Case: Iridium India Telecom Ltd Vs. Motorola Incorporated &amp; Others

The original complainant Iridium India Telecom Ltd. (hereinafter referred to as the appellant) has preferred this appeal against the judgment and order dated 8th August, 2003, passed by a learned single judge of the Bombay High Court quashing the criminal complaint dated 3rd October, 2001 filed by the appellant, inter alia, against respondent no.1, namely, Motorola IncorporatedThe complaint pertained to allegations of cheating under Section 420 read with Section 120B of the Indian Penal Code. Although the complaint spread over thirty five pages elaborately sets out the factual scenario, we may notice the foundational factsMotorola Inc (respondent No.1), Iridium LLC and Iridium Inc. are a part of one group of corporations created through mergers and takeovers. Respondent No.1 was the founder promoter of a corporation known as Iridium LLC incorporated in the State of Delaware, U.S.A; Iridium LLC was incorporated on 19th July, 1996 as a wholly owned subsidiary of respondent No.1. Iridium LLC was the successor of another corporation known as Iridium Inc. which was incorporated on 14th July, 1991 also a wholly owned subsidiary of respondent no.1. On or about, 19th July, 1996 Iridium Inc was merged into Iridium LLCIridium System/Iridium Project (which expressions are used inter-changeably) was represented as being the worlds first commercial system designed to provide global digital hand held telephone data, facsimile, paging, geo-location services similar to todays cellular phone. It was further averred that Iridium System was conceived by respondent No.1 in the year 1987 and it was intended to be a wireless communication system through a constellation of 66 satellites in low orbit to provide digital service to mobile phones and other subscriber equipment globallyIt was emphasized that Iridium Inc. was an instrumentality of respondent No.1; the corporate veil from behind which respondent No.1 operated. Respondent no.1 conceived, orchestrated, directed and controlled Iridium and was at all material times Iridiums dominant shareholder, supplier, financier, controller of its board, as well as the developer of Iridiums business model and the creator of the Iridium system, which was respondent no.1s proprietary space based Satellite Communication system. Respondent no.1 also designed, developed, sold, maintained and operated the hardware and software of the Iridium System/Project. It was further alleged in the complaint that respondent no.1 initially held the entire equity in Iridium. Although the equity of respondent no.1 was subsequently diluted by sale to various investors and shareholders through a series of private/public offerings, respondent no.1 continued to hold, own and control a substantial part (about 19.6%) of the equity of Iridium. From the inception respondent no.1 exercised effective control over the Board of Directors of Iridium. It was further alleged that most of the persons on the board of Iridium were either former employees or current employees of respondent no.1 who were deputed or seconded to IridiumIt was further alleged that respondent no.1 was the primary contractor for Iridium system/project. As already stated above, this comprised of five segments. These five segments were supplied, sold, maintained and operated by three contracts viz. (i) the space system contract; (ii) the operation and maintenance contract and (iii) the terrestrial Network Development Contract. Each of these contracts was awarded by Iridium Inc. to respondent no.1. The said contracts were intentionally structured to ensure that although Iridium paid all the development costs, respondent no.1 would still own the most valuable assets of the Iridium system. It was also alleged that respondent no.1 provided itself with excessive profits while saddling Iridium with exorbitant costs. Substantially, all the initial capital raised by Iridium (form persons which included Iridium India Telecom Ltd) was used to make payments to respondent no.1. In all a sum of Rs. 19500 crores (6.5 billion U.S $) has been paid till date by Iridium to respondent no.1 for the Iridium systemIt was further mentioned in the Complaint that in August 1992, a PPM was floated through merchant bankers, Goldman Sachs (who acted as placement agents) with the intention of attracting investments from large and successful companies world wide. Copies of PPM were distributed to and received by several prominent Indian companies, both in the public and private sector. Prominent amongst these were:(a) Infrastructure Leasing and Financial Services Ltd. (IL&FS)(b) Industrial Development Bank of India (IDBI)(c) Industrial Credit and Investments Corporation of India (ICICI)(d) State Bank of India (SBI)(e) Export Import Bank of India (EXIMP Bank)(f) Housing Development Finance Corporation Ltd. (HDFC)(g) Unit Trust of India (UTI)(h) General Insurance Corporation of India (GIC)(i) Life Insurance Corporation of India (LIC)The object of the said PPM was to obtain funds/ investments to finance the Iridium project. The PPM set out in detail the salient features of the Iridium project, its technical suitability, commercial feasibility, risk factors. Thus it was claimed that the said document was in the nature of a prospectus. It contained a positive invitation to offer. The next equity offering was made under the Private Placement Memorandum in 1995 (1995 PPM) wherein the original representations and/or warranties and/or assurances were substantially watered down and for the first time references were made to the fact that the system may not successfully operateIt was also mentioned in the Complaint that certain personal representations were made by the representatives of respondent no.1 to further induce the persons to invest in Iridium. In the course of these presentations and meetings, promotional video cassettes which depicted the progress of the project, the successful attainment of various project milestones well within schedule and how the said project would actually function when fully operational, were displayed. The representations made by respondent No.1 are as under:(a) The Iridium System would use technology which was tried and tested and had been successfully applied in a number of operational systems including systems used by NASA and the U.S Department of Defence. In other words the technology that would be employed in the Iridium System, was not untested or experimental, but was a proven and tested technology with a past record of successful operation(b) The Iridium System would provide a subscriber link on a global basis, which would be accessible virtually anywhere on the earth surface, save and except cases where severe or unusual conditions prevented the reception of signals. In normal operating day-to day real life environment, the Iridium System would, therefore offer a high quality link. In particular Iridium phones would work in automobiles and buildings which were the most common place where the professional traveler who would represent the bulk of Iridium customers, would use the same. Global coverage and accessibility was therefore assured(c) Subscribers would be able to access the Iridium System through compact, hand held small sized phones which were comparable in size and weight to cellular phones(d) The Iridium System would provide a high quality signal and offer (i) voice (ii) data (iii) fax and (iv) geo-location services. The System would provide a strong signal with sufficient link margin (i.e. a margin/allowance) in excess of the minimum technical requirement for desired voice quality.)(e) The Iridium System would be eminently viable and the investors in the Iridium project would expect to receive handsome financial gains(f) The Iridium System was a creation of respondent No.1 who was the world leader in cellular technology. Backing of respondent No.1 ensured its successAccording to the appellant the aforesaid representations were made to individual institutions and entities handling public money so as to induce them to believe that Iridium was a company worth participating and investing in by purchasing shares and operating a gateway. The officers of respondent no.1 impressed upon the prospective investors that Iridium Project venture was bound to succeedRelying upon the aforesaid representations the appellant as well as the banks and institutions mentioned hereinabove, in good faith, collectively invested a sum of US $70 million for purchasing equity of Iridium Inc as well as spent a sum of about Rs.150 crores in setting up a gateway at Deghi in Pune. The complaint then proceeds to state that the representations made by respondent no.1 proved to be false, dishonest, fraudulent and deceitful. It was discovered that Iridium System was a complete failure and all the material representations made, as aforesaid, were totally false, dishonest, fraudulent and deceitful, to the knowledge of respondent and in particular respondent no.1It is specifically pleaded that the System proved to be a complete non starter and technological failure as is evident from the followings:(1) The phones did not work inside buildings or cars and even under trees. In real world operating environments, therefore, they were useless(2) The Iridium phones were extremely bulky(3) The quality of the Iridium signals, even in open areas with no obstruction, was extremely poor with frequent disconnections(4) The promised data and fax features were not provided(5) The system was inferior to competing cellular systems(6) The system could operate with a single gatewayIt was also alleged that respondent no.1 had full knowledge about the un-viability of the Iridium system. This can be best gauged from the fact that the board of directors of respondent no.1 had in the early 1990s rejected a proposal that respondent no.1 itself fund the billions of dollars needed to develop the Iridium system. Obviously, therefore, respondent no.1 had no qualms about inducing others to invest their moneyIt was further averred in the complaint that the entire exercise of the respondent No.1 besides generating money for itself, was to experiment with others money and at others risk (including the appellant). The Iridium System and Iridium was therefore used as a research and development tool in order to facilitate and assist the respondent No.1 to develop its expertise in building satellite systems so that the said expertise could be marketed by it to others. It was further alleged that market researchers who had been commissioned by respondent no.1 had reported that Iridiums target market, the professional business traveler would have little interest in using the system. The research group characterized the product as suitable only for oil rigs or the desert. It had been pointed out that Iridium as then conceived may not address the needs of many US based executives who traveled globally and/or have offices in divergent or even in remote area. It was pointed out that the system limitations of Iridium were too severe to sustain interestThe appellant company was further induced to part with a sum of Rs. 126 crores for the gateway. The necessity for installation of a gateway was a complete fraud. The respondent no.1 knew that no gateway was necessary. The entire need for a gateway was dishonestly created to get a license to operate the system in it. The Collusy Group is now operating the System on a limited scale through one single gateway, which further establishes the fact that there was no need for more than one gatewayThe appellants subsequently learnt that within nine months of the huge investment made in Iridium, it applied for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Despite best efforts, Iridium could not be revived and ultimately the much touted Iridium System, for which US $ 6.5 billion had been paid to respondent No.1, was sold for a paltry sum of US $ 25 million. This represented 0.4% of the amount which was paid for by the appellant and other investors. Consequently, the investment of the appellants and its constituent shareholders of approximately Rs.500 crores was wiped out and/or completely lostThe appellants, therefore, addressed a notice dated 12th April, 2001, respondent No.1 calling upon them to make payment of a sum of US $ 250 million, being the loss suffered by the appellant as also seeking punitive damages. In the aforesaid notice, it was clearly mentioned that in the event respondent No.1 failing to make the payment, criminal prosecution would be instituted. The respondent No.1 by its reply dated 2nd June, 2001 repudiated his liability and instead made a claim of US $ 6,977,989 upon the appellant. Left with no other alternative, the appellants filed a criminal complaint alleging that respondent no.1 has committed an offence of cheating as defined under Section 415 of the Indian Penal Code. On the basis of the aforesaid allegations, the appellants have filed a complaint before the Judicial Magistrate, Ist Class, Khadki Court, Pune charging that respondent No.1 are guilty of the offence of criminal conspiracy for cheating the appellant and for the offence of cheating committed pursuant to the conspiracyThe entire material was placed before the Judicial Magistrate. Upon consideration of the complaint and upon hearing the counsel for the appellant, by an order dated 6th November, 2001 the Judicial Magistrate Ist Class, Khadki Court, Pune issued process against the respondent No.1 to 7 for offences under section 420 read with Section 120 IPC. The order reads as under :-Read Complaint and verification. Perused documents. Heard the advocate Nimbalkar for the complainant. It reveals that complainant is a company of which the shares are held by public financial institutions, nationalized banks and public insurance companies i.e. IDDI, ICICI, SBI, UTI, GIC, LIC etc. The investments made by complainant company was raised out of public savings and funds of above noted public institutions. Therefore, it reveals that this case involves issues regarding public money. It is settled principle that at the stage of issuance of process prima facie case is to be considered. After giving anxious though to the averments in the complaint and the documents produced on record, it reveals that prima facie case is made out to issue process. Hence, issue process against Accused No.1 to 7 for the offence under Section 420 r/w 120B of IPCAggrieved by the aforesaid order, the respondents filed a petition under Article 227 of the Constitution of India and under Section 482 Cr.P.C. seeking quashing of the order issuing process, dated 6th November, 2001, passed by the Judicial Magistrate Ist Class, Khadki Court, Pune. The grounds as culled out from the petition can be summed up as under:-(i) The complaint lacked the basic and essential ingredients of the offence of cheating and conspiracy(ii) At best the complaint had set out a civil dispute, subject to mandatory arbitration which the appellant herein (Iridium Telecom Pvt. Ltd.) was seeking to settle by adopting a cheaper coercive method(iii) The complaint suppressed material facts which would have nullified the claim of the appellant based on the alleged misrepresentations(iv) The Complaint does not even prima facie show that any of the representations made by the respondent No.1 herein (Motorola Inc/ petitioner before the High Court) were false nor is there any material to even prima facie establish any dishonest intention ab intio on their part while making the open offer investment in Iridium Inc(v) The Court of JMFC, Pune did not have any territorial jurisdiction to entertain the complaint(vi) The close association of respondent No.1 with the Iridium project was fully disclosed to all the potential investors in the 1992 PPM prior to their investment. The 1992 PPM also made it clear that each prospective investor should consult its own counsel and advisers and undertake such investigation as it deemed appropriate before investing in the shares of Iridium Inc(vii) The risk factors were very prominently highlighted in the 1992 PPM. The 1992 PPM made it clear that there were many risks in the investment. The entire project was unique being the first of its kind. The representations were made to very select strategic investors, who were experts in their own fields. The appellant had the backing of some of the prominent financial institutions of the country with the best of expertise in assessing the arrears of risk capital as well as with admitted technical advice, support and expertise of Videsh Sanchar Nigam Limited (VSNL)(viii) It was stated that the service of summons was illegal, invalid and improper. It was further averred that filing of the petition under Section 482 should not be construed to be an admission of valid serviceThe High Court granted ad interim relief staying the proceeding of C.C. No.81/2001 pending on the file of the learned Magistrate, to the respondent No.1 after the petition under Article 227 and Section 482 Cr.P.C was filed. The appellant had then filed a Special Leave Petition (Crl.) No.2093/2003 wherein this Court observed as follows:The order under challenge is an interlocutory order, therefore we are not inclined to interfere with the same. However, in the facts and circumstances of the case, we think it appropriate that the petition pending before the High Court should be disposed of as early as possible. Therefore, we request the High Court to dispose of the pending petition of the respondent by the end of July, 2003 and while so deciding the High Court the High Court should also decide whether such decision of the High Court will bind those who have not approached the High Court challenging the summons issued by the Trial Court to themWith these observations this Special Leave Petition is disposed offThe High Court by order dated 8th August, 2003 allowed the petition and quashed the order issuing process passed by the JMFC, Pune. Aggrieved by the said judgment, the appellant have filed the present appeal before this Court.

Reasoning:
32. The contours within which the High Court would exercise its jurisdiction to quash the criminal proceeding has been dilated upon, and well defined by this Court in a catena of judgments. We may make a reference here only to a few representative cases. In the case of Smt. Nagawwa Vs. Veeranna Supra considering the limits within which the Magistrate is required to conduct an inquiry under Section 202 of the Cr.P.C., this Court observed that the scope of such inquiry is (Para 4) extremely limitedlimited only to the ascertainment of the truth or falsehood of the allegations made in the complaint(i) on the materials placed by the complainant before the Court; (ii) for the limited purpose of finding out whether a prima facie case for issue of process has been made out; and (iii) for deciding the question purely from the point of view of the complainant without at all adverting to any defence that the case may have. In fact it is well settled that in proceedings under Section 202, the accused has got absolutely no locus standi and is not entitled to be heard on the question whether the process should be issued against him or not33. Keeping in view the aforesaid principles, we may now examine as to whether the High Court has adopted the correct approach while exercising its inherent power under Section 482 Cr.P.C. The High Court notices in extenso the facts as narrated above. Thereafter the High Court notices the submissions made on behalf of the parties. It was observed by the High Court that a company/corporation will not have the mens rea for commission of the offence under Section 415 IPC. The High Court relied on the observations made by this Court in the case of Kalpanath Rai Vs. State ((1997) 8 SCC 732 ) and distinguished the judgment in the case of M.V. Javali Vs. Mahajan Borewell & Co. ((1997) 8 SCC 72 ). It is held that a company being a juridical person cannot have the intention to deceive, which is the necessary mens rea for the offence of cheating. According to the High court, although a company can be a victim of deception, it can not be the perpetrator of deception. It can only be a natural person who is capable of having mens rea to commit the offence. According to the High Court, the same reasoning would also apply in respect of the offence of conspiracy which involves a guilty mind to do an illegal thing34. The judgments relied upon by the complainant are distinguished by the High Court, as they pertain to special provisions contained in different statutes such as, Income Tax Act, Essential Commodities Act, Food Adulteration Act and TADA Act. It is noticed that in Kalpanath Rai Vs. State Supra this Court was concerned with the provisions of TADA Act. The High Court was further of the opinion that Indian Penal Code does not contain any provision similar to the aforesaid acts. Since the offence of cheating under Section 415 and the offence of conspiracy under Section 120B can only be committed by a natural person, the word whoever cannot include in its sweep, a juridical person like a company. The High Court notices the judgment of the Calcutta High Court in the case of A.K. Khosla Vs. T.S. Venkatesan (1992 Crl. L.J. 1448) wherein it was held that there are two tests in respect of prosecution of a corporate body i.e. first being the test of mens era and the other being the mandatory sentence of imprisonment. However, no opinion has been expressed there upon by the High Court. In view of the aforesaid conclusions, the High Court has held that the complaint would not be maintainable against the respondent35. We are of the considered opinion that there is much substance in the submission of Mr. Jethmalani that virtually in all jurisdictions across the world governed by the rule of law, the companies and corporate houses can no longer claim immunity from criminal prosecution on the ground that they are incapable of possessing the necessary mens rea for the commission of criminal offences. The legal position in England and the United States has now crystallized to leave no manner of doubt that a corporation would be liable for crimes of intent38. From the above it becomes evident that a corporation is virtually in the same position as any individual and may be convicted of common law as well as statutory offences including those requiring mens rea. The criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such circumstances, it would be necessary to ascertain that the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons. The position of law on this issue in Canada is almost the same. Mens rea is attributed to corporations on the principle of alter ego of the company40. These observations leave no manner of doubt that a company / corporation cannot escape liability for a criminal offence, merely because the punishment prescribed is that of imprisonment and fine. We are of the considered opinion that in view of the aforesaid Judgment of this Court, the conclusion reached by the High Court that the respondent could not have the necessary mens rea is clearly erroneous42. A bare perusal of the aforesaid section would show that it can be conveniently divided into two parts. The first part makes it necessary that the deception by the accused of the person deceived, must be fraudulent or dishonest. Such deception must induce the person deceived to: either (a) deliver property to any person; or (b) consent that any person shall retain any property. The second part also requires that the accused must by deception intentionally induce the person deceived either to do or omit to do anything which he would not do or omit, if he was not so deceived. Furthermore, such act or omission must cause or must be likely to cause damage or harm to that person in body, mind, reputation or property. Thus, it is evident that deception is a necessary ingredient for the offences of cheating under both parts of this section. The complainant, therefore, necessarily needs to prove that the inducement had been caused by the deception exercised by the accused. Such deception must necessarily produce the inducement to part with or deliver property, which the complainant would not have parted with or delivered, but for the inducement resulting from deception. The explanation to the section would clearly indicate that there must be no dishonest concealment of facts. In other words,e of relevant information would also be treated as aof facts leading to deceptionIt was, therefore, necessary for the High Court to examine the averments in the complaint in terms of the aforesaid section. The High Court upon detailed examination of the 1992 PPM, the Stock Purchase Agreements and the 1995 PPM concluded that even if the averments made in the complaint are accepted on their face value, it would only disclose a civil dispute between the parties43. Surprisingly, the High Court notices the representations that were made and contrasted the same with the actual realities and yet concluded that the averments made in the complaint even if taken at their face value would not lead to the conclusion that the respondent has committed the offence of cheating. In coming to the aforesaid conclusions, the High Court has given elaborate reasons. The High Court negated the submissions of the appellant that 1992 PPM is in the nature of a prospectus or a brochure, which requires that all technical information touching upon the commercial feasibility of the project had to be faithfully and fully disclosed. The submission is rejected with the observation that the 1992 PPM contained the following caution:An investment in Iridium involves certain risks, many of which relate to the factors and developments listed above, prospective investors should carefully consider the disclosures set forth elsewhere in this memorandum, including those under the caption `risk factors(1992 PPM Pg. 5)The High Court also accepted the submissions of the respondent that the 1992 PPM contained a separate chapter titled Risk Factors. This portion related to the most important risk factors which were as follows:New regulated Business Venture. The Company is a new business venture of global scope that will require substantial licensing and authorizations from numerous sovereign nations before its business can be conducted in the manner contemplated by its current business plan. Therefore in deciding whether to invest in Shares, prospective investors must evaluate among other things, the potential feasibility and future performance of the Company based on its business plan without benefit of any operating history, and prior to application for an receipt of such licensing and authorizations. No assurance can be given that any of the necessary licenses and authorizations will be obtained in a timely or at all. (1992 PPM Pg. 72)44. According to the High Court, the respondent No.1 did not keep the investors in dark about the Iridium System and gave them all necessary information in respect of various aspects of the system. In coming to the aforesaid conclusion, the High Court observed that a bare perusal of the complaint shows that there is no reference to the Stock Purchase Agreements of 1993 and 1994. In fact, these two important documents contain acknowledgments of the investors about their capability of evaluating the merits and risks of the purchase of the shares and their relying upon their own advisors. The High Court, therefore, negated the submission that there has not been a complete and candid disclosure of the entire material which has resulted in the deception / inducement of the appellant to make huge investment in the Iridium. This conclusion reached by the High Court did not take notice of the explanation to Section 415. The aforesaid explanation gives a statutory recognition to the legal principles established through various judicial pronouncements that misleading statements which withhold the vital facts for intentionally inducing a person to do or to omit to do something would amount to deception. Further, in case it is found that misleading statement has wrongfully caused damage to the person deceived it would amount to cheating. It would at this stage be appropriate to notice the observations made by the House of Lords in the case of The Director &c. of the Central Railway Company of Venezuela Vs. Joseph Kisch supra which would be of some relevance to the issue under consideration. In this case, the House of Lords examined the duty of those who issued a prospectus inviting investments from the general public and held that they were required to make a true and full disclosure of all the relevant factsThe aforesaid observations leave no manner of doubt that the appellants were entitled to an opportunity to prove the averments made in the complaint. They were entitled to establish that they have been deliberately induced into making huge investments on the basis of representations made by respondent No.1 and its representatives, which representations subsequently turned out to be completely false and fraudulent. The appellants were entitled to an opportunity to establish that respondent No.1 and its representatives were aware of the falsity of the representations at the time when they were made. The appellants have given elaborate details of the positive assertions made by respondent No.1 which were allegedly false to its knowledge. It is also claimed by the appellants that the respondent No.1 and its representatives willfully concealed facts which were material and ought to have been disclosed, but were intentionally withheld so as to deceive the appellant into advancing and expending a sum of Rs.500 Crores. As noticed earlier, both the appellants and the respondents have much to say in support of their respective view points. Which of the views is ultimately to be accepted, could only be decided when the parties have had the opportunities to place the entire materials before the Court. This Court has repeatedly held that power to quash proceedings at the initial stage have to be exercised sparingly with circumspection and in the rarest of the rare cases. The power is to be exercised ex debito justitiae. Such power can be exercised where a criminal proceeding is manifestly attended with malafide and have been instituted maliciously with ulterior motive. This inherent power ought not to be exercised to stifle a legitimate prosecution. In the present case, the parties are yet to place on the record the entire material in support of their claims. The issues involved are of considerable importance to the parties in particular, and the world of trade and commerce in general45. In such circumstances, in our opinion, the High Court ought to have refrained from indulging in detailed analysis of very complicated commercial documents and reaching any definite conclusions. In our opinion, the High Court clearly exceeded its jurisdiction in quashing the criminal proceeding in the peculiar facts and circumstances of this case. The High Court noticed that while exercising jurisdiction under Section 482 Cr.P.C. the complaint in its entirety will have to be examined on the basis of the allegations made therein. But the High Court has no authority or jurisdiction to go into the matter or examine its correctness. The allegations in the complaint will have to be accepted on the face of it and the truth or falsity cannot be entered into by the Court at this stage. Having said so, the High Court proceeded to do exactly the opposite.