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

Date of the Judgment: 28 April 2023

Citation: 2023 INSC 385

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

Can a purely contractual dispute, where shares pledged as security are sold, be transformed into a criminal case of fraud and breach of trust? The Supreme Court of India recently addressed this question in a case involving allegations of fraudulent share sales. The court examined whether the actions of the accused, who sold pledged shares, constituted a criminal offense or were merely a matter of contractual interpretation. The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice Vikram Nath, with Justice B.R. Gavai authoring the opinion.

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 Rs. 50,00,000. As security, Ganesh Benzoplast pledged 15,00,000 of its equity shares, valued at Rs. 2,40,00,000. Prakash Aggarwal, Meera Goyal, and Suresh Chand Goyal (accused Nos. 2 to 4), who were directors of Morgan Securities, were responsible for managing its day-to-day affairs. On 3rd May 2000, Morgan Securities asked Ganesh Benzoplast to pledge additional shares due to a market downturn, which reduced the value of the pledged shares to Rs. 1,24,50,000. Ganesh Benzoplast, unable to repay the ICD by the due date of 5th June 2000, authorized Morgan Securities to sell the pledged shares to recover the dues, with any excess amount to be remitted to them. On 25th August 2000, the first ICD was repaid. However, the interest on the second ICD was being recovered by accused No. 1 till 6th August 2001. On 2nd August 2001, Morgan Securities demanded repayment of the second ICD, citing a further decrease in the value of the pledged shares to Rs. 44,25,000. On 14th August 2001, Morgan Securities invoked the arbitration clause, claiming outstanding dues. During arbitration, 15,00,000 pledged shares were sold for Rs. 24,67,631 to Doogar and Associates Ltd., later renamed Morgan Ventures Ltd., where accused Nos. 2 to 4 were also directors. On 11th February 2011, Ganesh Benzoplast filed a criminal complaint against accused Nos. 1 to 4, alleging fraud, cheating, and criminal breach of trust.

Timeline

Course of Proceedings

The Metropolitan Magistrate, Railway Mobile Court, Andheri, Mumbai, initially issued summons to the accused on 22nd March 2017, under Sections 406, 420 of the Indian Penal Code, 1860 (IPC) and Section 15-HA of the Securities and Exchange Board of India Act, 1992 (SEBI Act). This order was challenged in a Criminal Revision Application before the Court of Session for Greater Bombay, which remanded the matter back to the trial court for re-recording of verification. Following the remand, the trial court again issued process under Sections 406, 420 of the IPC and Section 15-HA of the SEBI Act. A subsequent Criminal Revision Application before the Court of Sessions, Dindoshi, Mumbai, partly allowed the revision, quashing the process against accused No. 1 and also against accused Nos. 2 to 4 under Section 420 of the IPC and Section 15-HA of the SEBI Act, but confirmed the process under Section 406 of the IPC. Both the complainant and the accused challenged this order in criminal writ petitions before the High Court of Judicature at Bombay. The High Court allowed the complainant’s petitions and dismissed the accused’s petitions, upholding the trial court’s order and confirming the issuance of process against them under Sections 406 and 420 of IPC. The charges under Section 15-HA of the SEBI Act were dropped at the instance of the complainant/respondent No.1. This led to the present appeals before the Supreme Court.

Legal Framework

The case primarily revolves around Sections 406 and 420 of the Indian Penal Code, 1860.
✓ Section 406 of the IPC deals with “punishment for criminal breach of trust.” It states, “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 IPC addresses “cheating and dishonestly inducing delivery of property.” It states, “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.”
These sections are invoked when there is an allegation of dishonest misappropriation of property or cheating that leads to the delivery of property. The court also considered the terms of the Inter-Corporate Deposit Agreement (ICDA) and the Letter of Pledge (LoP) between the parties, which outlined the conditions for the pledge and sale of shares. The court noted that the ICD was granted on the basis of securities provided, and the lender had the right to enforce their rights under the ICDA and LoP in case of default, including the right to sell the pledged shares. The LoP also authorized the lender to sell the shares to themselves, their group companies, or any outsider and the borrower had agreed not to dispute the price at which the securities were sold.

Arguments

Arguments by the Appellants (Accused Nos. 2 to 4):

• The complaint does not disclose any offense. The Inter-Corporate Deposit Agreement (ICDA) and Letter of Pledge (LoP) allowed the accused to invoke the pledge and sell the shares in case of default.
• The LoP specifically authorized the accused to sell the shares, even to themselves.
• The dispute is purely civil in nature and is already the subject of arbitration proceedings. Continuing criminal proceedings is an abuse of process.

Arguments by the Respondent (Complainant):

• The complainant had instructed the accused to sell the shares in June 2000 when the market price was high, but the accused waited until the price fell and then sold the shares at a lower price to a company where accused Nos. 2 and 3 were directors. This showed dishonest intent.
• The shares were sold at a meagre price, indicating a dishonest intention.
• The complainant only discovered the illegal acts in 2009, so there was no delay in lodging the complaint.
• The trial court, Revisional Court, and High Court have all found a case is made out for an offense under Section 406 of the IPC.

The innovativeness of the argument by the complainant was that the complainant had instructed the accused to sell the shares in June 2000 when the market price was high, but the accused waited until the price fell and then sold the shares at a lower price to a company where accused Nos. 2 and 3 were directors. This showed dishonest intent.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the main issue that the Court dealt with was:

• Whether the complaint, taken at its face value, discloses that any of the ingredients of the offense complained of have been made out.

Treatment of the Issue by the Court

Authorities

The Supreme Court did not specifically cite any case laws or books in its judgment. However, the court considered the following legal provisions:

• Section 406 of the Indian Penal Code, 1860: This section deals with criminal breach of trust. The court examined whether the actions of the accused constituted a breach of trust.
• Section 420 of the Indian Penal Code, 1860: This section deals with cheating and dishonestly inducing delivery of property. The court considered whether the accused had cheated the complainant.
• Inter-Corporate Deposit Agreement (ICDA): The court analyzed the terms of the ICDA to determine the rights and obligations of the parties.
• Letter of Pledge (LoP): The court examined the terms of the LoP, which outlined the conditions for the pledge and sale of shares.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ Section 406 of the IPC: The Court held that the actions of the accused did not constitute a criminal breach of trust, as the sale of shares was authorized by the contract.
✓ Section 420 of the IPC: The Court found that there was no cheating involved, as the accused acted within the terms of the contract.
✓ Inter-Corporate Deposit Agreement (ICDA): The Court relied on the terms of the ICDA to conclude that the lender was authorized to sell the shares in case of default.
✓ Letter of Pledge (LoP): The Court used the LoP to confirm that the lender had the right to sell the shares, even to themselves, and that the borrower had agreed not to dispute the price.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the contractual agreements between the parties. The court emphasized that the Inter-Corporate Deposit Agreement (ICDA) and the Letter of Pledge (LoP) explicitly authorized the accused to sell the pledged shares in case of default. The court noted that the complainant had agreed not to dispute the price at which the shares were sold. The court also highlighted the inordinate delay in lodging the criminal complaint, noting that the complainant was aware of the sale of shares since 2001 but filed the complaint only in 2011. The court found that the dispute was purely contractual and civil, and that the criminal complaint was an abuse of process.

Fact:Law Ratio

The court’s reasoning was primarily based on the interpretation of the contractual agreements and the application of legal principles related to criminal breach of trust and cheating. The factual aspects of the case, such as the sale of shares at a particular price, were considered in light of the contractual terms.

Logical Reasoning

Judgment

The Supreme Court allowed the appeals, quashing the judgment of the High Court and the order of the trial court. The court held that the complaint, taken at its face value, did not disclose any criminal offense. The court emphasized that the accused had acted within the terms of the contractual agreements, which authorized the sale of the pledged shares. The court also noted the inordinate delay in filing the complaint. The court concluded that the criminal complaint was an abuse of process and that the dispute was purely contractual and civil in nature.

The court stated, “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 accused No.1 Company had also agreed not to dispute or claim any loss on account of the price at which such securities were sold.”

The court also observed, “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. In the totality of the circumstances, we find that the present complaint is nothing else but an abuse of process of law.”

The court clarified that its observations would not affect the proceedings related to the arbitral award under Section 34 of the Arbitration Act or any other proceedings that the appellants might initiate.

The court also stated, “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.”

Key Takeaways

• Contractual Terms are Paramount: The judgment underscores the importance of adhering to the terms of contractual agreements. Parties are bound by the terms they agree to, and courts will generally uphold these terms.
• Civil Disputes Should Not Be Criminalized: The court cautioned against turning purely contractual and civil disputes into criminal cases. Criminal proceedings should not be used to settle contractual disagreements.
• Delay in Filing Complaints: The judgment highlights the significance of timely action. Delays in filing complaints can weaken the case and raise questions about the complainant’s motives.
• Abuse of Process: The court emphasized that the criminal complaint was an abuse of process, indicating that legal proceedings should not be initiated without a proper basis.

Directions

The Supreme Court did not give any specific directions, but it clarified that its observations would not affect the proceedings related to the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, or any other proceedings that the appellants might initiate.

Development of Law

The ratio decidendi of this case is that a purely contractual dispute, where the terms of the contract explicitly authorize the actions of the parties, cannot be turned into a criminal case of fraud or breach of trust. This judgment reinforces the principle that criminal law should not be used to resolve contractual disagreements, especially when the parties have agreed to specific terms and conditions. There is no change in the previous position of law.

Conclusion

In conclusion, the Supreme Court allowed the appeals filed by Prakash Aggarwal and others, quashing the criminal proceedings initiated against them. The court held that the dispute was contractual and civil in nature, and the complaint did not disclose any criminal offense. The judgment emphasizes the importance of contractual terms and cautions against the misuse of criminal proceedings to settle civil disputes.