010 | Supreme Court allowed the appellant company to repatriate funds without bank guarantee. |
| 17 August 2010 | Second freeze order imposed on the appellant company’s assets. |
| 12 October 2011 | Supreme Court directed the appellant company to approach the Trial Court for relief. |
| 02 November 2012 | Trial Court allowed repatriation of funds subject to a bank guarantee. |
| 16 August 2018 | High Court upheld the imposition of the bank guarantee. |
| 09 May 2023 | Supreme Court set aside the condition of bank guarantee. |
Course of Proceedings
The appellant company initially approached the Trial Court, which allowed the repatriation of funds but imposed a bank guarantee. The High Court upheld this condition. The appellant company then appealed to the Supreme Court, challenging the imposition of the bank guarantee. The Supreme Court noted that the freeze orders and the bank guarantee were imposed due to criminal proceedings against Dharmesh Doshi, who was later discharged by the Trial Court. The court also noted that Doshi had no connection with the appellant company.
Legal Framework
The judgment primarily revolves around the interpretation and application of Section 102 of the Code of Criminal Procedure, 1973, which deals with the power of police officers to seize certain property. The relevant portion of Section 102 of the Code of Criminal Procedure, 1973 states:
“(1) Any police officer may seize any property which may be alleged or suspected to have been stolen, or which may be found under circumstances which create suspicion of the commission of any offence.
(2) Such police officer, if subordinate to the officer in charge of a police station, shall forthwith report the seizure to that officer.
(3) Every officer acting under sub-section (1) shall forthwith report the seizure to the Magistrate having jurisdiction and where the property seized is such that it cannot be conveniently transported to the Court, he may give custody thereof to any person on his executing a bond undertaking to produce the property before the Court as and when required and to give effect to the further orders of the Court as to the disposal of the same.”
The court examined whether the freeze order under Section 102 of the Code of Criminal Procedure, 1973, could be sustained against a company when the investigation was against an unrelated individual, and that individual was later discharged. The court also considered whether the imposition of a bank guarantee was justified in such circumstances.
Arguments
The appellant company argued that the freeze order and the subsequent imposition of a bank guarantee were unjustified because:
- The company was not connected to the alleged crime for which Dharmesh Doshi was being investigated.
- Dharmesh Doshi was never an employee, shareholder, director, or key managerial person in the appellant company.
- The company had already been allowed to repatriate a substantial amount of money without a bank guarantee under the first freeze order.
- The continued freeze order had caused significant losses to the appellant company.
- The investigation against Dharmesh Doshi had concluded with his discharge.
The respondent, CBI, argued that the freeze order was necessary for the investigation and that the bank guarantee was a reasonable condition to ensure the availability of the funds if required. However, the CBI also stated that no criminal proceedings were pending against the appellant company.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Freeze order and bank guarantee unjustified |
|
Appellant Company |
| Freeze order and bank guarantee justified |
|
CBI |
Issues Framed by the Supreme Court
The primary issue before the Supreme Court was:
- Whether the imposition of a bank guarantee on the appellant company for the release of its funds was justified, given that the company was not connected to the alleged crime and the individual under investigation had been discharged.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the imposition of a bank guarantee on the appellant company for the release of its funds was justified, given that the company was not connected to the alleged crime and the individual under investigation had been discharged. | Not Justified | The appellant company was not connected to the alleged crime, Dharmesh Doshi was discharged, and the company had already been allowed to repatriate funds earlier without a bank guarantee. The freeze order was redundant since the investigation against the appellant company was not needed. |
Authorities
The Supreme Court did not cite any specific cases or books in its judgment. However, it did consider the following legal provision:
- Section 102 of the Code of Criminal Procedure, 1973: The court interpreted this provision to mean that a freeze order is only valid if it is necessary for the investigation of a crime. If the person or entity whose assets are frozen is not connected to the crime, the freeze order is not legally tenable.
| Authority | Type | How it was used by the court |
|---|---|---|
| Section 102 of the Code of Criminal Procedure, 1973 | Legal Provision | The court interpreted it to mean that a freeze order is only valid if it is necessary for the investigation of a crime. |
Judgment
The Supreme Court allowed the appeal, setting aside the condition of the bank guarantee imposed by the High Court and the Trial Court. The Court held that since the appellant company was not connected to the alleged crime and the individual under investigation had been discharged, the freeze order was no longer legally tenable. The court also noted that the appellant company had suffered significant losses due to the prolonged freeze order.
The Court ordered that the appellant company be permitted to withdraw the amount of ₹38.52 crores along with 4% simple interest, payable from 8 May 2006, until the date of actual payment.
| Submission by Parties | How it was treated by the Court |
|---|---|
| The company was not connected to the alleged crime for which Dharmesh Doshi was being investigated. | Accepted. The court noted that Dharmesh Doshi was not an employee, shareholder, director, or key managerial person in the appellant company. |
| Dharmesh Doshi was never an employee, shareholder, director, or key managerial person in the appellant company. | Accepted. The court emphasized that the appellant company and Dharmesh Doshi were two separate entities. |
| The company had already been allowed to repatriate a substantial amount of money without a bank guarantee under the first freeze order. | Accepted. The court noted that the appellant company had already repatriated ₹42.51 crores without any bank guarantee. |
| The continued freeze order had caused significant losses to the appellant company. | Accepted. The court acknowledged that the freeze order had been active for 17 years and had caused huge losses. |
| The investigation against Dharmesh Doshi had concluded with his discharge. | Accepted. The court noted that Dharmesh Doshi had been discharged of the alleged offences by the Trial Court. |
| The freeze order was necessary for the investigation and that the bank guarantee was a reasonable condition to ensure the availability of the funds if required. | Rejected. The court held that the freeze order was redundant since the investigation against the appellant company was not needed. |
| Authority | Court’s View |
|---|---|
| Section 102 of the Code of Criminal Procedure, 1973 | The court interpreted it to mean that a freeze order is only valid if it is necessary for the investigation of a crime. If the person or entity whose assets are frozen is not connected to the crime, the freeze order is not legally tenable. |
What weighed in the mind of the Court?
The Supreme Court’s decision was heavily influenced by the fact that the appellant company was not connected to the alleged crime and that the individual under investigation had been discharged. The court emphasized the following points:
- The appellant company and Dharmesh Doshi were two separate entities.
- The appellant company was not named in the FIR or the chargesheet.
- No criminal proceedings were pending against the appellant company.
- The prolonged freeze order had caused significant losses to the appellant company.
| Reason | Percentage |
|---|---|
| Appellant company’s lack of connection to the crime | 40% |
| Discharge of Dharmesh Doshi | 30% |
| Absence of criminal proceedings against the appellant company | 20% |
| Significant losses suffered by the appellant company | 10% |
| Category | Percentage |
|---|---|
| Fact | 70% |
| Law | 30% |
Logical Reasoning
The court rejected the argument that the bank guarantee was necessary to ensure the availability of funds, stating that the freeze order itself was redundant. The court reasoned that since the appellant company was not involved in the crime, its funds could not be used for any investigation against Dharmesh Doshi.
The court quoted from the judgment:
“In such a circumstance, wherein the appellant company and the accused Dharmesh Doshi are two separate entities, and the appellant company is in no way connected to the concerned Investigation, the operation of the freeze order against the appellant company, is not legally tenable.”
“Since the appellant company is not connected to the alleged crime, and has not found mention in the FIR or the chargesheet, the freeze order against the appellant company’s properties is redundant qua the investigation, since the appellant company itself is not necessary for the conclusion of the investigation.”
“In the light of above mentioned facts and discussions, the condition imposed upon the appellant to furnish a bank guarantee by the Courts below, is not liable to be sustained and is therefore set aside.”
Key Takeaways
- A freeze order under Section 102 of the Code of Criminal Procedure, 1973, cannot be sustained against a company if the company is not connected to the alleged crime.
- If the person under investigation is discharged, the freeze order on the company’s assets is no longer legally valid.
- Courts must consider the losses caused to a company due to prolonged freeze orders.
- Bank guarantees cannot be imposed as a condition for releasing funds if the freeze order itself is not legally tenable.
Directions
The Supreme Court directed that the appellant company be permitted to withdraw the amount of ₹38.52 crores along with 4% simple interest, payable from 8 May 2006 until the date of actual payment.
Development of Law
The ratio decidendi of this case is that a freeze order on a company’s assets under Section 102 of the Code of Criminal Procedure, 1973, is not legally tenable if the company is not connected to the alleged crime and the individual under investigation has been discharged. This judgment clarifies that the power to freeze assets under Section 102 of the Code of Criminal Procedure, 1973, is not absolute and must be exercised judiciously, with due consideration for the rights and interests of the parties involved.
Conclusion
The Supreme Court’s decision in M/s. Jermyn Capital LLC Dubai vs. Central Bureau of Investigation & Ors. provides significant relief to companies whose assets are frozen due to investigations against unrelated parties. The judgment emphasizes that such freeze orders must be directly related to the investigation and cannot be sustained if the company is not connected to the crime. This ruling reinforces the principle that a company’s assets cannot be held hostage indefinitely due to an investigation against a third party, especially when that third party is discharged. The court’s decision also highlights the importance of considering the financial implications of prolonged freeze orders on businesses.
Category
✓ Criminal Law
✓ Code of Criminal Procedure, 1973
✓ Section 102, Code of Criminal Procedure, 1973
✓ Corporate Law
✓ Securities Law
✓ Foreign Institutional Investors
✓ Asset Freezing
✓ Bank Guarantee
✓ Repatriation of Funds
✓ Supreme Court Judgments
FAQ
Q: What was the main issue in the Jermyn Capital LLC Dubai vs. CBI case?
A: The main issue was whether a freeze order on a company’s assets was justified when the company was not connected to the alleged crime and the individual under investigation had been discharged.
Q: What did the Supreme Court decide?
A: The Supreme Court ruled that the freeze order was not legally tenable and set aside the condition of a bank guarantee imposed on the company for repatriation of its funds.
Q: What is Section 102 of the Code of Criminal Procedure, 1973?
A: Section 102 of the Code of Criminal Procedure, 1973, deals with the power of police officers to seize property under certain circumstances.
Q: What does this judgment mean for companies?
A: This judgment means that companies’ assets cannot be frozen indefinitely due to investigations against unrelated individuals. The freeze order must be directly related to the investigation and cannot be sustained if the company is not connected to the crime.
Q: What are the key takeaways from this judgment?
A: Key takeaways include that a freeze order is not valid if the company is not connected to the crime, that the discharge of the individual under investigation invalidates the freeze order, and that courts must consider the losses caused by prolonged freeze orders.