Summary
A cheating prosecution under Section 420 IPC against the Managing Director of a company was quashed because the allegation on which it rested (that the complainant had already paid the seven dishonoured cheques by demand drafts and the company fraudulently encashed four cheques again) was precisely the defence that the complainant had raised and lost, up to the Sessions Court, in the earlier Section 138 NI Act proceedings in which he was convicted. The Supreme Court held that the principle of res judicata applies to criminal proceedings (Pritam Singh, a three-Judge Bench, binds; Devendra and Muskan Enterprises are distinguishable as decided at the Section 482 stage without adjudication on merits). Further, the company was not arraigned as an accused and no specific allegation was made against the Managing Director, so he could not be prosecuted vicariously for an IPC offence.
Issues
- Whether the principle of res judicata applies in criminal proceedings, and whether a finding recorded by a competent criminal court in Section 138 NI Act proceedings binds the parties in a subsequent prosecution on the same issue.
- Whether the two-Judge decisions in Devendra v. State of U.P. and Muskan Enterprises v. State of Punjab, holding that res judicata has no application in criminal proceedings, conflict with the three-Judge decision in Pritam Singh v. State of Punjab and later decisions following it.
- Whether the Managing Director of a company can be prosecuted under Section 420 IPC for a transaction between two companies when the company is not arraigned as an accused and no specific allegation is made against him personally.
- Whether the High Court should have quashed the chargesheet and summoning order under Section 482 CrPC as the prosecution was a counterblast to concluded Section 138 proceedings.
Provisions considered
- Section 138, Negotiable Instruments Act, 1881The complainant (respondent no. 2) had been convicted under Section 138 for seven dishonoured cheques, with a specific finding, affirmed in appeal, that his demand drafts related to other liabilities and not to the cheques. The Court treated that finding as binding on both parties in any later proceeding involving the same issue, so the FIR alleging double payment could not be maintained. (¶¶ 2, 3, 10, 11, 12, 20)
- Section 141, Negotiable Instruments Act, 1881Section 141 deems persons in charge of a company's business, as well as the company, guilty of a Section 138 offence committed by the company. Through the decisions in Aneeta Hada, Himanshu, Hindustan Unilever and Dayle De'Souza, the Court reiterated that this vicarious liability by deeming fiction arises only when the company itself commits the offence and is arraigned; it drew on this to hold that a Managing Director cannot be prosecuted for a company's dealings without the company being an accused. (¶¶ 21, 22)
- Section 420, Indian Penal Code, 1860Section 420 punishes cheating that dishonestly induces delivery of property. The business relationship, cheques and demand drafts were between the two companies and nothing was paid by the complainant to the appellant individually. Following Delhi Race Club, the IPC contains no provision for vicarious liability, so an office bearer can be arrayed for cheating only on direct allegations that he personally practised the deception; none were made. (¶¶ 1, 21, 23, 25)
- Section 482, Code of Criminal Procedure, 1973The inherent power of the High Court to prevent abuse of process was invoked to quash the chargesheet and summoning order. Relying on Iqbal v. State of U.P., the Court stressed that where a prosecution is alleged to be frivolous, vexatious or instituted for vengeance, the court must look at the FIR closely, read between the lines and consider the overall circumstances, including the earlier Section 138 proceedings between the same parties. (¶¶ 1, 6, 9, 24, 25)
- Section 156(3), Code of Criminal Procedure, 1973The FIR originated from the complainant's application under Section 156(3) while the Section 138 proceedings were pending. The Court noted, through Delhi Race Club, that a Magistrate acting on a complaint under Section 156(3) or Section 200 must apply his mind to whether the complaint, taken at face value, discloses personal liability of office bearers. (¶¶ 6, 23)
Held
- The principle of res judicata applies to criminal proceedings. A finding recorded by the jurisdictional criminal court in Section 138 NI Act proceedings between the parties binds both of them in any subsequent proceeding involving the same issue. Sambasivam (Privy Council, five Judges) and Pritam Singh (three-Judge Bench), followed in Bhagat Ram and Tarachand Jain, lay down that a verdict of a competent court is binding and conclusive in all subsequent proceedings between the parties. (¶¶ 12, 13, 14, 15, 16, 19)
- There is no real divergence between those decisions and Devendra and Muskan Enterprises: the latter were decided at the stage of successive quashing petitions under Section 482 CrPC where there had been no final adjudication on merits, and are distinguishable. In any event, Pritam Singh, being a three-Judge Bench decision, is binding on the applicability of res judicata in criminal proceedings over the later two-Judge decisions. (¶¶ 17, 18, 19)
- The complainant, whose specific defence in the Section 138 case (that the cheque amounts had already been paid by demand drafts) was rejected by the Magistrate and affirmed by the Sessions Judge, cannot maintain a prosecution founded on precisely those allegations; the criminal proceedings deserved to be quashed on this ground alone. (¶¶ 10, 11, 20)
- Where the business dealings, cheques and demand drafts were between two companies and no payment was made to the Managing Director individually, the Managing Director cannot be prosecuted without the company being arrayed as an accused (Sharad Kumar Sanghi, Aneeta Hada, Dayle De'Souza). The IPC does not attach vicarious liability to office bearers merely because of their managerial position; direct allegations of personal involvement in the cheating are required (Delhi Race Club). (¶¶ 21, 22, 23)
- When quashing is sought on the ground that a prosecution is manifestly frivolous, vexatious or instituted for vengeance, the court owes a duty to look into the FIR with care, read between the lines and take into account the overall circumstances leading to its registration and the material collected in investigation (Iqbal v. State of U.P.). (¶ 24)
Result
Appeal allowed. The High Court's order dated 28.04.2017 dismissing the Section 482 petition set aside; Criminal Case No. 7489 of 2002 pending before the Chief Judicial Magistrate, Ghaziabad, for the offence under Section 420 IPC quashed against the appellant.