Criminal Application No.2198 of 1997

4th April, 2003

Petitioner Counsel: Shri. NIRANJAN MUNDARGI, A. P. GUPTE
Respondent Counsel: Shri. RANE, Shri. N. B. SOMAN, Shri. K. V. SASTE

Cases Cited:
Central Bureau of Investigation SPE SIU (X) New Delhi Vs. Duncans Agro Industries Ltd., Calcutta, AIR 1996 SC 2452 [Para 5,6,9]
Madhavrao Jiwaji Rao Scindia Vs. Sambhajirao Chandrojirao Angre, AIR 1988 S.C. 709 [Para 13]

JUDGMENT

JUDGMENT :- The petitioners are assailing correctness, propriety and legality of the order passed by the Judicial Magistrate, F.C., Palghar in the matter of Criminal Case No.211/1990, by which he dismissed the application moved by the petitioners for exonerating them by discharging them from the said criminal prosecution.

2. Some facts need to be quoted for the purpose of understanding the controversy between the litigating parties i.e. petitioners and Union Bank of India, Boisar Branch. The petitioners 1 and 2 are Directors of M/s. Lyka Silk Mills Ltd. (hereinafter referred to as Company for convenience). That company does the business in textile. In the year 1980 the petitioners who happen to be customers of Union Bank of India - respondent No.1 made a request to the said bank for various credit facilities including cash credit with hypothecation facility. The said cash credit with hypothecation was granted in favour of the petitioners as the facts narrated indicate. The record shows that the petitioners took the loans on various occasions from the respondent No.1, Union Bank of India, which were granted. The raw material was hypothecated with respondent No.1. Stock in process and finished goods lying with the petitioners were also hypothecated in favour of respondent No.1. In addition to that the agreement of guarantee were signed by petitioners No.1 and 2 in respect of the said loan transactions. On 6th of February, 1982, the agreement took place between the petitioners No.1 to 3 and respondent No.1 Union Bank of India. The said agreement also took place on 23rd of June, 1982. The letter of continuity was issued on 23rd of June, 1982 to said transactions and letter of guarantee was executed by petitioner No.1 and 2 on 23rd of June, 1982 guaranteeing Rs.3 lacs. On 4th of February, 1983 another hypothecation agreement was executed for Rs.15 lacs in respect of processed and finished goods. On the same day, letter of continuity was also executed by the petitioners 1 and 2 in favour of respondent No.1 for Rs.20 lacs.

3. Another hypothecation agreement was executed by petitioner No.1 and 2 in favour of respondent No.1 on 6/6/1986 and letter of guarantee was also executed. It was clarified, that the said date 4th of July, 1986 was erroneously mentioned, but it was 4th July, 1987. Vide that letter of guarantee the suitings, shirtings, yarns, semi-finished goods, finished goods lying at factory premises and elsewhere were hypothecated in favour of respondent No.1, and they were worth Rs.38,03,992.46 paise.

4. The respondent No.1 the original complainant alleged in the said complaint that the petitioners 1, 2 and 3 agreed by such an agreement that they would not part with said hypothecated goods, by way of sale in the ordinary course of their business. Respondent No.1 pointed out that by declaration Clause (15) the petitioners declared that "all hypothecated goods are the absolute property of the borrowers at the sole disposal of the borrower and are free from any prior charge or encumbrance." The respondent No.1 contended that, as the said goods were hypothecated with respondent No.1, the petitioners should have obtained prior permission from Respondent No.1 for sale of said goods, which they did not do and failed to repay the dues to the respondent No.1. On account of that the respondent No.1 was required to file civil suit in Bombay High Court in the year 1987 for recovery of their dues and the said suit happens to be numbered, as 3478/1987. The High Court appointed a receiver in respect of said goods. Thus, with all these facts and allegations the said complaint was filed in the said Court alleging that the petitioners No.1 to 3, mainly 1 and 2 had committed an offence punishable under Sections 403, 406 r/w Sections 34 and 120B of Indian Penal Code.

5. When such an application was moved, the learned Magistrate heard both the parties and dismissed the said application by holding that the observations of the Supreme Court in the matter of Central Bureau of Investigation SPE SIU (X) New Delhi Vs. Duncans Agro Industries Ltd., Calcutta, reported in AIR 1996 S.C. 2452, paragraph Nos.26 and 27, were not applicable to the case before him. He dismissed the prayer made by the petitioners for discharging them from the said prosecution and that order has been challenged by the petitioners vide this application filed in view of provisions of Section 482 of Code of Criminal Procedure, 1973 (hereinafter referred to as Code for convenience).

6. The Counsel appearing for the petitioners submitted that the Supreme Court in the matter of C.B.I. Vs. Duncan (Supra) held that;

"there is to be entrustment and dominion of the person whom such property has to be entrusted and if, that is lacking, there cannot be an offence indicated by section 403, Section 405 of I.P.C."

He submitted that in view of that, the learned Magistrate should have discharged the petitioners and as he did not do it, this Court be pleased to quash the said prosecution. Counsel appearing for respondent No.1, submitted that by the agreement of hypothecation, the goods were entrusted with respondent No.1 and it had dominion over the said goods. Therefore, the petitioners were not empowered to sell the goods without prior permission of the respondent No.1. He submitted that the observations made by the Supreme Court in C.B.I. Vs. Duncan (Supra) were in different context. In that case, there was a settlement between the parties and therefore, there was no criminal offence committed by the said accused. He submitted that civil suit has been pending in the High Court dealing with the same subject and therefore, the learned Magistrate happens to be right in dismissing the application.

7. Shri. Saste submitted that the appropriate order be passed by this Court in view of the facts of the case.

8. Section 403 indicates that;

"whoever dishonestly, misappropriates or converts to his own use any moveable property would be punishable with etc."

Section 406 provides that;

"whoever commits criminal breach of trust shall be punishable with etc."

Therefore, Section 405 defining criminal breach of trust will have to be seen.

Section 405 defines criminal breach of trust by providing that;

"whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property or dishonestly uses or disposses of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust or wilfully suffers any other person so to do, commits "criminal breach of trust."

9. The Supreme Court, has observed in Central Bureau of Investigation, SPE, SIU (X) New Delhi Vs. Duncans Agro Industries Ltd., Calcutta, reported in A.I.R. 1996 S.C. 2452 in paragraph No.26 that;

"After giving our careful consideration to the facts and circumstances of the case and the submissions made by the respective counsel for the parties, it appears to us that for the purpose of quashing the complaint, it is necessary to consider whether the allegations in the complaint prima facie make out an offence or not. It is not necessary to scrutinise the allegations for the purpose of deciding whether such allegations are likely to be upheld in the trial. Any action by way of quashing the complaint is an action to be taken at the threshold before evidence are led in support of the complaint. For quashing the complaint by way of action at the threshold, it is, therefore necessary to consider whether on the face of the allegations, a criminal offence is constituted or not."

10. In paragraph No.27 Supreme Court further observed that ;

"In the instant case a serious dispute has been raised by the learned Counsel appearing for the respective party as to whether on the face of the allegations, an offence of criminal breach of trust constituted or not. In our view, the expression "entrusted with property" or "with any dominion over property" has been used in a wide sense in Section 405, I.P.C. Such expression includes all cases in which goods are entrusted, that is voluntarily handed over for a specific purpose and dishonestly disposed of in violation of law or in violation of contract. The expression "entrusted" appearing in section 405, I.P.C. is not necessarily a term of law. It has wide and different implications in different contexts. It is however, necessary that the ownership or beneficial interest in the ownership of the property entrusted in respect of which offence is alleged to have been committed must be in some person other than the accused and the latter must hold it on account of some person or in some way for his benefit. The expression "trust" in Section 405, I.P.C. is a comprehensive expression and has been used to denote various kinds of relationship like the relationship of trustee and beneficiary, bailor and bailee, master and servant, pledger and pledgee. When some goods are hypothecated by a person to another person, the ownership of the goods still remains with the person who has hypothecated such goods. The property in respect of which criminal breach of trust can be committed must necessarily be the property of some person other than the accused or the beneficial interest in or ownership of it must be in other person and the offender must hold such property in trust for such other person or for his benefit. In a case of pledge, the pledged article belongs to some other person but the same is kept in trust by the pledgee. In the instant case, a floating charge was made on the goods by way of security to cover up credit facility. In our view, in such case for disposing of the goods covering the security against credit facility the offence of criminal breach of trust is not committed. In the facts and circumstances of the case, it however appears to us, that the Respondents moved the High Court only in 1991 although the first F.I.R. was filed in 1987 and the second was filed in 1989. The C.B.I. therefore, got sufficient time to complete the investigation for the purpose of framing the charge." (emphasis supplied)."

11. While dealing with criminal transactions in which the company hypothecates stock in trade, raw material and saleable products in favour of a bank against cash credit facilities or loan facilities granted to it, such bank should have a "floating charge" over such goods. Such goods are hypothecated and the ownership never changes. If it changes such commercial company is prohibited from selling such articles, dealing in commercially with such articles. In that case it would not run at all. That is not the spirit of such facilities granted to such commercial concern. The ownership does not change. It remains with the company but a floating charge is created so as to allow the bank to have a charge over such articles as a security for repayment of the loan. If this spirit is not properly understood, the commercial activities would collapse and there would be unimaginable movements in ordinary function of such commercial concern. The commercial activities in commercial world would seriously get hampered and it would be detrimental to the commercial world and bank also.

12. The words which are used in these relevant sections of Indian Penal Code have to be understood in proper way, more particularly "dominion, dishonestly, misappropriates or converts". So also mens rea has to be properly understood and kept in mind while dealing with such complaints filed in criminal Courts. Criminal Courts should be slow in issuing process against the accused in such cases, when already a civil suit has been filed and when the Criminal Court is called on to apply judicial mind in respect of such complaint for the purpose of issuing the process. And if there happens to be a civil suit pending in the Court of competent civil jurisdiction, the Criminal Court should be mindful of that pendency of the civil suit and should be slow in issuing the process against such accused. It does not mean that when a civil suit is pending, there is bar for filing a criminal case. But in such cases, the facts would be depicting a different case altogether. The facts and circumstances of the case made out in the complaint would by itself show the dishonest intention of the accused to commit the offence alleged to have been committed by them. The allegations made in the complaint would indicate an intention to commit the offence. It would exhibit mens rea behind such acts alleged to have been committed by the accused.

13. When the allegations made in the complaint are prima facie self eloquently negative, the criminal Court should be bold enough to nip out the multiplicity of litigations at the initial stages itself when such Courts have been called on to apply the judicial mind on such allegations made in the complaint. In every Court there is a spate of incoming litigations. The Courts should be careful enough to restrict the incoming flood of litigations. A case of breach of trust is both a civil wrong and a criminal offence. When the Civil Court is having seisin over the disputed claims, and when the offence is not made out prima facie by the allegations made in the complaint, the Criminal Courts are restrained from entertaining such allegations. It would be proper to quote the observations of the Supreme Court in the matter of Madhavrao Jiwaji Rao Scindia and another etc. Vs. Sambhajirao Chandrojirao Angre and others, etc., reported in A.I.R. 1988 S.C. 709, where the Supreme Court has pointed out that;

"the legal position is well settled that when a prosecution at the initial stage is asked to be quashed, the test to be applied by the Court is as to whether the uncontroverted allegations as made, prima facie establish the offence. It is also for the Court to take into consideration any special features which appear in a particular case to consider whether it is expedient and in the interest of justice to permit a prosecution to continue. This is so on the basis that the Court cannot be utilised for any oblique purpose and where in the opinion of the Court chances of an ultimate conviction are bleak and therefore, no useful purpose is likely to be served by allowing a criminal prosecution to continue, the Court may while taking into consideration the special facts of a case also quash the proceeding even though it may be at a preliminary stage."

14. In this case, it is pertinent to note that the agreements were renewed from 1982 to 1987 and fresh loans were granted. Whether the bank was not aware of the activities of which the complaint has been filed in the Court?. The trial Court should have kept this aspect into consideration while applying the judicial mind for issuing the process. It may have committed a mistake in not utilising the restrictive measure at the initial stage but the appropriate order should have been passed when an application has been moved when the petitioner made a prayer for discharging them from the prosecution. At that stage the learned Magistrate was in a position to have better material for consideration and the submissions advanced by the advocates appearing for the rival litigants.

15. Shri. Rane appearing for respondent No.1 submitted that the petitioners should have filed a revision petition before the Sessions Court, before approaching the High Court. It should have done so normally, but there is no bar for the petitioners to approach the High Court for invoking its inherent jurisdiction conferred by the provisions of Section 482 of the Code. Even section 397 does not create any bar as such for filing a revision petition in the High Court but such instances should be rare. This petition has been filed in the year 1997. Therefore, there is no point in asking the petitioners to go back to Sessions Court and to wait for some more months, at least, for getting their grievance adjudicated. Thus, the objection raised by the respondent No.1 stands dismissed.

16. The petition is hereby allowed. The prosecution pending in the Court of J.M.F.C., Palghar bearing C.C. No.211/1990 stands quashed. The petitioners stand exonerated. The bail bonds, if any, furnished by them stand cancelled.

The parties are directed to act upon the copy of this order duly authenticated by the Court Stenographer/Sheristedar of this Court.

Petition allowed.