Iridium India Telecom Ltd vs Motorola Incorporated & Ors

3. Motorola 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 1 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 LLC.

6. It 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 3 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 system.

7. It 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:

8. 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 operate.

9. It 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 5 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:

10. According 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 succeed.

11. Relying 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, 7 dishonest, fraudulent and deceitful, to the knowledge of respondent and in particular respondent no.1.

15. The 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 gateway.

16. The 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 lost.

17. The 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 10 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 conspiracy.

18. The 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 :-

21. The 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.

24. Mr. Jethmalani further submitted that the judgment of the High Court is contrary to all known principles on the basis of which an order issuing process can be quashed. He invited our attention to the detailed pleadings in the complaint; the Stock Purchase Agreements, Gateway Equipment Purchase Agreement and From S-1 etc. According to Mr. Jethmalani, the documents were subjected to meticulous analysis by the High Court at the instance of the respondent. On a wholly erroneous interpretation of the aforesaid documents, the High Court concluded that the allegations made in the complaint even if they are taken on the face value, disclosed only civil liability. The High Court was unnecessarily influenced by the submission that the "Risk Factors" had been duly pointed out to the prospective investors including the appellants. These matters were to be examined by Court of competent jurisdiction at the appropriate time. The allegations could be proved or disproved on the basis of the evidence led by the parties. The High Court, according to Mr. Jethmalani, failed to appreciate that the 1992 PPM was in the nature of a deemed prospectus. Therefore whilst issuing the aforesaid PPM, the promoter was required to make a true and full disclosure of all the relevant facts. This duty is imposed on the promoter under Section 3 and 64 of the Companies Act, 1956. The statements made in the PPM as also 15 in the representations made to the high ranking officials of the prospective investors including the appellants, have been proved to be incorrect and misleading. According to Mr. Jethmalani, the legal position on this issue is quite clear and placed reliance on:- The Directors &c., of the Central Railway Company of Venezuela Vs. Joseph Kisch5, New Brunswick and Canada Railway Company Vs. Muggeridge6, Redgrave Vs. Hurd7, Aarons Reefs Limited Vs. Twiss8.

28. We may now note the submission of Mr. Ashok Desai. The learned senior counsel at the very out set, submitted that even the basic facts have not been placed before this Court. According to 12 [(1999) 8 SCC 686] 13 Supra 14 Supra 18 him there were three things which have to be noted. Firstly, no representation was made by Motorola as such. Secondly, Iridium Inc was a company controlled by strategic investors. Thirdly, representations were not of existing facts but future projections wherein every possible warning was given. According to the learned senior counsel, the most important aspect of the case are that:-

40. 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 erroneous.

46. We, therefore, allow the appeal and set aside the impugned judgment of the Bombay High Court. There shall be no order as to costs.

October 20, 2010.