2011 (7) TMI 1008 - HC - Companies Law

Court sets aside Registrar's complaint against company for false defense. Parties settle claims, no costs imposed.

The court set aside the direction for the Registrar to lodge a complaint against the appellant-company for a false defense. The parties settled their ... Direction to file criminal complaint for alleged false affidavit/forgery arising from civil proceedings - Requirement of preliminary enquiry and expediency in the interest of justice before court directed prosecution - Standard for initiating prosecution: reasonable probability of conviction and not merely contradictory or untenable defence - Alleged offence under section 191 of the Indian Penal CodeDirection to file criminal complaint for alleged false affidavit/forgery arising from civil proceedings - Requirement of preliminary enquiry and expediency in the interest of justice before court directed prosecution - Standard for initiating prosecution: reasonable probability of conviction and not merely contradictory or untenable defence - Alleged offence under section 191 of the Indian Penal Code - Whether the company court was justified in directing the Registrar, original side to lodge a complaint for prosecution under section 191 IPC for alleged false statements/forgery made by the appellant-company in reply to the statutory notice - HELD THAT: - The company court's direction was examined against established principles that a court may direct filing of a complaint only after forming an opinion on a preliminary enquiry that it is expedient in the interest of justice to investigate the alleged offence, and ordinarily where there is a reasonable probability of conviction. Mere untenability or implausibility of a defence in a civil adjudication, or contradictions between stages, does not alone satisfy the threshold for invoking criminal proceedings. The court must apply its mind to both the commission of a falsehood or fabrication and the expediency of prosecuting, having regard to the effect on administration of justice and the likelihood of conviction. On the facts, the appellant had taken the specific defence that an earlier statutory notice was not served and disputed aspects such as a debit note and substituted cheques; those defences, even if unlikely to succeed in the civil forum, were not shown to be fabricated or so inherently false as to justify prosecution. Reliance on authorities established that (i) a recorded finding of fabrication and an express application of mind to the expediency of prosecution are required, (ii) contradiction alone is insufficient, and (iii) prosecution should be directed only where there is reasonable foundation for conviction. Applying those principles, the court held that the company court erred in treating the defence as a 'moonshine' falsehood warranting a criminal complaint and that it had not applied the requisite judicial mind to expediency of prosecution. [Paras 21, 23, 26, 27, 29]That portion of the company court's order directing the Registrar, original side to lodge a complaint for taking cognizance of the alleged offence by the appellant-company is set aside; the defence in the civil proceedings did not warrant referral for criminal prosecution.Final Conclusion: The High Court set aside the company court's direction to initiate criminal proceedings for alleged false statements/forgery, holding that the threshold of a preliminary finding of fabrication and expediency for prosecution was not met; the monetary claim itself having been settled, no costs were awarded. Issues Involved:1. Settlement of monetary claims between the parties.2. Legitimacy of the company court's direction to lodge a complaint against the appellant-company for making a false defense.Issue-wise Detailed Analysis:1. Settlement of Monetary Claims:The appellant-company and the petitioning creditor reached a settlement, withdrawing their claims and counterclaims. The monetary claim of the petitioning creditor was satisfied, and thus, the appellant-company was not aggrieved by the portion of the order directing the payment of money as claimed in the company petition.2. Legitimacy of the Company Court's Direction to Lodge a Complaint:The appellant-company challenged the portion of the judgment where the company court directed the Registrar, original side, to lodge a complaint against the appellant-company for making a false defense. The company court had found the defense set up by the appellant-company in reply to a statutory notice to be a 'moonshine defense having smack of falsehood.'The appellant-company argued that merely finding the defense untenable did not confer power upon the court to invoke section 191 of the Indian Penal Code, 1860. The appellant-company contended that the court should have recorded a positive finding of fabrication or creation of a document to deceive the court.Several judgments of the apex court were cited, emphasizing that before directing an inquiry for an offense committed, the court should form an opinion about the commission of such an offense on a preliminary inquiry and should be satisfied that it is expedient in the interest of justice to start prosecution.The petitioning creditor also agreed that the court should not have directed the Registrar to lodge a complaint against the appellant-company for making a deceitful defense.The company court's journey began with the defense taken by the appellant-company in reply to a statutory notice. The court stressed that the earlier statutory notice, which was the basis of the earlier company petition, was not replied to by the appellant-company. The court found the story of issuing a debit note improbable and noted that the objection was raised after the confirmation of the balance.However, the defense was not found to be absolutely irrational or illegal, leading to conviction without any reasonable doubt. The defense might be untenable but did not necessarily appear false to the knowledge of the person adducing it.The apex court in the case of Pritish held that before directing an inquiry, the court should be satisfied that it is expedient in the interest of justice. Similarly, in B.K. Gupta, the apex court emphasized the need for the court to apply its mind regarding the expediency for filing a complaint. The court in K.T.M.S. Mohd. held that mere contradiction in statements does not justify prosecution.The five-judge bench in Iqbal Singh Marwah reiterated that the court is not bound to make a complaint unless it is expedient in the interest of justice. The court should weigh the impact of the offense on the administration of justice before filing a complaint.The Division Bench in Jadu Nandan Singh and Keramat Ali cautioned against setting criminal law in motion without a reasonable probability of conviction and emphasized the need for great care and caution.The court concluded that the defense taken by the appellant-company did not make it expedient in the interest of justice to be referred for trial under criminal law. Therefore, the portion of the order directing the Registrar to lodge a complaint was set aside.Conclusion:The court set aside the portion of the order directing the Registrar, original side, to lodge a complaint against the appellant-company. The parties had settled their monetary claims, and no costs were imposed.