1. Underwriting agreement for share subscription — Allegation of fictitious agreement to cheat company — Conviction under Section 420 read with Section 34, Indian Penal Code. (Para 1 , 2 , 4 , 5 , 6 )
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1964 Supreme(SC) 358
SUPREME COURT OF INDIA
P Gajendragadkar, C.J.I., Raghubar Dayal, J.C. Shah, K.C. Das Gupta, M. Hidayatullah, JJ.
Naini Gopal Lahiri and others - Appellant
Versus
State Of Uttar Pradesh - Respondent
Criminal Appeal No. 113 of 1960
Decided On : 08-05-1964
Advocates Appeared:
For the Appellants :Purshottam Tricumdas, Senior Advocate, Nuruddin Ahmed and R.L. Kohli, Advocates.
For the Respondent:C.B. Agarwala, Senior Advocate, O.P. Rana, Atiqur and C.P. Lal, Advocates.
For the Appellants :Purshottam Tricumdas, Senior Advocate, Nuruddin Ahmed and R.L. Kohli, Advocates.
For the Respondent:C.B. Agarwala, Senior Advocate, O.P. Rana, Atiqur and C.P. Lal, Advocates.
Cheating under Section 420 IPC requires proof of a deceptive representation that induces the victim to act to their prejudice. Mere payment of commission under a genuine underwriting agreement, even if directors assisted in share sales, does not constitute cheating without evidence of such deception.
Headnote:(A) Indian Penal Code, 1860 - Sections 415 and 420 read with Section 34 - Cheating - Essential ingredients - Deception and inducement - To constitute cheating, the victim must be made to believe as true what is not true, and must be induced to act to their prejudice based on such deception (Paras 16, 17).
(B) Underwriting Agreements - Nature and scope - An underwriter is entitled to appoint agents to procure business, and the company is not concerned with the method by which the underwriter procures purchasers (Paras 13, 14).
(C) Company Law - Role of Directors - There is no legal bar preventing directors of a company from participating in canvassing the sale of shares (Para 14).
Facts of the case:
A public limited company appointed a firm as underwriters for its shares via a written agreement. The company paid a commission to the firm. It was alleged that the agreement was a sham and that the appellants, including directors, used the firm as a conduit to fraudulently obtain and share the commission by selling shares themselves. The High Court maintained a conviction for cheating, finding that while the agreement was genuine, the directors had exploited it for unlawful gain.
Findings of Court:
The court found that the underwriting agreement was genuine. There was no evidence of any specific representation made to the company that deceived it into paying the commission. The fact that directors assisted in selling shares is permissible as underwriters can appoint agents.
Issues: Whether the appellants committed the offence of cheating by inducing the company to pay underwriting commission under a genuine agreement.
Ratio Decidendi: The gravamen of cheating is the deceiving of the victim through a representation that the victim believes to be true, which induces them to act to their prejudice. In the absence of evidence showing a deceptive representation made to the company, the mere fact that commission was paid to an underwriter for shares sold by others (including directors acting as agents) does not establish the offence of cheating. (Paras 17, 18, 19).
Result: Appeal allowed and the three appellants are ordered to be acquitted of the offence under Section 420 read with Section 34 of the Indian Penal Code.
Legal Category Hierarchy
- crime and sentencing
- company law
Table of Contents
2. Prosecution contended the underwriting agreement was a sham used to fraudulently induce the company to pay commission to directors through a conduit. (Para 6 , 8 , 9 )
3. The underwriting agreement was genuine; directors acting as agents for underwriters is not illegal; no evidence of deceptive representation made to the company. (Para 14 , 18 , 19 )
4. Cheating under Section 415, IPC requires a deceptive representation that induces the victim to act to their prejudice; mere payment under a genuine agreement is insufficient. (Para 17 , 18 )
5. Appeal allowed — Conviction under Section 420 read with Section 34, Indian Penal Code set aside — Appellants acquitted. (Para 23 , 24 )
6. What are the essential elements of cheating under Section 415 of the Indian Penal Code?
Cheating requires deceiving a person through representation, express or inferred, to fraudulently or dishonestly induce them to deliver property or do or omit an act, causing damage or harm. The victim must be made to believe as true what is not true, and the offender must possess the specified mens rea. (Para 16 , 17 )
7. Does the fact that directors of a company canvass for the sale of shares necessarily constitute cheating if commission is paid to an underwriter?
No. There is no legal bar preventing directors from participating in canvassing shares or acting as agents for an underwriter. If the underwriting agreement is genuine, the fact that directors helped sell shares does not establish cheating. (Para 14 , 19 )
8. Can a conviction for cheating be sustained if the underlying agreement used to claim payment is found to be genuine?
No. If the agreement is genuine and no specific deceptive representation was made to induce the payment, the offence of cheating is not made out, even if the commission was shared among others. (Para 18 , 19 )
9. Can an appellate court convert a conviction of cheating into a conviction for criminal breach of trust if the State has not appealed the acquittal on the latter?
The court declined to do so where the appellants had already been tried and acquitted of criminal breach of trust by the High Court and the State failed to apply for leave to appeal against that acquittal. (Para 22 )
JUDGMENT :
J.C. Shah, J.
On November 13, 1946, the United Hindustan Films Ltd. was incorporated as a public limited company with its head office at Calcutta, "to carry on the business of cinematographic trade and industry and particularly the film industry both silent and talkie, ... to manufacture and deal in educational films, commercial and agricultural pictures and to purchase films or to take on hire films from other film producers." By Clause 31 of the memorandum of association, the company was authorised to employ brokers, commission agents and underwriters for sale of shares and debentures and to provide for their remuneration. The articles of association provided that the company may pay a commission for subscribing or agreeing to subscribe for any shares or agreeing to procure subscribers for any shares, but so that the commission in respect of the shares shall not exceed ten per cent. of the shares subscribed or to be subscribed. The articles also provided that " Messrs. Eastland Trust" a firm will be appointed managing agents for a period of twenty years with authority, inter alia, to appoint underwriters on a commission of ten per cent. on sale of shares of the company sold directly or through brokers or agents appointed by them.
2. On November 30, 1946, the prospectus of the company was filed with the Registrar, Joint Stock Companies, West Bengal. On December 2, 1946, Ram Kishore Chatterji, the third appellant in this appeal, applied to the managing agents of the company offering the services of Messrs. Chatterji and Co. of which he was a partner as underwriters of the company. By letter dated December 9, 1946, Messrs. Chatterji and Co. were informed that the application had been placed before the board of directors and it had been decided to appoint Messrs. Chatterji and Co. as underwriters of the company. A formal contract was then executed. At a meeting of the board of directors held on June 21, 1947, the appointment of Messrs. Chatterji and Co. as underwriters of the company with a commission of ten per cent. on the face value of the shares sold by them was confirmed.
3. The activities of the company were restricted to the area of the District of Benaras and neighbouring districts. Sheo Prasad Sharma, appellant No. 2, was appointed managing director of the company's branch at Benaras. He also worked as branch manager of the Bengal Express Bank at Benaras. Ram Kishore Chatterji, appellant No. 3, was a part-time clerk of the company at Benaras and also worked as accountant of the Bengal Express Bank at Benaras. The first appellant, Naini Gopal Lahiri, was working as a clerk in the Traffic Accounts Office, East Indian Railway, at Benaras during the period 1946-47.
4. Many persons residing in the District of Benaras purchased shares of the company. In a complaint addressed to the Home Minister, Uttar Pradesh, some time in the year 1951, it was allged that office-bearers of the company including the appellants had made false representations to the public that the company intended opening a cinema house at Benaras and that the venture was likely to yield large profits, and relying upon the representations the public were induced to purchase shares of the company. Investigation was directed into this complaint and a police report was submitted against the three appellants and eight others in the court of the Magistrate, 1st Class, Benaras, charging them with offences of conspiracy to commit cheating, criminal breach of trust, falsification of accounts and alternatively of committing those offences in furtherance of the common intention of the accused. The case was tried before the Court of Session on charges against the accused for offences under Section 420 read with Section 34 of the Indian Penal Code and also for offences under Sections 406, 408, 409, 417, 465, 471, 477A read with Section 120B of the Indian Penal Code. The Sessions Judge, Benaras, convicted the appellants and two others, B.B. Biswas and R.C. Moitra, o
