The Right Wing is euphoric. It has already started visualizing the Mother-Son duo in Tihar. The other camp is just about recovering from the shock and continues with its “we care a damn” façade and knee-jerk reactions. The court order issuing Summons in the Complaint filed by Dr. Subramaniam Swamy in the National Herald Matter has caused quite a flutter in social media.
While each camp believes things in every issue in the way they find it expedient, a big segment of laymen who wish to form an informed opinion on any legal issue often have very little options. The mainstream media, barring a few instances, has never been of much help as there are only a few reporters trained or qualified in law covering legal issues. So all one gets is just bits and pieces here and there, confusing more than giving clarity. There is a pressing need for people who could make legal issues simple for laymen and ensure forming of proper public opinions. This piece is an attempt to achieve this in respect of the said Order.
This piece bases itself on the Order issuing Summons and primarily explains the transactions which form the subject matter of the Complaint (as concluded by the Court and set out in the Order) and then the legal basis on which the Order has been issued. To further clarify, it ignores the facts which are otherwise floating around in media and social media and which are not to be found in the Order. It also ignores the other defenses in fact and law which are being put forth by some of the Congress supporters on social media. Some independent observations and thoughts on the transactions and the legal basis have however been put forth at appropriate places as both the transactions and the legal basis raise questions.
A criminal complaint of the type filed by Dr Swamy is called a private complaint and is filed directly before a criminal court without any police investigation. If the court finds a prima facie case by hearing the complainant and examining his case (at this stage only the complainant is heard), it issues summons to the accused to attend Court. Thereafter the accused appear and charges are framed where the court requires a slightly higher degree of satisfaction. Thereafter, the trial begins where evidence is led by both sides and the matter is finally argued. Finally an order of conviction is passed if the court is satisfied on the offence beyond reasonable doubt or else the accused are acquitted. There is no scope for arrest at any stage (unless an accused does an Arvind Kejriwal).
In the present case, just the Order issuing Summons has been issued. This is the first stage. In other words, the Court has just formed a prima facie view based on the Complaint of Dr Swamy. This is not a statement that certainly would be a conviction. We have a long way to go.
Examining Dr. Swamy’s complaint
The Criminal Complaint filed by Dr Swamy has seven accused:
1. Ms Sonia Gandhi (SG)
2. Mr Rahul Gandhi (RG)
3. Mr Motilal Vora (MV)
4. Mr Oscar Fernandes (OF)
5. Ms Suman Dubey (SD)
6. Mr Sam Pitroda (SP)
7. Young India, a company formed by SG, RG, MV and OF.
The Accused have been accused of offences under Sections 403 (Dishonest Misappropriation), 406 (Criminal Breach of Trust), 420 (Cheating) and 120B (Criminal Conspiracy) of IPC. The offences are alleged to have been committed against the Congress Party. (Indeed, the office bearers of the Congress Party have been sued by a rival politician for offences against their own party) and against one Associated Journals Limited, the company which owned the newspaper National Herald.
Understanding the Transactions
Before analyzing the legal basis on which the Order issuing Summons has been passed, let us understand the transactions independent of any legal arguments.
Fact 1: National Herald (NH) was a newspaper once owned and published by a company called Associated Journals Limited (AJL). NH was started under the chairmanship of Jawaharlal Nehru. Publication of NH was closed down in 2008.
Fact 2: AJL also closed down in 2008–this is what the Order says at one place but it is evident from the Order itself that it continued.
Fact 3: AJL had real estate assets worth more than Rs. 2000 Crores.
Fact 4: AJL had more than 1000 shareholders who had in its early days contributed about 89 Lakhs for the formation of the Company when the value of the Rupee was much more than what it is today.
Fact 5: Congress Party had given an interest free loan of Rs. 90.25 Crores to AJL. (It is not clear from the Order as to when it was given but the Order says it was given by SG and RG). It is alleged that the loan is against the provisions of the Representation of Peoples Act, 1951 and the Constitution of the Congress Party.
Fact 6: In November 2010, SG and RG formed Young India (YI), a company licensed under Section 25 of the Companies Act, 1956 (as a company for the promotion of art, science, culture etc.). SG and RG held 38% each in YI aggregating 76% and the balance 24% was held by MV and OF. YI was formed with a share capital of Rs. 5 Lakhs only.
Fact 7: In December 2010, the Board of Directors of AJL declared that the loan of Rs. 90.25 Crores given by the Congress Party cannot be repaid and accordingly, decided and transferred the loan to YI. In lieu thereof, it also decided and issued shares of AJL to YI thereby giving YI control of 99% of AJL and its assets. On its part, YI paid a further consideration of Rs. 50 lakhs to AJL.
Fact 8: Sanction of the existing shareholders of AJL was not taken for the share issue to YI. The decision was taken solely by the Board of Directors of AJL comprising MV, OF, SD and SP.
Fact 9: In the meantime, the Congress Party under SG and RG wrote off the loan of Rs. 90.25 Crores given to AJL as unrecoverable. This was done without making any efforts of recovery though AJL had assets worth Rs. 2000 Crore. The write off paved the way for issue of 99% shares of AJL to YI.
Fact 10: Having taken control of AJL, YI formally stopped publication of NH though the Memorandum of Association of AJL forbids entering into any transaction which was not to further its objective of publishing papers.
Fact 11: Having taken control of AJL, YI gave the properties of AJL out on rent fetching about Rs. 60 Lakhs per month.
Fact 12: YI had no other assets or independent business or income other than those of AJL.
Fact 13: After acquiring 99% of AJL, YI wrote off the investments in AJL in its books.
In this matter, pre-summons evidence was led by Dr Swamy along with a practicing Chartered Accountant, an official from the Registrar of Companies and another person, and the facts as stated above seem to have been prima-facie established. The Accused certainly have a right to counter the case of the Complainant and establish their own case at the trial but at the moment, one has to move forward with the prima facie case of the Complainant only.
Effect of the transactions as alleged in the Complaint
The loan of Rs. 90.25 Crores given by the Congress Party could have been repaid by AJL out of the assets of AJL which were valued at more than Rs. 2000 Crores. The balance of Rs. 1900 Crores would have remained for the existing shareholders. Repayment of the loan as above could have obviated the need for the issue of 99% of the shares of AJL to YI. Thus by the transaction, the existing shareholders lost 99% of the net assets of AJL.
On its part, YI got control of the net assets of AJL worth about Rs. 1900 Crores for just Rs. 50 Lakhs.
The Congress Party could have recovered the loan given by it to AJL out of the assets of AJL which were valued at Rs. 2000 Crores. Instead the loan was written off. In the process, the Congress Party lost Rs. 90.25 Crores.
The transactions do not seem to be something even a die hard Congress fan would be proud of. Before examining the legality of the Order issuing Summons, following are a few observations and thoughts on the transactions as they come quite naturally.
1. The Congress Party seems to have used an ingenious and circuitous route to fund a company floated by its President and Vice President albeit for noble purposes contemplated under Section 25 of the Companies Act 1956.
2. It is an internal matter of the Congress Party if it wished to fund YI but that should have been done either directly (if permissible) or by facilitating the raising of funds independently. Instead of funding in a transparent manner, it seems to have been done in a clandestine manner which prima facie shows malafide intentions and an intention to hide something.
3. The clandestine routing of funds also facilitated taking a backdoor control of 99% of AJL and its assets.
4. The acquisition of AJL and its assets worth Rs. 2000 Crores by YI, a company with a share capital of Rs 5 Lakhs and no other assets or business or income, in lieu of a loan of Rs. 90.25 Crores and Rs. 50 Lakhs consideration without the consent of the other shareholders of AJL was prima facie bad.
5. The avowed noble objects of YI did not justify the clandestine transaction or its malafides nor did it justify the taking of backdoor and wrongful control of AJL and its assets. Section 25 of the Companies Act, 1956 does not give a license to usurp the assets of others.
6. It certainly did not befit the President and Vice President of the then ruling Party of India to indulge in such a clandestine and malafide transaction, however noble the objects of YI are.
7. Be that as it may, while it is the prerogative of the Congress Party to advance loans and merrily write them off and/or fund any charitable organization of its President and Vice President, the same cannot be said about taking control of the assets of any other company unrelated to it. Acquisition of AJL by YI with backdoor facilitation by the Congress Party is patently bad in law and needs to be set aside by appropriate civil action.
Legal basis of Order issuing Summons
The transactions reek of foulness but all such things are not criminal acts unless they fit into the strict definition of defined offences under law. Before examining whether the transactions constitute offences as alleged or otherwise, it is necessary to first examine the point of locus.
Can an outsider to Congress Party, or for that matter to AJL, file a criminal complaint for alleged offences against it? This is the easiest to answer and the answer is “Yes, he/she can”. As per settled law laid down by Supreme Court, the concept of “locus” is alien to criminal law and anyone can set the criminal machinery in motion. So, the Criminal Complaint of Dr Swamy is fine on this aspect. The Order issuing Summons also holds so categorically.
As said earlier, pre-summons’ evidence prima facie has established the transaction. Now the issue remained as to whether the facts satisfied the ingredients of the offences alleged.
The ingredients of Sections 403 (Dishonest Misappropriation), 406 (Criminal Breach of Trust) and 420 (Cheating) of IPC, relevant for our analysis, have been set out below and the transactions need to be compared with these to ascertain whether any offences have been committed. (For the sake of brevity, the full definition of the offences have not been set out).
Section 406 of IPC (Criminal Breach of Trust)
The essential ingredients are as follows:
- There must have been an entrustment of property or dominion over property.
- There must have been a dishonest misappropriation or conversion for own use or dishonest use and disposal of the property in violation of:
- Any directive of law in respect of the trust reposed.
- Any legal contract, express or implied, in respect of the trust reposed.
Punishment: Three years imprisonment or fine or both.
Do the facts in the present case bear out an offence under Section 406 of IPC? The Court held that prima facie they do, both against the Congress Party as well as AJL.
406 against Congress:
It was concluded as follows:
1. SG/RG/MV/OF are deemed to have held the funds of the Congress Party in trust.
2. They used the said funds for the purpose of advancing loan to AJL.
3. The loan to AJL was in violation of the Representation of People’s Act and the Constitution of the Congress Party.
4. No efforts were made by them to recover the loan given and eventually the loan was wrongly written off.
In the above factual matrix, it was held that SG/RG/MV/OF as Trustees failed to discharge the trust reposed in them and committed the offence against the Congress Party.
406 against AJL:
It was concluded as follows:
1. MV was a director of AJL and was in a fiduciary relation with it and a trustee of its assets.
2. He falsely declared that AJL had no net worth and was unable to repay the loan of the Congress Party when it had assets more than Rs. 2000 Crores.
3. He, along with SD and SP, gave 99% control of AJL and its assets to YI when the loan of the Congress Party could have been easily repaid.
4. YI was a company where MV was a shareholder and accordingly, giving wrongful control of AJL and its assets to YI was conversion for own use.
In the factual matrix it was held that MV committed the offence against AJL.
Section 420 of IPC (Cheating)
The essential ingredients are as follows:
- Fraudulent or dishonest inducement by deceiving.
- Inducement made to deliver property or do some act etc.
- Delivery of property or act done, something which wouldn’t have been delivered or done but for the inducement.
Punishment: Seven years imprisonment and fine.
Do the facts in the present case bear out an offence under Section 420 of IPC? The Court held that prima facie they do, but against the Congress Party only.
420 against Congress:
It was concluded as follows:
1. The Congress Party had invited funds from the public by way of membership and donations.
2. The funds raised for the Party were to be used for advancement of democracy only.
3. The funds were fraudulently used for advances to AJL which was carrying out commercial activity.
4. The persons giving the funds were defrauded as money was never given by them for these purposes.
In the above factual matrix, it was held that the Accused committed the offence against the Congress Party.
Section 403 of IPC (Dishonest Misapprpriation)
The essential ingredients are dishonest misappropriation or conversion for own use. The ingredients are similar to Section 406 of IPC except that there is no entrustment of property.
Punishment: Two years imprisonment or fine or both.
Do the facts in the present case bear out an offence under Section 403 of IPC? The Court held that prima facie they do, but against AJL only.
403 against AJL:
The conclusions were similar to those for Section 406 of IPC against AJL. It was held that all the Accused who controlled the Congress Party and AJL between themselves deliberately formed YI, a sham company with a share capital of just Rs. 5 Lakhs and no assets and no independent business or income, for misappropriating the assets of AJL.
Section 120B of IPC (Criminal Conspiracy)
The essential ingredient is an agreement between two or more persons to do an illegal act or a legal act by illegal means.
Punishment: As provided for abetment of the offence in this case.
Do the facts in the present case bear out an offence under Section 120B of IPC? The Court held that prima facie they do as all the Accused have acted in concert with each other to commit the offence in a preplanned manner and there is sufficient ground for proceeding against all of them.
Summary of legal implications
Thus it was held by the Court that prima facie, offences under Sections 406 and 420 of IPC were committed by the Accused against the Congress Party and under Sections 403 & 406 of IPC were committed against AJL. Further, the Accused committed offence under Section 120B of IPC. Accordingly Summons was issued against all the Accused by an Order dated June 26, 2014.
1. Regarding the offence under Section 420 against the Congress Party: the offence, if any, could have been against the persons who donated or became members and not the Congress Party. Even if it is assumed that the giving of loan by the Congress Party to AJL was bad in law and a misapplication of funds, can a subsequent application by itself make a prior raising of funds dishonest? There does not seem to be any fraudulent or dishonest inducement by deceiving at the time of raising funds by the Congress Party. Under the circumstances, it is doubtful if the offence under Section 420 of IPC against the Congress Party can be sustained.
2. Regarding the offence under Section 406 against the Congress Party: while it is true that SG/RG/MV/OF were trustees of the funds of the Congress Party, the giving of the loan did not amount to misappropriation or conversion for own use although it might have been prohibited under the Representation of People’s Act or the Constitution of Congress. Even if the subsequent write off was dishonest, the amount loaned was not per se misappropriated or converted for own use as the same remained with AJL. Under the circumstances, it is doubtful if the offence under Section 406 of IPC against the Congress Party can be sustained.
3. Regarding the offences under Sections 403 and 406 of IPC against AJL: it seems that a prima facie case has been made out as the control of the assets of AJL were wrongly given to YI. The Issue of Summons seem proper. It is to be borne in mind that at the stage of Issue of Summons, the test is not whether there will be conviction. This is only a prima facie view and it is open for the Accused to present its own case with evidence at the trial.
4. A question may arise that under Section 25 of the Companies Act, 1956, YI cannot distribute profits as dividends to its shareholders and accordingly, can there be a misappropriation or conversion for own use so as to attract Sections 403 and 406 of IPC since there has been no personal gain to the Accused? The answer may be simple. One cannot rob and give money to charity and claim that there was no personal gain to himself and hence no offence was committed. Further, the Accused may not enjoy the assets of AJL and income arising thereof personally but it cannot be denied that they are entitled to the control and use thereof by virtue of them controlling YI. Finally, in offences, the corporate veil may be pierced, and if that is done, its assets may be deemed those of its shareholders. Accordingly, it is doubtful that one can hide behind the sole shield of Section 25 of the Companies Act, 1956.
5. Another aspect makes the argument of Section 25 of the Companies Act, 1956 redundant. Dishonesty is not just “wrongful gain” but includes causing “wrongful loss” also. Here there was prima facie “wrongful loss” caused to the existing shareholders of AJL due to the illegal issue of shares to YI. That would sustain offences under Sections 403 and 406 of IPC.
6. The Court in this case was well aware of the provisions of Sections 25 of the Companies Act, 1956 and has specifically dealt with possible arguments based on that on the lines stated above.
Options for Accused after Issuance of Summons
After issuance of Summons, the Accused can come to Court, plead “Not Guilty” and face trial.
If an Accused does not wish to face trial, he can either file a Revision Application before the Sessions Court under Section 397 of the CrPC or file a Petition for Quashing under Section 482 of the CrPC before High Court. In a Revision or Quashing, the Accused has to argue on the case of the Complainant pointing out its inherent defects and cannot normally lead any new evidence. The Accused has to argue that even if the allegations of the Complainant are taken at face value and assumed correct, no offence can be said to have been made out. Unless the case of the Complainant is grossly bad, the Accused is normally asked to face trial and place his case before the Trial Court.
Whether Revision or Quashing or Trial, it will be interesting to see how the matter proceeds from here. But we surely have a long way to go.