Morgan Securities & Credits Pvt. Ltd. v. State of Delhi & Anr.

1. In the above-captioned eight petitions, quashing of FIR No.505/2005 registered at P.S. Defence Colony, Delhi for the offences of criminal breach of trust, criminal misappropriation, forgery, etc. and FIR No.511/2005 registered at P.S. Connaught Place, Delhi for the aforesaid offences, is sought by petitioners-Morgan Securities & Indo Rama Synthetics on the ground that the dispute raised in these two FIRs is essentially of civil nature and the ingredients of the offence alleged are lacking and that the proceeding arising out of these FIRs is the abuse of process of law.

2. In Crl. M.C.2059/2005, petitioner-Morgan Securities and Credits Pvt. Ltd. seeks quashing of FIR No.108/2005 registered in the State of Himachal Pradesh at the instance of M/s. Morepen Laboratories Ltd. for the aforesaid offences on identical grounds as taken in Crl.M.C.4603/2005. Under the orders of the Apex Court, aforesaid petition was transferred to this High Court for being heard alongwith Crl.M.C.4603/2005 etc. In Crl.M.Cs. 279/2011, 280/2011 and 281/2011, trial court's order of 14th January, 2011 is assailed on the ground that since the pledged shares have been sold in open market to bonafide purchasers, therefore, superdari of the pledged shares in question to the complainant/first informant is unwarranted as subject matter of these FIRs is already under active consideration in the civil proceedings 2013:DHC:4829 Crl.M.C.4603/2005 between the parties. Thus, quashing of order of 14th January, 2011 is sought in the above referred three petitions.

3. With the consent of learned counsel for the parties, above titled eight petitions were heard together as the quashing of the proceedings arising out of the three FIRs in question is sought on identical grounds and so, by this common judgment, these eight petitions are being disposed of.

4. The relevant factual background of these matters can be conveniently picked up from the status report filed by respondent-State in February, 2008 in Crl.M.C. 5004/2005, which is as under: - "The brief facts of the case FIR No.511 dt.07.09.05 under Section 406/409/465/468/471/120B of IPC PS Con. Place, New Delhi are that the complainant M/s. Petunia Financial Services P. Ltd. (PFSPL) reported that their company was the pledger towards Inter Corporate Deposit

(ICD) of Rs.[5] crores taken by M/s. Morepen Laboratories

(MLL) from petitioner M/s. Morgan Securities and Credits Pvt. Ltd. (MSCPL). The complainant company pledged 2,70,000 equity shares of M/s. Blue Coast Hotels & Resorts Ltd. (BCHRL) for securing the said ICD. The borrower M/s. MLL repaid the principal amount and have some dispute over payment of interest and negotiations were going on between the parties for reconciliation of the interest. During that period, they were shocked to learn that the lender M/s. MSCPL has disposed off the pledged shares by transferring them to their sister concerns/concerns of their relatives without their knowledge or consent. These transfers were done with malafide intention and in collusion with co-accused knowing that such transfers were fraudulently done on a price far below the actual price value of the shares in question. No credit was given to borrower for such transfers/sales. These transactions were sham and were made on the basis of false documents in conspiracy with relative/associate companies of the petitioner in order to cause wrongful gain to them and wrongful loss to the complainant. That on the basis of the complaint, above case was registered on 07.09.05 at PS Connaught Place and investigation was taken up by local police. That subsequently, the investigation of the case was transferred to Economic Offences Wing vide order No.53095-105/C&T (AC-III) dt. 21.10.05 by the PHQ. That the investigation revealed that M/s. MLL obtained an ICD of ` 5 crores and ` 2 crores from the lender M/s. MSCPL in accordance with agreement dt. 19.09.02 and 30.10.02, without security for a period of 120 days. The witnesses belonging to borrower and guarantor companies stated that due to unforeseeable circumstances, the MLL could not repay the ICDs. They were requested by Sh. Suresh Chand Goyal etc. of the MSCPL for pledging as security the 15 lac equity shares of M/s. Blue Cost Hotel & Resorts Ltd. (BCHRL) one of the group company of the borrower. The complainant stated that they were also assured that the said security is required for the purpose of corporate documentations and that the same would not be sold without prior intimation & consent. Therefore, they agreed to pledge the 15 lac shares as security through six associate companies namely Niketan Traders P. Ltd., Petunia Financial P. Ltd., Beckers Traders P. Ltd., Cross Traders P. Ltd., Ebony Traders P. Ltd. & Tendril Financial Services P. Ltd., holding these shares. Pledge agreements dt. 07.02.02 were also signed by pledgers & handed over to the MSCPL. Accordingly, schedule of repayment was extended. Mr. Sushil Suri, CMD M/s. MLL, the borrower company stood as guarantor. The complainant company Petunia pledged 2,17,000 equity shares of BCHRL out of the 15 lac shares. That the borrower MLL defaulted and did not make payments as per the schedule. Both the parties negotiated and a Memorandum of Settlement (MOS) was executed on 27.05.03 in which new schedule of payment was agreed upon. At that time, late Sh. Arun Suri, CMD, BCHRL also became personal guarantor and M/s. BCHRL stood as surety for the purpose of securing the due payment. On the basis of the MOS, the consent award was passed by the Hon'ble Arbitrator vide order dt. 28.06.03. That pursuant to the MOS dt. 27.05.03 and award dt. 28.06.03, the MLL made full and final payments towards ICD of ` 2 crores by 13.03.2004. The payment include an amount of ` 8,94,220/- realized from sale of 19,701 pledged shares of BCHRL. A letter was sent to MSCPL to this effect, which was duly received by it. However, the MLL could not make payment towards ICD of ` 5 crores. That the lender and the borrower resorted to litigation in the courts. Of the various litigations, in Jan. 2004, the petitioner M/s. MSCPL filed two Execution Petitions in the Hon'ble High Court praying for execution of the award. On 08.01.04 and 26.03.04, the Hon'ble Court issued attachment warrants for recovery of ` 6,24,44,250/against the borrower and the guarantors i.e. M/s. MLL and M/s. BCHRL. In pursuance of the said attachment warrants, few bank accounts of M/s. MLL and M/s. BCHRL were attached. That the CMD of BCHRL late Sh. Arun Suni, Sh. I S Deo, Vice President, BCHRL and Sh. PK Singh, Company Secretary, MLL stated that on 24.02.04, they approached Sh. Suresh Chand Goyal, CMD, MSCPL and held a meeting to sort out the dispute because issuing of attachment warrants were threat to their business. In the said meeting, Sh. SC Goyal told them that there is no need to rake up the dispute in the court. He stated that though 1 lac shares approx. have been sold in the open market but assured that remaining shares have been kept/parked in his associate companies under his control. He further assured that the same would be returned once the ICD is repaid. He also agreed to charge interest @ 17% p.a. instead of the 30% per annum as was done in the ICD of ` 2 crores. That on 17.03.04, the MSCPL also filed an urgent application in the Execution Petition No.13/04 praying for restraining the BCHRL from increasing or changing its status of equity shares of the company as it may cause decrease in value of the security held by them. This confirmed the statement of Sh. SC Goyal, CMD, MSCPL made on 24.02.04 to borrower/surety that about 1 lac shares have been sold and remaining are parked/transferred by him in his associate companies, which would be returned on repayment of the ICD. However, both the parties negotiated and settled the matter amicably. On 05.04.04, the BCHRL filed an undertaking not to increase or change the status of its equity shares, the MLL withdrew its application asking for details of sale of pledged shares and assured to make repayments of the ICD. In view of the same, the Hon'ble High Court withdrew the attachment warrants issued earlier and disposed off the matter vide order dt. 05.04.04. That accordingly, the borrower M/s. MLL paid the principal amount of ` 5 crores from Apr. 2004 to Apr. 2005 through pay orders drawn at their banks. They have also paid part interest component. The dispute remains on the rate of interest to be paid. After paying the complete principal amount the MLL asked the lender MSCPL to reconcile the rest payment of interest and also asked for return of their pledged shares vide letter dt. 29.06.05. The MSCPL through its letter dt. 02.07.05 asked the MLL to pay the remaining debt of Rs. 1,17,59,339/- but did not state about sale of shares. The dispute again arose between both the parties. Both the parties filed petitions in the High Court at Delhi. That thereafter, the witnesses stated that Sh. Arun Suri was informed by Sh. SC Goyal saying that the entities/companies with whom remaining shares were parked, are willing to return the same only at the then current market price. This proposition if accepted would have resulted into unreasonable and unjust loss to the borrower and gain to the lender and its associates who are Mr. Goyal and his relatives/friends because they have acquired these pledged shares at an abnormally beaten down price of ` 8/9 per share and the same were quoted at ` 100 per share approx. at that time. The value of these shares became ` 15 crores approx. at the then prevailing prices. That it has been alleged by the borrower, surety and pledgers against the lenders that they have not sold the pledged shares as claimed by them but have been transferred clandestinely into their associate companies or in the companies of their relatives at an abnormally beaten down price of ` 8/10 per share with a ill-motive to resell at higher prices to the borrower and to earn illegally in multiple manners. That the complainant, borrower and surety have alleged that during litigation before the courts, the lender neither informed them nor the courts at any point of time that they had invoked the pledge and had sold the pledged shares. Further the amount realised towards the sale proceeds of the shares was not adjusted towards repayment of the ICD of ` 5 crores. They purposely concealed the material informant throughout with malafide intention to misappropriate the shares entrusted as collateral security. That the borrower MLL and the surety BCHRL have stated that the prices of their 15 lac pledged shares of BCHRL were lowered down with manipulation by Sh. SC Goyal in connivance and conspiracy with his associates. This reflected from the working of the price mechanism in share market forces. The BCHRL owned Park Hyatt Resort and Spa, Goa which was commercially launched on 01.10.03. The hotel has the potentials to grow and earn income. The quarterly financial results for the quarter ending 31.12.03 & 31.03.04 reflected increased earning from the operations of the hotel. The assets of the company also increased. Accordingly, as per the market forces, the share prices were bound to increase in the stock exchange during this period. But, contrary to the fact, the share prices have come down heavily as shown by the lenders and their associates. Again during the lean period in the hotel industry, the prices are normally decreased slightly but in the instant transactions, these have been shown risen. After the sale of pledged shares completed, the prices continued to increase thereafter because the hotel is doing well. These facts established that the prices of the shares were manipulated by accused persons while transferring the pledged shares between 16.12.03 to 25.03.04. That the MSCPL through Sh. PK Gupta filed an application dated 23.08.05 in EP No.13/04 in the Hon'ble High court, Delhi attaching therewith a copy of the sale statement and ledger accounts showing details of sale of shares. The complainant, borrower and surety stated that prior to this date, they were never informed about sale of shares nor provided details of the sale of shares, amount realized from the sale and adjusted towards repayment of the ICD of ` 5 crores. They repaid complete principal amount of ` 5 crores w.e.f. Apr. 2004 without getting adjusted sale proceeds of the pledged shares from the principal amount because they were not informed about the sale.” On the investigation aspect, the status report is as follows: “That during investigations, it has been revealed that the pledged 15 lac shares (except 9) have been sold by MSCPL between 16.12.03 to 25.03.04. Majority of the shares have been sold through specific and limited number of brokers at the BSE. Majority of the shares 10,89,400 (73%) were sold through M/s. Anand Rathi Securities P. Ltd. of which 9,70,000 (65%) were purchased through this very broker on 24.02.04 and 06.03.04 by the Northern Projects Ltd. In which co-accused Parkash Aggarwal who is son in law of Sh. SC Goyal and Mrs. Meera Goyal is the Director, who is also Director in the seller company i.e. MSCPL, as well as in its holding company M/s. Goyal MG Gases P. Ltd. And other group company Morgan Venture Ltd. It has been further been revealed that Northern Projects Ltd have opened demat account with Anand Rathi Securities P. Ltd. for the purpose of these transactions only. The seller M/s. MSCPL and its group companies Morgan Venture Ltd. and Parveen Electronics Ltd. have also regular demat accounts with this broker.” The status report concludes as under:- “That thus, out of the 15 lac shares 13,89,400 approx (93%) shares have been bought by three companies namely Northern Projects Ltd., 65%, Parveen Electronics P. Ltd. 20% and Namedi Leasing & Finance Ltd. 8%. About 715 shares initially were purchased by Morgan Venture Ltd. which is direct under the control of seller MSCPL. Later on, this company acquired about 45,345 (3%) shares as on 30.06.04."

5. At the hearing, learned senior counsel for the parties assisted by learned counsel for the parties were heard and with their able assistance the material on record was perused. The written synopsis and the decisions in Renu Kumari v.Sanjay Kumar & Ors. 2008 [2] JCC 1032; Iqbal Singh Marwah & Anr. V. Meenakshi Marwah & Anr. 2005 II AD (Cr.) SC. 12; decision of this Court in CS (OS) No.2281/2006 rendered on 11th December, 2006; Kailash Chand Sharma, v. State & Ors. 2005 [2] JCC 602; J.R.D. Tata, Chairman, Tata Iron & Steel Company Ltd. And etc. V. Mrs. Payal Kumar and another 1987 Crl.L.J. 447; M/s. A.E.C. Enterprises Ltd. & Anr. V. Ms. Peacock Chemicals Pvt. Ltd. & Others 75 (1998) DLT 484; Acharya Arun Dev v. State & Anr. 2005 [2] JC 897; S.P. Sharma, v. National Capital Territory of Delhi & Ors. 1999 [1] JCC [Delhi] 59; Iqbal Singh Marwah & Anr. V. Meenakshi Marwah & Anr. 2005 II AD (Cr.) SC; K.G. Premshankar v. Inspector of Police and Another 2002 Crl. L.J. 4343; Subhakarn Luharuka & Anr. V. State (Govt. Of NCT of Delhi ) & Anr. 170 (2010) DLT 516, have been also perused.

6. On behalf of petitioners, it was contended that this is a classic case where the borrower after having received the monies is unable to repay the debts and resorts to criminal action to avoid it's liabilities under the contract which it had signed without any pressure or coercion. It was asserted that the admitted position between the parties is that the Borrower had taken an Inter Corporate Deposit of ` 5 crores returnable within 120 days and had defaulted in the repayment leading to additional securities being provided to the lender through the associate companies of the Borrowers in the form of pledge of demated shares by the complainants. Petitioners assert that the consent award was passed and a schedule of the payment was arrived at and the borrower also defaulted in the same and it was only after such default that the petitioner invoked the pledge and sold the shares. As per petitioners, their action was strictly in consonance with the covenants of the different ICD Agreements and the Letter of Pledge and the Consent Award passed by the learned Arbitrator and hence cannot be subject matter of a criminal action. It was next submitted that contents of different impugned FIRs only allege violation of different agreements which cannot ipso facto lead to criminal prosecution of Directors of the Company against whom no specific role is attributed in the FIR.

7. The basic stand of petitioners is that even if the FIRs in question and the documents relied upon by the complainant/first informant are taken on their face value, still no criminal offence is made out. Pertinently, the precise stand of learned senior counsel for the contesting respondents-complainant/first informant of FIRs in question is that selling of pledged shares does not give rise to criminal offences in question, but it is the selling of 3,10,000 pledged shares of M/s. Niketan Traders Pvt. Ltd. and 2,70,000 pledged shares of M/s. Petunia Financial Services P. Ltd. without mandatory Notice under Section 176 of the Contract Act, 1876 and that to subsidiary companies owned by petitioner-M/s. Morgan Securities and Credits Pvt. Ltd. at much lesser price than the market value and by not giving credit for it, makes petitioners liable to face the proceedings arising out of the FIRs in question.

8. Respondent-complainant also claims that aforesaid Inter Corporate Deposit of ` 5 crores was returned to petitioner- M/s. Morgan Securities and Credits Pvt. Ltd. during the period from April, 2004 upto April, 2005 and very nominal dispute regarding payment of interest is pending. On behalf of respondent-complainant, it was asserted that fraudulent transfer of shares by petitioners-accused clearly attracts the ingredients of offences of criminal breach of trust, misappropriation, forgery, etc.

9. On the contrary, it was asserted with much vehemence by learned counsel for petitioners that breach of contract is by respondentcomplainant which gives rise to a purely civil dispute and does not entail any criminality. During the course of hearing, attention of this Court was drawn by petitioners' counsel to Clause 4 (iii), Clause 7 (ii) and Clause 9

(vii) of Pledge Agreements in question and to the Award already given by the Arbitrator, to assert as under: - "a. That in event of default the Lender (petitioner) had unfettered rights to deal with the shares in any manner whatsoever including realizing itself. b. That the Award clearly provided that in event of default in payments the Lender could take unilateral steps and all the steps for sale of shares were taken by the petitioner in terms of the Award and the Letter of Pledge and hence no criminal liability can be foisted on the petitioner. c. That the complaint/F.I.R. clearly relates to interpretation and application of the covenants of the Letter of Pledge and the Award which clearly would have a Civil Flavour."

10. Infact, it is the case of respondents-complainant that they were misled into believing that the pledged shares were not sold and only in the year 2005, they came to know about the selling of the pledged shares. Thus, the stand of respondents-complainant is that they had no notice of the sale of pledged shares by petitioner-M/s. Morgan Securities and Credits Pvt. Ltd. To the contrary is the assertion of petitioners, who maintain that the pledged shares in question were sold in open market at stock exchange between December, 2003 and March, 2004 after giving due notice to respondents-complainant vide Notice of 9th December, 2003 by registered Post and at the hearing, attention of this Court was drawn to the copies of aforesaid Notice and the postal receipts.

11. Attention of this Court was also drawn to copies of letters sent to petitioner-M/s. Morgan Securities and Credits Pvt. Ltd. by respondentscomplainant on 7th February, 2004, 25th February, 2004, 4th March, 2004 and 14th June, 2004 to point out that respondent/complainant-M/s. Morepen Laboratories Ltd. was well aware of the sale of pledged shares as M/s. Morepen Laboratories Ltd. had failed to adhere to Memorandum of Settlement of 27th May, 2003. Thus, according to learned counsel for petitioners, no criminal offence is made out and the liability, if any, is of purely civil nature.

12. To repel the contention of learned counsel for respondentscomplainant of sale of pledged shares being a sham transaction, attention of this Court was drawn to the Securities Appellate Tribunal's judgment of 29th August, 2011 in Appeal No.55/2011 relating to Pledge Agreement, Consent Award, etc. to assert that the transaction in question has been found to be valid as the credit for the sale of pledged shares was given by petitioner-M/s. Morgan Securities and Credits Pvt. Ltd. to respondent- M/s. Morepen Laboratories Ltd. before the initiation of these criminal proceedings.