IN THE HIGH COURT OF JUDICATURE OF ANDHRAPRADESH AT HYDERABAD HONOURABLE SRI JUSTICE SAMUDRALA GOVINDARAJULU CRIMINAL PETITION Nos.5292 & 8902 of 2009 DATE:26.04.2011 CRL.P.No.5292 of 2009 Between: K.S.Rao …… Petitioner And M/s.Rajvir Industries Limited and another …..Respondents CRL.P.No.8902 of 2009 Between: M/s.Suryalakshmi Cotton Mills Limited and others …… Petitioners And M/s.Rajvir Industries Limited and another …..Respondents HONOURABLE SRI JUSTICE SAMUDRALA GOVINDARAJULU CRIMINAL PETITION Nos.5292 & 8902 of 2009 COMMON ORDER : These two criminal petitions are filed by A-1 to A-6 and A-7 respectively in C.C. No.329 of 2009 on the file of II Additional Chief Metropolitan Magistrate, Hyderabad, relating to offences punishable under Sections 109, 406, 409, 418, 420, 423, 477- A/34 I.P.C, seeking quashing of proceedings therein in exercise of inherent power of this Court under Section 482 Cr.P.C. A-1 is a public limited company by name M/s.Suryalakshmi Cotton Mills Limited (in short, SCML). A-2 is chairman and Managing Director, A-3 is Managing Director, A-4 is Director, A-5 is Company Secretary and A-6 is Vice President (Finance) of SCML. A-7 is a Chartered Accountant and Partner of Brahmayya & Co., Chartered Accountants and is auditor of SCML. The complainant is another public limited company by name M/s.Rajvir Industries Limited (in short, RIL) represented by its Executive Director, by name Rithesh Kumar Agarwal, S/o.U.K.Agarwal. There is no dispute that U.K.Agarwal is son of A-2’s brother. A-3 is son of A-2. 2) R.I.L is no other than resulting company after demerger of SCML which demerger took place in or about the year 2004. There is no dispute that originally U.K.Agarwal, A-2 and A-3 were in the Board of Directors of SCML prior to its demerger and that in pursuance of scheme of arrangement, there was demerger of SCML and that the said scheme was approved by the Company Law Court i.e., this Court in C.P.Nos. 8 and 9 of 2004 filed by A-1 represented by A-2 and U.K.Agarwal representing the complainant respectively, as per common order dated 22.03.2005. Under the scheme, as per swap ratio report given by M/s.M.P.Chitale & Co, Chartered Accountants, Mumbai, original share holders of SCML were allotted 2:3 equity shares in SCML after demerger and 1:3 equity shares in the resulting company RIL. There is also no dispute that subsequent to approval of the scheme by this Court, U.K.Agarwal as kartha of his H.U.F sold away entire holding of his family’s shares in SCML to A-2 and A-3 and resigned from directorship of SCML on 31.03.2005. In turn, A-2 and A-3 also sold away their shares in RIL to U.K.Agarwal and resigned from Board of Directors of RIL in the same year 2005. It is contended by the petitioner’s senior counsel that the scheme of arrangement and the events subsequent thereto were arrived at by both the families of U.K.Agarwal and L.N.Agarwal (A-2) in order to have exclusive management of the respective families in R.I.L and SCML. It is contended by the counsel for the 1st respondent/complainant that since SCML and RIL are public limited companies and not private limited companies, the question of exclusive management by one family of a public limited company will not arise at all. This academic controversy is totally irrelevant for the purpose of decision in these criminal petitions. 3) Prior to demerger of SCML, the company was involved in manufacturing of yarn having its spinning division at Mahabubnagar, another spinning mill at Amangal, dyeing plant at Edira and Denim unit at Ramtek of Maharashtra. Under the scheme of arrangement arrived at by the shareholders in pursuance of memorandum of understanding between U.K.Agarwal and L.N.Agarwal (A-2), the spinning unti at Mahabubnagar and dyeing unit at Edira were allotted to the resulting company RIL after demerger of SCML and the spinning unit at Amangal and Denim unit at Ramtek remained with SCML after demerger. As pointed out earlier, the said scheme was approved by this Court under Sections 391 to 394 of the Companies Act, 1956 as per common order dated 22.03.2005 in Company Petition Nos.8 and 9 of 2004 filed by the respective companies. 4) Subject matter of C.C. No.329 of 2009 in the lower Court is loan of Rs.10.00 crores advanced by Industrial Development Bank of India (in short, IDBI) to SCML before demerger. IDBI vide letter dated 22.12.1998 sanctioned long term rupee loan of Rs.10.00 Crores to SCML. The said loan was sanctioned by IDBI and was also availed by SCML against security of 17.50% redeemable non-convertible debentures which are secured by first legal mortgage on the fixed assets of SCML’s denim unit at Ramtek and guaranteed by three directors of the Company. According to the 1st respondent/complainant, the said loan of Rs.10.00 Crores was utilised for the denim unit at Ramtek and the said fact is also evident from the accounts and balance sheets of SCML from the year 1998-99 onwards. There is no dispute that under the scheme of arrangement approved by this Court under Sections 391 to 394 of the Companies Act, the above loan of Rs.10.00 Crores was allotted to RIL. The 1st respondent’s counsel stated that the 1st respondent is honouring the scheme approved by this Court by making repayment of the said loan to IDBI by way of instalments regularly till now. 5) According to the 1st respondent/complainant, allotment of the loan of Rs.10.00 Crores obtained from IDBI by SCML to RIL under the scheme is nothing but criminal fraud committed by all the accused in the accounts and accounting procedure, and as a result of the fraud, all the accused caused wrongful loss to the complainant to the extent of Rs.10.00 Crores by fraudulently transferring the liability to the extent of Rs.19.53 Crores to the complainant. It appears that by the date of the scheme, the balance payable to IDBI under the said loan was Rs.19.53 Crores. It is contended by the 1st respondent’s counsel that SCML having retained denim unit at Ramtek after demerger, had fraudulently transferred IDBI loan to the extent of Rs.19.53 Crores to RIL even though the said liability is in respect of Denim Unit at Ramtek retained by SCML. 6) This argument of the 1st respondent/complainant is based on a misnomer that IDBI loan was obtained only for the purpose of Denim Unit at Ramtek. In para 19 at page 13 it was specifically stated by the complainant as follows: “The long term rupee term loan which was taken by the Respondent Company originally from IDBI in the year 1998-99 was for the purpose of whole of the company but the same was used for ‘Denim Division of Ramtek’ which is evident from the declaration in the balance sheet of the Respondent Company in the year 1998-99 but in the subsequent years it was again declared in the balance sheets that the long term rupee term loan was obtained for the company and finally transferring the loan of Rs.10 Crores upon the Applicant Company is nothing but a clear fraud played by the Respondent Company which is in contravention with the provisions of Companies Act, 1956 and Income Tax Act, 1961.”(Emphasis is mine) 7) Even as per allegations in the complaint filed by the 1st respondent complainant in the lower Court and on facts, there is no dispute of the fact that long term rupee loan of Rs.10.00 Crores was taken by SCML for the purpose of whole of the company and it is not specified either by IDBI in the sanction letter or by SCML in any undertaking that the loan was granted only in respect of Denim Unit at Ramtek and that the loan will be exclusively utilised by SCML for its Denim Unit at Ramtek. Even though the loan was obtained by SCML as a whole in the year 1998, exigencies during that period might have made the company to utilise the said loan for the purpose of Denim Unit at Ramtek. The said utilisation cannot convert a general loan obtained by the Company into a special loan obtained for Denim Unit of SCML. Even though security for the said loan of Rs.10.00 Crores given to IDBI was 17.50% redeemable non- convertible debentures secured by first legal mortgage on the fixed assets of the company’s Denim Unit at Ramtek and guaranteed by three directors of the company, the said fact will not make the loan as exclusive loan of Denim Unit at Ramtek of SCML and not a general loan obtained by SCML. In case the security is insufficient for realisation of the loan by IDBI, then it is not as if IDBI is not entitled to proceed against other assets of SCML in other units at Mahabubnagar or Amangal or Edira as unsecured creditor. Therefore, the loan of Rs.10.00 Crores advanced by IDBI was a general liability outstanding on SCML before its demerger. 8) As one of the directors of SCML before demerger, U.K.Agarwal who is a party to the memorandum of understanding in pursuance of which scheme of arrangement of SCML for demerger was arrived at, was aware of all the facts and figures relating to SCML before demerger including the accounts and balance sheets of SCML. U.K.Agarwal representing his H.U.F as Kartha as well as RIL which is the complainant herein are eo nominee parties to company petition Nos.8 and 9 of 2005 before this Court in which by common order dated 22.03.2005 the scheme of arrangement was approved, which scheme includes allotment of the above loan of Rs.10.00 Crores due to IDBI to the resulting company RIL. In case there is any illegality in such allotment of loan of RIL, then remedy of the complainant/1st respondent is to approach the Company Law Court with an appropriate application to remedy the same. This Court was informed that the complainant/1st respondent had in fact approached the Company Law Court with an application to remedy the alleged illegality and that it is pending. At any rate, there is no fraud or deception in the scheme in order to launch criminal proceedings against any of the petitioners/accused herein. It is not the 1st respondent’s case that there was any suppression of truth or suggestion of falsehood to either RIL or to U.K.Agarwal in relation to IDBI loan of Rs.10.00 Crores before entering into and acceptance of the scheme of arrangement which was approved by this Court. Entire scheme is put on paper, scrutinised by all the parties to it, certified by the respective Chartered Accountants of both the companies and approved by the Board of Directors of both the companies before presentation of the scheme to this Court along with company petition Nos.8 and 9 of 2004 for approval of this Court in accordance with Sections 391 to 394 of the Companies Act. Therefore, it cannot be said that there was any element of fraud or deception or manipulation of accounts or registers or criminal misappropriation or breach of trust including abetment thereof in this case. It is evident that due to subsequent differences between the two families, the 1st respondent/complainant is resorting to series of litigations including criminal cases against the accused/petitioners. Taking the allegations in the complaint on their face value, I do not find any ingredients for the offences for which the case was taken cognizance by the lower Court against the accused/petitioners herein. 9) Simply because there is opportunity for the accused to approach the lower Court for discharge under Section 245 Cr.P.C, this Court cannot refrain itself from coming to the rescue of the petitioners/accused from facing the process in the lower Court unnecessarily and rigmarole of trial in the lower Court, even in the absence of prima facie existence of the ingredients for the offences mentioned in the complaint. At this stage, I deem it relevant to reiterate the following observations of the Supreme Court in Pepsi Foods Ltd., V. Special Judicial Magistrate[1] “27. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and would that be sufficient for the complainant to succeed in bringing charge home to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinise the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused. 28. No doubt the Magistrate can discharge the accused at any stage of the trial if he considers the charge to be groundless, but that does not mean that the accused cannot approach the High court under Section 482 of the Code or Article 227 of the Constitution to have the proceeding quashed against him when the complaint does not make out any case against him and still he must undergo the agony of a criminal trial.” 10) In the result, both the Criminal Petitions are allowed quashing proceedings in C.C. Nos.329 of 2009 on the file of II Additional Chief Metropolitan Magistrate, Hyderabad. _______________________________ SAMUDRALA GOVINDARAJULU, J April 26, 2011 ksh [1] AIR 1998 SC 128