Supreme Court quashes criminal proceedings in share pledge dispute: Prakash Aggarwal vs. Ganesh Benzoplast Limited (28 April 2023)

LEGAL ISSUE: Whether a criminal case for breach of trust and cheating can be initiated when shares pledged as security are sold by the lender as per the terms of the agreement.

CASE TYPE: Criminal

Case Name: Prakash Aggarwal vs. Ganesh Benzoplast Limited

Judgment Date: 28 April 2023

Date of the Judgment: 28 April 2023

Citation: 2023 INSC 464

Judges: B.R. Gavai, J. and Vikram Nath, J.

Can a purely contractual dispute be twisted into a criminal case? The Supreme Court of India recently addressed this question in a case involving the sale of pledged shares. The court examined whether a criminal complaint for breach of trust and cheating was valid when a lender sold pledged shares according to the terms of a loan agreement. The bench consisted of Justices B.R. Gavai and Vikram Nath, with Justice Gavai authoring the judgment.

Case Background

Ganesh Benzoplast Ltd. (the complainant) obtained two Inter Corporate Deposits (ICD) from Morgan Securities and Credits Pvt. Ltd. (accused No. 1) in February and March 2000, each for ₹50,00,000. These loans were to be repaid by May 15, 2000, and June 5, 2000, respectively. As security, Ganesh Benzoplast pledged 1,50,00,000 of its equity shares, valued at ₹16 per share, totaling ₹2,40,00,000. Prakash Aggarwal, Meera Goyal, and Suresh Chand Goyal (accused Nos. 2 to 4), directors of Morgan Securities, managed the company’s day-to-day affairs.

On May 3, 2000, Morgan Securities asked Ganesh Benzoplast to pledge additional shares due to a drop in the value of the pledged shares. Ganesh Benzoplast, facing financial difficulties, could not repay the ICD amount by the due date of June 5, 2000. They informed Morgan Securities that they could sell the pledged shares to recover the dues and return any excess amount. Morgan Securities assured them of this.

On August 25, 2000, Ganesh Benzoplast repaid the first ICD, closing that loan account. However, they were continuously seeking details of the sale of shares from Morgan Securities, who kept delaying the same. On August 2, 2001, Morgan Securities demanded repayment of the second ICD, stating that the value of the pledged shares had further decreased. On August 14, 2001, Morgan Securities invoked the arbitration clause in the ICD agreement and appointed a Sole Arbitrator, claiming the outstanding amount. During the arbitration, Morgan Securities sold 15,00,000 pledged shares for ₹24,67,631 to Doogar and Associates Ltd., later renamed Morgan Ventures Ltd., where accused Nos. 2 to 4 were also directors.

Ganesh Benzoplast filed a criminal complaint on February 11, 2011, alleging fraud, cheating, and criminal breach of trust against Morgan Securities and its directors. The Magistrate issued summons for offences under Sections 403, 406, 420, and 120-B of the Indian Penal Code, 1860 (IPC). This order was challenged, and the matter was remanded to the trial court for re-recording verification. The trial court then issued process under Sections 406, 420 read with Section 34 of the IPC and Section 15-HA of the Security Exchange Board of India Act, 1992 (SEBI Act). The High Court upheld the order of the trial court.

Timeline:

Course of Proceedings

The Metropolitan Magistrate, Railway Mobile Court, Andheri, Mumbai, initially issued summons to the accused. This order was challenged in the Court of Session for Greater Bombay, which remanded the matter back to the trial court. After re-recording verification, the trial court issued process under Sections 406, 420 read with Section 34 of the IPC, and Section 15-HA of the SEBI Act. The Court of Sessions, Dindoshi, Mumbai, partly allowed the revision application, quashing the process against accused No.1 but confirming it against accused Nos. 2 to 4 under Section 406 read with Section 34 of the IPC. The High Court allowed the writ petitions filed by the complainant and dismissed those filed by the accused, confirming the issuance of process against them under Sections 406 and 420 read with Section 34 of the IPC. The charges under Section 15-HA of the SEBI Act were dropped.

Legal Framework

The case revolves around the interpretation of the Inter-Corporate Deposit Agreement (ICDA) and the Letter of Pledge (LoP). The ICDA specified that the loan was granted based on the securities provided, and the borrower would mark a lien in favor of the lender until all dues were cleared. Clause 9 of the ICDA allowed the lender to enforce its rights if any interest payment was missed or if there was a shortfall in the pledged security. The LoP allowed the lender to invoke the pledge at any time and sell the shares to recover dues.

Relevant provisions include:

• Section 406 of the Indian Penal Code, 1860: “Punishment for criminal breach of trust.—Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.”
• Section 420 of the Indian Penal Code, 1860: “Cheating and dishonestly inducing delivery of property.—Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.”
• Section 34 of the Indian Penal Code, 1860: “Acts done by several persons in furtherance of common intention.—When a criminal act is done by several persons in furtherance of the common intention of all, each of such persons is liable for that act in the same manner as if it were done by him alone.”

Arguments

Accused’s Arguments:

• The complaint does not disclose any offense.
• The LoP allowed the accused to invoke the pledge and sell the shares.
• The accused were authorized to sell the shares to themselves as per the LoP.
• The dispute is civil in nature, and the criminal proceedings are an abuse of process.
• Arbitration proceedings were conducted, and an arbitral award was passed.

Complainant’s Arguments:

• The complainant had asked the accused to sell the shares in June 2000 when the market price was higher.
• The accused sold the shares to a company where they were also directors at a lower price.
• This shows a dishonest intention.
• The complainant only came to know about the illegal act in 2009.
• The trial court, Revisional Court, and High Court have concurrently held that a case is made out under Section 406 of the IPC.

Innovativeness of the argument: The complainant argued that the sale of shares to a related company at a lower price indicated a dishonest intention, which was a novel argument to convert a civil dispute into a criminal one.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the criminal proceedings initiated against the accused for offences under Sections 406 and 420 of the IPC were justified, given the terms of the ICDA and LoP, and the fact that the accused had sold the shares as per the terms of the agreement.

Treatment of the Issue by the Court

Authorities

The court did not cite any specific case laws or books in its judgment. The judgment primarily relies on the interpretation of the terms of the ICDA and the LoP. The court also considered the findings of the arbitrator in the arbitration proceedings between the parties.

Judgment

How each authority was viewed by the Court?

• The terms of the Inter-Corporate Deposit Agreement (ICDA) and Letter of Pledge (LoP) were interpreted by the court as authorizing the lender to sell the shares in case of default, including to themselves or their group companies.
• The Arbitral Award dated 9th December 2005 was cited to show that the arbitrator had already considered the allegations of price manipulation and rejected them.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the contractual terms agreed upon by the parties. The court emphasized that the ICDA and LoP explicitly authorized the lender to sell the pledged shares, even to themselves or their group companies. The court also considered the findings of the arbitrator, who had already examined and rejected the allegations of price manipulation. The court noted the delay in lodging the complaint, which further weakened the case of the complainant. The court was of the view that the complainant was trying to convert a civil dispute into a criminal one, which was an abuse of process.

Ratio: The ratio of fact to law is 30:70. The court primarily focused on the legal interpretation of the contractual terms and the legal implications of converting a civil dispute into a criminal one. The factual aspects of the case, such as the timing of the sale and the price of the shares, were secondary to the legal analysis.

The Court’s reasoning was that the ICDA and LoP specifically authorized the accused to sell the shares, even to themselves or related companies, in case of default. The Court observed that the arbitrator had already examined the allegations of price manipulation and rejected them. The Court also noted the significant delay in filing the complaint, which further weakened the complainant’s case. The Court concluded that the complainant was attempting to convert a contractual dispute into a criminal case, which was an abuse of process. The Court’s decision was based on a careful analysis of the contractual terms, the arbitrator’s findings, and the delay in lodging the complaint.

The Supreme Court considered alternative interpretations, such as the complainant’s argument that the sale to a related company at a low price indicated a dishonest intention. However, the court rejected this interpretation, emphasizing that the terms of the agreement allowed for such a sale. The court also considered the complainant’s argument that they only came to know about the fraud in 2009, but this was rejected as it was not supported by the facts and averments in the complaint.

The court’s decision was clear: the criminal proceedings were an abuse of process. The court stated, “We find that the complaint, taken at its face value, does not disclose that any of the ingredients of the offence complained of have been made out.” The court also noted, “A perusal of the terms of the ICDA as well as the LoP would clearly reveal that, in the event of any of the events occurring as provided in Clause 9 of the ICDA, accused No. 1 Company was entitled to sell the shares either to itself, its group companies or to any outsider.” The court further observed, “However, it would clearly reveal that the complainant/respondent No.1 has attempted to turn a purely contractual dispute between the parties into a criminal case.” The court quashed the criminal proceedings, emphasizing that the dispute was contractual and civil in nature.

There was no majority or minority opinion in this case, as both judges concurred in the decision.

The court’s decision has potential implications for future cases involving similar disputes. It clarifies that contractual disputes, where parties have agreed to specific terms, cannot be easily converted into criminal cases. The court’s emphasis on the terms of the agreement and the findings of the arbitrator highlights the importance of adhering to contractual obligations and resolving disputes through established mechanisms like arbitration.

The judgment does not introduce any new doctrines or legal principles. It reinforces the principle that criminal proceedings should not be used to resolve contractual disputes unless there is clear evidence of criminal intent beyond a mere breach of contract.

Key Takeaways

• Contractual disputes cannot be easily converted into criminal cases.
• Agreements like ICDAs and LoPs should be carefully drafted, and their terms must be followed.
• Arbitration is an effective mechanism for resolving commercial disputes.
• Significant delays in lodging complaints can weaken a party’s case.
• Criminal proceedings should not be used as a tool for recovering dues or settling civil disputes.

Directions

The Supreme Court did not issue any specific directions in this case, except to quash the impugned judgment of the High Court and the order of the trial court and dismiss the complaint.

Specific Amendments Analysis

There is no discussion of any specific amendments in this judgment.

Development of Law

The ratio decidendi of this case is that a purely contractual dispute cannot be converted into a criminal case unless there is clear evidence of criminal intent beyond a mere breach of contract. This judgment reinforces the principle that criminal proceedings should not be used to settle civil disputes. There is no change in the previous position of law, but this judgment clarifies the application of existing principles in the context of share pledge agreements.

Conclusion

The Supreme Court’s decision in Prakash Aggarwal vs. Ganesh Benzoplast Limited quashed criminal proceedings against the accused, holding that the dispute was purely contractual and civil in nature. The court emphasized that the sale of pledged shares was conducted as per the terms of the ICDA and LoP, and the complaint did not disclose any criminal offense. This judgment reinforces the importance of adhering to contractual terms and resolving disputes through appropriate mechanisms like arbitration. It also cautions against using criminal proceedings to settle civil disputes.