2009 (8) TMI 693 - SC - Companies Law

Supreme Court affirms convictions for criminal conspiracy, modifies sentences, emphasizes RBI Circular violations. Acquittal for Accused No. 8.

The Supreme Court upheld the convictions of Accused Nos. 1, 2, 4, and 5 for criminal conspiracy and criminal breach of trust, modifying their sentences. ... Jurisdiction of Special Court under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 - meaning of 'securities' and scope of jurisdiction for transactions connected with securities - statutory force of Reserve Bank of India circulars governing discounting/rediscounting of bills - binding nature of RBI directions issued under the Banking Regulation Act, 1949 (sections 21 and 35A) - criminal breach of trust by public servant (section 405 read with section 409 IPC) - criminal conspiracy (section 120B IPC) - requirement of mens rea for attracting criminal liability under section 409 IPCJurisdiction of Special Court under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 - meaning of 'securities' and scope of jurisdiction for transactions connected with securities - Whether the Special Court had jurisdiction to try the offences arising from discounting and rediscounting transactions - HELD THAT: - The Court held that the definition of 'securities' in the 1992 Act is inclusive and must be given an expansive meaning; jurisdiction of the Special Court is exclusive and wide, extending not only to transactions strictly labelled as securities but also to utilization of amounts relating to transactions in securities and matters connected therewith or incidental thereto. The factual matrix showed that the bills of exchange were represented as arising out of transactions in shares involving Harshad Mehta and associated entities; the method of siphoning funds related to securities transactions and thus fell within the Special Court's statutory ambit. The Special Court therefore had inherent and exclusive jurisdiction to try the offences committed within the notified period. [Paras 46, 50, 51, 52, 53]Special Court had jurisdiction to try the offences arising from the discounting/rediscounting transactions connected with securities.Statutory force of Reserve Bank of India circulars governing discounting/rediscounting of bills - binding nature of RBI directions issued under the Banking Regulation Act, 1949 (sections 21 and 35A) - Whether the RBI Circular dated 5-9-1988 has statutory force and was binding on UCO Bank and its officers - HELD THAT: - The Court analysed the statutory powers of the Reserve Bank under the Banking Regulation Act, 1949, observing that directions issued under sections 21 and 35A carry statutory force. Distinguishing precedents where RBI communications were mere advice under section 36, the Court held that the Circular relating to Bills Rediscounting set out binding directions concerning procedure (including requirements for usance promissory notes and holding of unencumbered usance bills) and thereby imposed enforceable obligations on scheduled banks and their officials. Consequently, contravention of those directions could found liability where other ingredients of criminality were proved. [Paras 58, 68, 70, 71, 74]The RBI Circular of 5-9-1988 is statutory in character for the purposes of banks and binding on UCO Bank and its officers.Criminal breach of trust by public servant (section 405 read with section 409 IPC) - requirement of mens rea for attracting criminal liability under section 409 IPC - Whether the offence of criminal breach of trust (and Section 409 where applicable) was proved against the officer-accused - HELD THAT: - The Court set out the ingredients of criminal breach of trust and emphasized that, while some breaches may give rise only to civil liability, a breach accompanied by dishonest intention (mens rea) and violation of directions prescribing the mode of discharge of trust engages criminal liability. Applying those principles to the proved facts-entrustment of bank funds to officers, failure to follow RBI directions and Bank Manual safeguards, absence of genuine supporting documents, rapid creation of accounts and transfer of funds benefiting the Mehta group, and borrowing of call money to meet the shortfall-the Court concluded that accused Nos. 1 and 2 dishonestly used/ disposed of bank property in violation of prescribed directions. The role of Accused No. 2 was found subsidiary to Accused No. 1 but nonetheless sufficient to establish criminal breach of trust; Accused No. 8, being a Scale IV employee, was not proved guilty of criminal breach of trust. [Paras 75, 77, 96, 110, 116]Criminal breach of trust (and section 409 where applicable) is established against Accused Nos. 1 and 2; Accused No. 8 is not guilty of criminal breach of trust.Criminal conspiracy (section 120B IPC) - requirement of meeting of minds and proof by circumstantial evidence - Whether criminal conspiracy was established against the accused and which accused are guilty - HELD THAT: - The Court reiterated that criminal conspiracy requires an agreement to do an illegal act or to do a lawful act by unlawful means, and that proof may be by direct or circumstantial evidence forming an incriminating chain. Having considered the conduct and surrounding circumstances-meeting between Accused No. 1 and Harshad Mehta, contemporaneous resolutions and account openings, presentation of bills without original contract notes, choice of an atypical branch, lack of required procedural safeguards, subsequent purchase of shares to cover defaults, and participation/signatures of the private accused-the Court concluded that a conspiracy to benefit Harshad Mehta and his group was established. Accused Nos. 1, 2, 4 and 5 were held guilty of criminal conspiracy; Accused Nos. 6, 7 and 9's convictions were left undisturbed as they did not appeal; Accused No. 8 was acquitted of conspiracy for lack of evidence showing active participation. [Paras 124, 125, 129, 132, 135]Accused Nos. 1, 2, 4 and 5 are guilty of criminal conspiracy; Accused No. 8 is acquitted of conspiracy; convictions of Accused Nos. 6, 7 and 9 remain undisturbed.Sentencing and appellate limitation on enhancement - Appropriate sentences to be imposed and whether this Court may enhance sentences - HELD THAT: - The Court noted that the CBI had not appealed for enhancement of sentence; accordingly this Court could not impose higher sentences than those imposed by the Special Court except where it chose to modify within the scope of the appeals. The Court declined to interfere with the sentence of Accused No. 1 (six months RI and fine) but altered the sentences of others: Accused No. 2's sentence was reduced to one month RI and a specified fine (with default simple imprisonment), and Accused Nos. 4 and 5 were sentenced to one month RI each with specified fines (with default simple imprisonment). The Court directed that all accused be entitled to set-off the period of imprisonment already undergone. [Paras 137, 138, 139, 140, 141]Sentence of Accused No. 1 upheld; sentences of Accused Nos. 2, 4 and 5 modified as specified; period already undergone to be set off.Final Conclusion: The appeals establish that the Special Court had exclusive jurisdiction; the RBI circular of 5-9-1988 was binding on UCO Bank and its officers; criminal breach of trust is proved against Accused Nos. 1 and 2 (but not Accused No. 8); criminal conspiracy is proved against Accused Nos. 1, 2, 4 and 5 (Accused No. 8 acquitted on conspiracy; convictions of Accused Nos. 6, 7 and 9 left undisturbed); sentences are upheld for Accused No. 1 and modified for Accused Nos. 2, 4 and 5, with entitlement to set off time already served. Issues Involved:1. Criminal Breach of Trust2. Criminal Conspiracy3. Jurisdiction of the Special Court4. Applicability and Binding Nature of RBI Circulars5. Violation of UCO Bank Manual and RBI Circulars6. SentencingDetailed Analysis:1. Criminal Breach of Trust:The Special Court convicted Accused Nos. 1 and 2 for criminal breach of trust, finding that they had been entrusted with UCO Bank's funds and had discounted two Bills of Exchange drawn by M/s. J.H. Mehta and accepted by Growmore and Mazda. The transactions violated the RBI Circular dated 5-9-1988, resulting in a transfer of Rs. 50 crores to Harshad Mehta and his associates. The Court held that the actions of Accused Nos. 1 and 2, in violation of the Circular, constituted an offence under Section 405 of the Indian Penal Code.2. Criminal Conspiracy:The Court found that Accused Nos. 1, 2, 4, and 5 conspired to benefit Harshad Mehta and his group, thus proving the charge of criminal conspiracy. The evidence showed that Accused No. 1 met Harshad Mehta and subsequently initiated the bill discounting transactions through the Nariman Point Branch, despite objections and without following due procedures. The transactions were carried out in a manner that facilitated the unlawful transfer of funds to Harshad Mehta's entities.3. Jurisdiction of the Special Court:The Supreme Court upheld the jurisdiction of the Special Court, stating that the definition of 'securities' under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, is inclusive and should be given an expansive meaning. The Court held that the Special Court's jurisdiction is not confined to securities alone but extends to any amount relating to transactions in securities and matters connected therewith or incidental thereto.4. Applicability and Binding Nature of RBI Circulars:The Court held that the RBI Circulars issued under Sections 21 and 35A of the Banking Regulation Act have statutory force and are binding on all public sector banks. The Circular dated 5-9-1988, which laid down the procedure for rediscounting bills, was applicable to UCO Bank and its officials. The Court rejected the argument that the Circular was merely advisory and not binding.5. Violation of UCO Bank Manual and RBI Circulars:The Court found that the transactions violated the UCO Bank Manual and the RBI Circulars. The Manual required verification of creditworthiness and obtaining security before discounting bills, which was not done. The transactions were carried out without the necessary approvals and in a manner that bypassed established procedures, indicating a lack of bona fide commercial intent.6. Sentencing:The Supreme Court modified the sentences imposed by the Special Court. Accused No. 1 (K. Margabanthu) was sentenced to six months' RI and a fine of Rs. 1,00,000. Accused No. 2 (Ramaiya Venkatakrishnan) had his sentence reduced to one month of RI and a fine of Rs. 1,00,000. Accused Nos. 4 (Ashwin Mehta) and 5 (Sudhir Mehta) were each sentenced to one month of RI and a fine of Rs. 1,00,000. Accused No. 8 (S.V. Ramanathan) was acquitted of the charge of criminal conspiracy. All accused were entitled to set off for the period of imprisonment already undergone.Conclusion:The Supreme Court upheld the convictions of Accused Nos. 1, 2, 4, and 5 for criminal conspiracy and criminal breach of trust, while modifying the sentences. The Court affirmed the jurisdiction of the Special Court and the binding nature of the RBI Circulars, highlighting the violations of established banking procedures and regulations.