Jaswantrai Manilal Akhaney vs The State Of Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Criminal Appeal No. 152 of 1954

Decision Date: 4 May, 1956

Coram: Bhuvneshwar P. Sinha, Vivian Bose, B. Jagannadhadas

In the matter titled Jaswantrai Manilal Akhaney versus the State of Bombay, decided on 4 May 1956, the Supreme Court of India, with Justice Bhuvneshwar P. Sinha, Justice Vivian Bose and Justice B. Jagannadhadas forming the bench, delivered a judgment authored by Justice Bhuvneshwar P. Sinha. The petitioner, Jaswantrai Manilal Akhaney, challenged the conviction under section 409 of the Indian Penal Code for criminal breach of trust, together with ancillary provisions of the Indian Penal Code, the Indian Contract Act, the Indian Companies Act and the Code of Criminal Procedure. The factual backdrop involved the appellant, who was the Managing Director of a bank, possessing a power of attorney authorising him to act on behalf of all the directors and to borrow money for the bank. A separate bank had pledged certain Government Promissory Notes with the appellant’s bank as security for an overdraft facility up to a prescribed limit, although in reality the pledgor had not drawn any overdraft. The pledgee bank subsequently found itself in a precarious financial condition. To obtain funds for the bank’s own use, the Managing Director pledged the same securities to a third party. When the bank failed to repay the loan on demand, the creditors of the third party sold the securities in order to realize their dues, leaving the pledgee bank unable to return the securities to the original pledgor upon his demand. The Official Liquidator, appointed to wind up the bank, lodged an information with the police, and the appellant was prosecuted under section 409 of the Indian Penal Code. The Court held that the appellant was guilty of the offence charged and dismissed the appeal. It further observed that, because no overdraft existed, the pledgee bank acquired no enforceable interest in the securities, rendering section 179 of the Contract Act inapplicable. The delivery of the securities by the pledgor, the Court explained, made the pledgee a trustee for the pledgor, with the pledgor retaining ownership subject only to any special interest expressly created by agreement. In the present case, there was no right of redemption by the pledgor, no overdraft, and no sale by the pledgee in enforcement of any special interest, because none had accrued. Consequently, the pledgee bank possessed no authority to deal with the securities. The Court also concluded that the remedy of the pledgor lay in a civil action for damages rather than a criminal prosecution, given the absence of mens rea and other essential elements of the offence. Section 79 of the Indian Penal Code was deemed inapplicable, as it was neither pleaded in the appellant’s written statement nor found by the lower courts. Finally, the Court affirmed that no sanction under section 179 of the Companies Act was required for the prosecution.

In this case the Court explained that determining whether the pledged‑owner’s remedy should be pursued as a civil suit for damages for breach of contract or as a criminal prosecution depended on the presence of mens rea and the other elements that complete the offence. The Court noted that although the crime of criminal breach of trust assumes an entrustment, that entrustment does not have to satisfy every technical requirement of trust law. Accordingly, where the accused possessed the necessary authority, exercised control over the securities, caused wrongful loss to the pledgor and an unlawful gain to the pledgee by dealing with those securities, the accused was liable for the offence.

The Court further held that Section 79 of the Indian Penal Code could not aid the accused because it was never pleaded in his written statement and the lower courts had not found that he was unaware of the absence of any overdraft. The Court also observed that no sanction under Section 179 of the Companies Act was required for the prosecution. That provision is merely permissive, allowing a court‑appointed liquidator to act with court permission, and it does not limit the general jurisdiction of the courts to take cognisance of a crime, nor does it restrict the police from initiating prosecution or a private citizen from invoking the criminal process to bring an offender to justice. The decision in Basdeo Agarwalla v. King‑Emperor ([1946] F.C.R. 93) was distinguished and held to be inapplicable.

The Court then addressed the adequacy of the charge against the accused. It found that the charge satisfied the requirements of Sections 221 and 222(1) of the Code of Criminal Procedure, as the particulars set out were sufficient to inform the accused of the matter with which he was charged. Consequently, it was not necessary to describe the manner of commission of the offence as mandated by Section 223 of the Code. The judgment proceeded under criminal appellate jurisdiction, being Criminal Appeal No. 152 of 1954, filed by special leave against the judgment and order dated 20 October 1953 of the Bombay High Court in Criminal Appeal No. 652 of 1953, which in turn arose from the judgment and order dated 9 April 1953 of the Court of Presidency Magistrate, 19th Court, Bombay, in Criminal Case No. 12164/P of 1949. Counsel for the appellant included H.J. Umrigar and R.A. Govind, while counsel for the respondent comprised Porus A. Mehta and R.H. Dhebar, appearing for P.G. Gokhale. Delivered on 4 May 1956 by Justice Sinha, the appeal challenged the concurrent orders of the lower courts that had convicted the appellant under Section 409 of the Indian Penal Code, imposing three months’ rigorous imprisonment, a fine of Rs 201, and, in default, an additional six weeks of rigorous imprisonment. The appellant had previously been convicted and sentenced for a similar offence in another case tried by the same Presidency Magistrate, prompting the court to consider the appropriate adjudication of the present appeal.

In the appeal, the court at the nineteenth Court, Esplanade, Bombay, ordered that the term of imprisonment imposed in the present case be to run at the same time as the term imposed in the other case. The charge formulated by the trial court stated that the accused was alleged to have violated section 409 of the Indian Penal Code by committing criminal breach of trust in respect of certain government promissory loan notes. Specifically, the charge referred to three‑percent Government Promissory Loan Notes for the years 1966‑68 with a face value of Rs 50,000 and two‑and‑quarter‑percent Government Promissory Notes of 1961 with a face value of Rs 25,000. These instruments were said to have been handled in the period from February to May 1949, having been entrusted to the accused in his capacity as Managing Director of the Exchange Bank of India and Africa Limited, and belonging to the Cambay Hindu Merchants Co‑operative Bank. The detailed particulars of the charge were framed separately. At every relevant moment, the appellant occupied the position of Managing Director of the Exchange Bank, a company whose registered office was in Bombay. He possessed a power of attorney that authorized him to act as Managing Director on behalf of the company’s directors, and that power conferred upon him the authority to borrow money in the name of the bank. In 1944 the Cambay Hindu Merchants Co‑operative Bank, hereafter referred to as the Co‑operative Bank, opened a current account with the Exchange Bank. Acting on instructions from the Co‑operative Bank, the Exchange Bank, in August 1946, purchased securities worth Rs 25,000 in its own name using funds that belonged to the Co‑operative Bank; those securities were retained by the Exchange Bank as collateral for any overdraft that might be drawn. In March 1948 the bank purchased two additional lots of government securities, each valued at Rs 25,000, thereby adding another Rs 50,000 to the securities held for the same purpose. On 14 May 1948 the two banks entered into a contractual arrangement documented by three separate instruments, the contents of which are considered in detail later. In summary, the Exchange Bank consented to extend to the Co‑operative Bank an overdraft facility not exceeding Rs 66,150, and as security for that facility the government securities already in the Exchange Bank’s custody, having a total face value of Rs 75,000, were pledged to the Co‑operative Bank. These securities will be referred to as “the securities.” The Co‑operative Bank did not actually draw upon the overdraft until 28 February 1949, when a critical development occurred. At that time the Exchange Bank found itself in a strained financial situation and obtained a loan of one lakh rupees from the Canara Bank, securing that loan by pledging the securities together with other securities that are not the subject of this case. Subsequently, on 24 April 1949, the Exchange Bank discharged its liability to the Canara Bank by securing a fresh loan of the same amount, one lakh rupees, from Messrs Merwanji Dalal & Co., and again pledged the same securities that had earlier been pledged to the Canara Bank.

After the Exchange Bank had repaid the loan it had taken from the Canara Bank, Messrs Merwanji Dalal & Co. demanded the return of their money on the morning of 28 April 1949, requiring payment before the forenoon of the following day. The Exchange Bank was unable to meet this demand, and consequently the lenders sold the pledged securities—including those that had been pledged by the Co‑operative Bank—to recover the amounts owed to them. This sale of the securities took place on 3 May 1949. During the same period, the Co‑operative Bank wrote to the Exchange Bank requesting a certificate confirming the securities that the latter held on the Co‑operative Bank’s behalf in relation to the overdraft facility. In response, the Exchange Bank issued a certificate dated 1 April 1949, stating that at the close of business on 31 March 1949 it possessed Government of India securities with a total face value of Rs 75,000 as security for the overdraft extended to the Co‑operative Bank, and that no overdraft amount was outstanding against those securities on that date. On 29 April 1949 the Co‑operative Bank sent another letter to the Exchange Bank asking it to deliver securities worth Rs 50,000 to the Central Bank. The Central Bank, acting on instructions from the Co‑operative Bank, also made a similar demand. Because the Exchange Bank failed to comply, the Central Bank wrote to the Co‑operative Bank on 3 May 1949 to inform it that the securities had not been transferred as directed. Subsequently, the Co‑operative Bank appealed to the Reserve Bank requesting that securities valued at Rs 25,000 be stopped. At that point it became evident that the Exchange Bank could not return the securities to their rightful owner, the Co‑operative Bank. Despite the Managing Director of the Exchange Bank (the appellant) attempting to avert the crisis by obtaining loans from various sources, the bank experienced a severe run. The directors therefore applied to the Company Judge of the Bombay High Court for a fifteen‑day moratorium, which was granted. On 18 May 1949 a provisional liquidator was appointed over the Exchange Bank upon a creditor’s application, and on 24 June 1949 an Official Liquidator was named to wind up the bank. On 25 June 1949 M N Raijee, acting as an agent of the Official Liquidator, filed a police report charging the appellant with breach of trust concerning several securities, including those belonging to the Co‑operative Bank. The police submitted a charge‑sheet under section 409 of the Indian Penal Code on 31 October 1949, alleging that the appellant had misappropriated securities with a face value of Rs 75,000 belonging to the Co‑operative Bank. The formal charge against the appellant was framed on 4 April 1952. The considerable delay of roughly two and a half years before the appellant was placed on trial was attributed to a stay requested by the accused, pending the resolution of a separate case against him.

In this case, the trial was postponed for about two and a half years because the accused requested that the proceedings on this charge be stayed until the other case pending against him was finally disposed of.

At trial, the prosecution called the manager of the Co‑operative Bank as the first witness. He explained the transactions that had taken place between the Co‑operative Bank and the Exchange Bank, thereby establishing the factual background of the dispute.

The second witness for the prosecution was a partner in the firm of Messrs Merwanji Bomanji Dalal, which was active during the material period. He testified that his firm had advanced a loan of one lakh rupees to the Exchange Bank, securing the loan on the pledge of securities belonging to the Co‑operative Bank as well as on other securities. He further stated that the appellant was the individual who finalised the loan on behalf of the Exchange Bank. When the Exchange Bank failed to repay the loan on demand, his firm sold the pledged securities, including those in question, and recovered the amount due from the proceeds of the sale, amounting to one lakh rupees.

The third prosecution witness was the chief accountant of the Exchange Bank, who served in that capacity until the bank closed on 2 May 1949. He possessed a power of attorney that allowed him to act jointly with another person holding a similar authority. According to his testimony, the appellant, in his capacity as Managing Director, exercised all powers of borrowing, raising money, purchasing, selling and pledging bonds, scrips and other securities on behalf of the bank and its constituents during the relevant period, and no other individual exercised those powers. He also described a crisis that began in mid‑February 1949, leading to a rush on the bank that continued until its closure. During the material period, the Co‑operative Bank maintained a credit balance in its favour and never incurred an overdraft from the Exchange Bank. He produced Exhibits E, F and G, which were documents evidencing the contract between the two banks concerning the pledge of securities. He corroborated the earlier witness that the appellant had negotiated and finalised a loan of one lakh rupees from Canara Bank, that the securities in question and other securities had been pledged to Canara Bank, and that the appellant had endorsed those securities to Canara Bank. He further explained that the Exchange Bank had submitted a declaration to Canara Bank stating that the pledged securities belonged absolutely to the Exchange Bank, and that the loan from Canara Bank had been obtained to meet the overwhelming demand of depositors during the bank’s crisis.

The most important prosecution witness was Ganpati Venkatrao Kini, who served as an accountant in the Exchange Bank during the relevant period and later assisted the Official Liquidator after the court ordered the bank’s liquidation. Like the previous witness, he held a power of attorney that permitted him to act only in conjunction with another person holding a similar authority. He affirmed that the power to borrow money, purchase, sell, pledge or re‑pledge securities was exercised exclusively by the appellant on all material dates, and he corroborated the earlier testimony regarding the bank’s crisis from mid‑February 1949 and the consequent heavy rush of depositors until the bank’s closure. He also authenticated Exhibits E, F and G and stated that from the date these documents were executed on 14 May 1948 until the bank’s closure on 2 May 1949, the Co‑operative Bank never had an overdraft and always maintained a credit balance.

During the period in question, the witness was employed by the Exchange Bank and later assisted the Official Liquidator after the court ordered the bank’s liquidation. Like the earlier witness, he possessed a power of attorney that could be exercised only together with another person holding a similar authority. He affirmed the earlier witness’s testimony that the authority to borrow money, to purchase, sell, pledge, or re‑pledge securities was exercised solely by the appellant and by no other individual on any material date. He also corroborated that a financial crisis had begun at the Exchange Bank around mid‑February 1949 and that a severe rush of depositors continued from that time until the bank was closed. He produced Exhibits E, F and G and declared that from 14 May 1948, when those documents were executed between the two banks, up to 2 May 1949, when the Exchange Bank shut its doors, the Cambay Co‑operative Bank never incurred an overdraft because it always maintained a credit balance. He detailed the transaction in which the Exchange Bank obtained a loan of one lakh rupees from the Canara Bank and identified the securities that were offered as security for that loan. He made a significant admission, stating, “I had handed over the two securities belonging to the Cambay Co‑operative Bank to the accused for being handed over to the Canara Bank against the loan. The accused actually asked me for these securities and I handed them to the accused.” When questioned why he did not inform the appellant that the securities belonged to the Co‑operative Bank rather than the Exchange Bank, he replied, “In fact, the accused himself told me to bring securities pledged by the Cambay Co‑operative Bank with the Exchange Bank.” He introduced Exhibit L, a crucial document signed by the accused, and asserted that the declaration in that document, which claimed the securities represented the Exchange Bank’s investments, was incorrect. He further explained the various financial interests the appellant held: the appellant received a monthly salary of Rs 2,500 as Managing Director of the Exchange Bank and an additional Rs 1,000 as Managing Director of Union Life Assurance Co. Ltd., whose current account and branches had deposited six to seven lakh rupees with the Exchange Bank as call deposits. The appellant was also associated with Messrs L. A. Stronach Ltd., advertising agents that had been granted overdraft facilities by the Exchange Bank, from whom he received a monthly salary of Rs 2,000. Moreover, the appellant and his wife were the principal shareholders of Akhaney & Sons Ltd.

In the course of the proceedings it was established that the appellant and his wife served as Secretaries and Treasurers of Indian Overseas Airlines. The Exchange Bank had extended a loan of one crore and ten lakh rupees to Indian Overseas Airlines, and the firm Akhaney & Sons Ltd., which was linked to the appellant, received a monthly remuneration of Rs 2,500 from that airline. Consequently, when the various remuneration streams were combined, the appellant and his wife appeared to draw roughly Rs 8,000 per month from the several companies that were financially inter‑connected, and the appellant functioned as the principal figure and the connecting link among them. Because of this position, it was in his interest to ensure that the Exchange Bank continued to operate for as long as possible, even if that required borrowing large sums of money despite an existing run on the bank. The Court noted that the appellant’s acts of commission and omission had to be assessed against this background of financial relationships and motives. The trial record further indicated that the remaining four witnesses, identified as P.W. 5 to P.W. 8, were essentially formal witnesses whose testimony served only to prove certain documents and letters that did not require detailed notice. The evidence of P.W. 2 was excluded because he was unavailable for cross‑examination after the charge had been framed, having left the country. The appellant’s defence was presented in a lengthy written statement comprising twenty numbered paragraphs spread over seven typed pages and submitted on 3 October 1952. In brief, the defence asserted that the charge framed against the appellant was legally unsound and extremely vague, that such vagueness had materially hindered his ability to defend himself, and that the prosecution had acted unfairly by failing to examine the first informant, M. N. Raiji. The defence contended that, had the informant been examined, the records in the appellant’s possession would have shown that the Co‑operative Bank suffered no loss and that the Exchange Bank, under the liquidator, possessed ample funds to satisfy its liabilities. Furthermore, the defence argued that the prosecution had commenced without the sanction of the Company Judge who was overseeing the liquidation of the Exchange Bank, thereby violating the requirements of sections 179 and 237 of the Indian Companies Act. It was also maintained that the securities in question had not been entrusted to the appellant but, if any entrustment had occurred, it was to the Exchange Bank itself, which under the documents marked Exs. E, F and G was legally empowered to deal with the securities in any manner it chose. The sub‑pledging of those securities to Canara Bank or to Messrs Merwanji Bomanji Dalal was described as being fully permissible within the law. The defence concluded that the essential elements of an offence under section 409 of the Indian Penal Code had not been established. Finally, the appellant complained that Inspector Milburn, who had investigated the case, had not been called as a prosecution witness, thereby depriving the appellant of the opportunity to challenge the prosecution’s evidence through reference to the police diary.

In this case the appellant argued that the essential elements required to constitute an offence under section 409 of the Indian Penal Code had not been established, and he further complained that Inspector Milburn, who had investigated the matter, was not called as a prosecution witness, thereby depriving him of the opportunity to challenge the prosecution’s evidence by referring to the police diary. After a thorough and impartial examination of all the evidence and of the points raised by the appellant in his defence, the learned Magistrate concluded that the appellant was guilty of criminal breach of trust punishable under section 409 of the Indian Penal Code and imposed a lenient sentence, taking into consideration the observations that “not a pie went to the pocket of the accused” and that “the accused had not taken up any dishonest defence”. The Magistrate also held that the charge as framed was not vague within the meaning of section 222 of the Criminal Procedure Code, with particular reference to the provisions of sub‑section (2) of that section. Regarding the absence of examination of the first informant, M. N. Raiji, and of the investigating police officer, the court noted that both were formal witnesses because the material facts of the case were not contested, and observed that, had the accused or his counsel applied to the court for their examination, they could have been called and subjected to cross‑examination, but no such application was made. Concerning the alleged lack of sanction from the Company Judge, the Magistrate ruled that section 179 of the Indian Companies Act did not apply because the proceedings were not instituted under the Companies Act, and therefore no sanction was required. Addressing the contention that no entrustment existed within the meaning of section 405 of the Indian Penal Code, the Magistrate observed that the accused possessed delegated powers from the Board of Directors and held the property in trust on behalf of the Directors of the Exchange Bank. He further held that the pledge contract dated 14 May 1948 between the two banks did not confer an absolute right on the Exchange Bank to deal with the securities, and that the Exchange Bank could not deal with the securities so long as the Co‑operative Bank had not taken an overdraft from it. Finally, on the question of dishonest dealing, the court found that, in all the circumstances, wrongful loss was inflicted upon the Co‑operative Bank and wrongful gain accrued not to the appellant personally but to the Exchange Bank, which he represented during the transactions.

On appeal to the Bombay High Court, a Division Bench dismissed the appellant’s challenge, largely affirming the findings of the trial magistrate. The High Court considered a new issue raised for the first time before it, namely whether the appellant was operating under a mistake of fact or law concerning the Cooperative Bank’s indebtedness to the Exchange Bank or concerning the Bank’s authority to deal with the security. The Court concluded that no genuine mistake of fact could be attributed to the appellant in good faith. It further observed that the appellant himself had never invoked any plea of mistake, whether regarding the factual matrix or any doubtful question of law. The Court also highlighted that the appellant, while acting on behalf of the Exchange Bank, had declared that the securities belonged absolutely to the bank and represented its investment statements, statements that the appellant knew to be false. When the appeal was examined on the question of sentence, the High Court noted the presence of convincing evidence indicating that the appellant was also motivated by personal benefit. Accordingly, the High Court confirmed both the conviction and the sentence imposed by the trial magistrate.

Subsequently, the appellant applied to the High Court for a certificate authorising a further appeal to this Court, a request that was denied. The appellant then approached this Court and obtained special leave to appeal. In support of the appeal, counsel for the appellant raised several questions of law and contended that, both under the law and on a proper construction of the contract between the two banks, the appellant was fully entitled to pledge the securities provided that the overdraft agreement remained in force, irrespective of whether an actual overdraft existed on 28 February 1949, the date of the pledge. To examine this position, the Court referred to Exhibits E, F and G, all dated 14 May 1948, which constitute a single transaction and set out the terms of the contract between the banks. Exhibit E is a promissory note issued by the Cooperative Bank in favour of the Exchange Bank for Rs 66,150, bearing interest at three per cent per annum with half‑yearly rests. Exhibit F is a letter from the Cooperative Bank to the Exchange Bank enclosing Exhibit E. Exhibit G is the bond that pledges all marketable securities and goods to the Exchange Bank in consideration of its promise to extend overdraft credit limited to the aforesaid amount, with interest at three per cent per annum. The bond contains a significant clause that reads: “........................... and”.

In the agreement the parties stated that if the Cooperative Bank failed to keep the required margin on the pledged movable property, marketable securities and goods, or failed to repay on demand any amount advanced by the Exchange Bank together with interest, costs, charges and expenses, the Exchange Bank would be entitled, though not obligated, to sell or otherwise dispose of all or any of the pledged movable property, marketable securities and goods. The sale could be conducted either by public auction or private contract, on such terms and conditions that the Exchange Bank considered appropriate, without needing the consent of the Cooperative Bank. The proceeds from such sale were to be applied first to cover all costs, charges and expenses incurred in connection with the sale and the enforcement of the pledge and charge created in favour of the Exchange Bank; second, the proceeds were to be applied to repay the amount of the advance or credit together with interest and any associated costs, charges and expenses, including any loss in exchange, and to satisfy all other debts and monies due from the Cooperative Bank to the Exchange Bank; and third, any surplus remaining after these deductions was to be paid to the Cooperative Bank. The contract expressly declared that this arrangement would constitute a continuing security to cover any amount of advance or credit that the Exchange Bank might allow to the Cooperative Bank, together with interest, costs, charges, expenses and all other debts and monies due as specified.

When the three exhibits—E, F and G—are read together, it becomes clear that securities with a face value of Rs 75,000 were pledged by the Cooperative Bank to the Exchange Bank as security for an overdraft facility limited to Rs 66,150, for which the Cooperative Bank had issued a promissory note to the Exchange Bank. The documents further stipulated that if the pledgor defaulted in paying on demand the amount advanced under the overdraft together with accrued interest, the Exchange Bank could realize the securities by sale. After satisfying the pledgee’s claims against the pledgor, any surplus from the sale proceeds would be returned to the pledgor. Consequently, the contract made it evident that the Exchange Bank did not acquire an unconditional right to sell the securities merely because there might be no outstanding dues from the Cooperative Bank. The securities were to remain in the possession of the Exchange Bank, charged only with the amount that might be advanced under the overdraft arrangement. This charge was not absolute; it was contingent upon the existence of an adverse balance between the two banks, meaning that a charge would arise only when the Cooperative Bank’s account reflected a liability against the Exchange Bank.

In this case the Court noted that the Co‑operative Bank had never drawn any amount from the Exchange Bank under the agreement that had been described earlier. The Court explained that the Exchange Bank’s authority to act upon the securities could arise only if certain specified events occurred, namely, if the pledgor failed to maintain the required margin or if the pledgor defaulted on repayment of the outstanding amount when demanded by the Exchange Bank. The Court observed that, as long as neither of those contingencies materialised—and no party alleged that they had— the pledgee bank possessed no right to deal with the securities by way of pledge, sub‑pledge or assignment. The Court then turned to the argument that relied upon section 179 of the Indian Contract Act, contending that because the securities had been agreed between the two banks to secure an overdraft not exceeding Rs 66,150, the pledgee bank would, up to that amount, have an interest in the securities that it could lawfully deal with. It was further argued that, since there was no evidence that the appellant had dealt with the securities for an amount exceeding that limit, the appellant could not be said to have breached the contract. The Court rejected this contention as untenable. It held that section 179 provides that the pledgor retains a limited interest which he may lawfully transfer, and any transaction by the pledgor within that limited interest would be valid. Consequently, if the Co‑operative Bank had actually drawn on its overdraft facility within the stipulated limit, the Exchange Bank would have acquired a proportional interest in the securities and might then have been entitled to pledge or sub‑pledge those securities to a third party. However, because no overdraft had been drawn by the pledgor, the pledgee possessed no such interest and therefore could not lawfully pledge or sub‑pledge the securities. Furthermore, the Court found that the factual narrative made clear that the appellant had dealt with the securities in connection with third parties after expressly declaring that the securities were the absolute property of the Exchange Bank. The Court stressed that it was not concerned with the extent of any interest acquired by the third parties but solely with the legal relationship between the two banks, the Exchange Bank being represented by its Managing Director, the appellant. Accordingly, the Court concluded that, under the terms of the contract, the appellant was not authorised to transfer any interest in the securities, and that any such transfer would constitute a breach of the contractual terms. Finally, the Court indicated that it would now examine the legal position apart from the contractual provisions, noting that, on the facts, the Exchange Bank had become the bailee of the securities.

The securities were handed over by the Co‑operative Bank to the Exchange Bank expressly for the purpose stated in the contract, namely that they would be disposed of according to the terms set out in Exhibit G. By delivering the securities to the Exchange Bank, which acted as a bailee, the Exchange Bank assumed the role of a trustee under the contract, but only for the limited purpose defined by the parties’ agreement. In the present matter, the pledgor—the Co‑operative Bank—simply transferred possession of the securities to the pledgee—the Exchange Bank—so that the pledgee could enforce a charge for payment of an overdraft, if any existed, while ownership of the securities remained with the pledgor. The pledgee’s special interest in the securities terminated as soon as the underlying debt was discharged. The pledgor retained the right to redeem the pledge by paying in full the amount for which the pledge was created; this right could be exercised at any time if no fixed redemption period was stipulated, or after a specified date if one was fixed, and it continued until lawful sale of the pledged item. Consequently, the Co‑operative Bank could have demanded the return of the securities at any time, because no overdraft ever existed. Since the pledge was not ended by redemption nor by a lawful sale triggered by any contingency contemplated in the agreement or permitted by law, the securities remained the property of the Co‑operative Bank, and the Exchange Bank—or, more precisely, its Managing Director who represented it—had no authority to deal with them. An alternative argument was raised that, even if the Exchange Bank acted contrary to the contractual terms, the Managing Director’s conduct amounted only to a breach of contract, for which the appropriate remedy would be a suit for damages rather than criminal prosecution. That contention rests on the premise that the same factual scenario cannot give rise to both civil liability and criminal prosecution. Such a premise, presented in its bare form, is unacceptable because the absence of mens rea or any other essential element of an offense would preclude criminal liability while still allowing a civil action. Accordingly, the question required examination was whether mens rea existed in this case and whether the essential ingredients of a criminal offence were satisfied. It was contended that no offence under Section 409 of the Indian Penal Code could be established against the Managing Director for three reasons: first, that there was no entrustment of property; second, that there was no mens rea; and third, that there was no dishonesty on his part. For an offence under Section 409, the first essential element is the entrustment of property.

In this case the Court explained that the first element required to establish an offence under section 409 of the Indian Penal Code is that the property must have been entrusted to the accused. The submissions of the defence argued that such entrustment, as imagined by the statute, did not exist because the securities had merely been pledged by the Co‑operative Bank to the Exchange Bank in its capacity as a debtor. The defence further maintained that the parties had never intended to create a trust in the strict legal sense. The Court observed, however, that section 405, which defines criminal breach of trust, uses the expression ‘a person being in any manner entrusted with property’ without requiring the technical creation of a trust under trust law. Rather, the provision envisions a relationship in which the owner transfers possession of his property to another person for the purpose of retaining it until a specified contingency occurs or for disposing of it upon the happening of a certain event. The owner who transfers possession continues to be the legal owner, while the recipient obtains only a custodial interest, limited to keeping the property or disposing of it for the benefit of the owner, and may acquire a special interest only to the extent of a claim for money advanced for safekeeping or for incidental expenses incurred. Applying this description to the facts, the Court noted that the Co‑operative Bank had entrusted the Exchange Bank with the securities in order to hold them as security for any overdraft that might be drawn by the Co‑operative Bank. Legally, the securities remained the property of the Co‑operative Bank, and because the Co‑operative Bank never borrowed any money from the Exchange Bank, the latter possessed no interest that would enable it to transfer the securities to any third party. The entrustment, therefore, was made to the Exchange Bank itself. Since the Exchange Bank is a corporate entity, its business had to be conducted through an authorized representative. The appellant, who held a power of attorney on behalf of the directors of the Exchange Bank, was authorised to transact the bank’s business and consequently exercised dominion over the securities. Accordingly, the Court held that the appellant could be said either to have been entrusted with the securities in a derivative sense or to have had dominion over them in his capacity as a banker; in either view the first essential condition for the offence under section 409 was satisfied. The Court then turned to the question of mens rea. It said that it must be determined whether the appellant had dishonestly disposed of the securities in breach of the contractual terms governing their pledge. The record showed that the appellant had indeed disposed of the securities contrary to the conditions of the contract between the two banks. Nevertheless, the Court indicated that the enquiry must continue as to whether such disposal was made dishonestly, a point that would be examined in the subsequent discussion.

The remaining question was whether the appellant acted dishonestly; that is, whether his disposal of the securities was intended to cause a wrongful benefit to the Exchange Bank and a wrongful loss to the Co‑operative Bank. The Court held that the appellant intended both outcomes. In fact, his actions resulted in a wrongful loss to the pledgor bank and a wrongful gain to the pledgee bank. The Exchange Bank obtained funds by raising money on the securities, an act for which it had no authority, and the Co‑operative Bank was deprived of those securities, even if only for a brief period. Established law treats any deprivation, however short, as falling within the meaning of the expression. Because the appellant disposed of the securities with the purpose of causing loss to one bank and gain to the other, the Court concluded that the requisite mens rea was clearly present.

The next argument advanced was that, assuming the essential elements of an offence under section 409 of the Indian Penal Code were satisfied, the appellant might have made a mistake of fact by believing that the Co‑operative Bank owed a debt to the Exchange Bank, or a mistake of law by mistakenly thinking that, as pledgee, the Exchange Bank possessed the right to sub‑pledge the securities to raise money for its own purposes. The Court noted as a matter of fact that the Co‑operative Bank had not drawn any overdraft from the Exchange Bank. Nonetheless, it was contended that the appellant’s knowledge of this fact had not been proved. The appellant, in his extensive written statement, did not attempt to rely on any such mistake. He exercised full control over the bank accounts, and, as the lower courts observed, it was implausible that, given the severe financial crisis confronting the bank and the appellant’s desperate efforts to mobilise all of the bank’s resources, he would have been unaware that the Co‑operative Bank did not owe any overdraft to his bank. Consequently, the Court found no basis to presume that the appellant was ignorant of the true state of accounts between the two banks.

The argument then shifted to the possibility that the appellant erred in law, believing that his actions were justified under the law. This line of reasoning sought to invoke one of the general exceptions found in Chapter IV of the Indian Penal Code, specifically section 79, which provides: “Nothing is an offence which is done by any person who is justified by law, or who by reason of a mistake of fact and not by reason of a mistake of law in good faith, believes himself to be justified by law, in doing it.” The Court observed that, when assessing such a defence, the attitude of the accused is a critical consideration.

The Court observed that the attitude of the accused is a material factor in determining the applicability of the defence under section 79 of the Indian Penal Code. It noted that the appellant made no effort in the trial court to raise such a defence. The Court explained that, had the appellant alleged that, after exercising due care, he was mistaken about the existence of an overdraft by the Co‑operative Bank in favour of the Exchange Bank, he might have been able to invoke the statutory exception. However, the Court found that in the present case there was no mistake of fact, and that the appellant must have known that no such overdraft existed; consequently, section 79 could not be applied. The Court further held that the appellant could not rely on the exception merely by asserting that he believed, on legal grounds, that he was entitled to treat the securities as the property of the Exchange Bank, as he had claimed in his written statement. The Court added that, if the appellant had also proven a good‑faith belief that the Co‑operative Bank owed money to his bank, such a belief might have assisted in bringing him within the exception. Because there was no factual mistake, the provisions of section 79 did not arise in this matter.

The Court then turned to the objections concerning the alleged illegality or irregularity of the procedure followed in the trial. It recorded that the prosecution was challenged on the ground that it was incompetent, since no sanction from the Company Judge had been obtained under section 179 of the Indian Companies Act. The Court reproduced the relevant portion of section 179, which states: “The official liquidator shall have power, with the sanction of the Court, to do the following things: (a) to institute or defend any suit or prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company…” The Court explained that this provision delineates the powers of the official liquidator, who must act under the directions of the court overseeing the liquidation. One of the liquidator’s powers is to institute prosecutions in the name of, and on behalf of, the company undergoing liquidation, but only with the court’s sanction. The Court clarified that section 179 does not intend to place any limitation on the authority of a criminal court to entertain a criminal prosecution that is instituted in the ordinary course under the Code of Criminal Procedure. When a prosecution must be launched in the name of, or on behalf of, a company, the judge naturally has to consider whether it is appropriate to incur expenses on the company’s behalf; therefore, the statute requires the judge’s prior sanction before the liquidator may commence or defend such proceedings. The

In this matter the Court observed that the present proceeding was not a prosecution brought in the name of, or on behalf of, the company, and that the official liquidator did not wish to prosecute. The prosecution had been initiated by a charge‑sheet filed by the police, even though the original information report had been lodged by an officer acting under the official liquidator. Consequently, the case was not one that had been started or instituted by the official liquidator himself. The Court further held that the situation could not be compared, even by analogy, with the rule formulated by the Federal Court in Basdeo Agarwalla v. King‑Emperor, where a prosecution commenced without prior sanction of the Government, as required by clause 16 of the Drugs Control Order, 1943, was held to be wholly void. In that precedent the Federal Court examined the words of clause 16, which declared that “No prosecution for any contravention of the provisions of this Order shall be instituted without the previous sanction of the Provincial Government….” The Court noted that section 179 of the Companies Act contained no similar language. When the legislature intended to restrict a court’s power to take cognisance of an offence unless certain conditions were satisfied, for example under sections 196 and 197 of the Criminal Procedure Code, it expressly used limiting words such as “No court shall take cognisance…”. By contrast, there was nothing in section 179 that could be read as limiting the court’s authority to take cognisance of an offence, nor the police’s power to commence a prosecution, nor a private citizen’s right to invoke the criminal justice machinery against a wrongdoer such as the appellant. The Court explained that a prosecution for breach of trust, even when it involved a director of a company, did not require any prior sanction from an authority unless the prosecution was undertaken in the name and on behalf of the company by the official liquidator, which would entail expenditure of company funds. Section 179 was described as an enabling provision, cited as (1) [1945] F.C.R. 93, that permitted the liquidator to act with the court’s sanction; it did not govern the general law of the land. The Court then turned to the contention that the charge framed by the trial court was illegal, vague, and had caused material prejudice to the appellant. It observed that the charge had already been set out and that the learned trial magistrate had, at the close of the hearing, indicated that a detailed charge would be framed separately. However, no such detailed charge was before the Court, and the appeal proceeded on the assumption that the trial court had not, in fact, framed a detailed charge. Accordingly, the Court identified the key issue as whether the charge as currently framed satisfied the legal requirements. It noted that the appellant’s counsel had argued that the charge was deficient.

In this matter, the charge that had been framed was said by the appellant to be materially defective because it did not set out the specific nature of the alleged breach of trust, the precise facts constituting the breach, nor the exact date and manner in which the breach was purported to have occurred. The Court examined the content of the charge against the requirements laid down in the Criminal Procedure Code. It observed that the charge satisfied the provisions of section 221 of the Code because it identified the offence as “criminal breach of trust” and expressly referred to section 409 of the Indian Penal Code. By doing so, the charge implicitly gave the accused notice of each legal element that must be proved for the offence of criminal breach of trust. The Court further held that the charge complied with section 222(1) of the Code, since it specified the particular securities involved and identified the Co‑operative Bank against which the alleged breach of trust had been committed. In the Court’s opinion, these particulars were adequate to inform the accused of the matter with which he was charged. While the trial magistrate had also referred to sub‑section (2) of section 222, the Court found that reliance on that provision was misplaced because sub‑section (2) relates to offences of dishonest misappropriation of money, which were not the subject of the present case. The Court noted that the charge did not describe the manner of commission required by section 223 of the Code; however, it explained that such a description is necessary only when the information supplied under sections 221 and 222 fails to give sufficient notice. Accordingly, the Court concluded that although the charge could have been drafted with greater detail as the magistrate had originally intended, the charge as it stood provided the accused with sufficient notice of the nature of the offence alleged against him.

The Court next considered whether any alleged omissions in the charge could be regarded as material. It held that, under section 225 of the Code, an omission can be treated as material only if the accused demonstrates that he was actually misled by the omission or that a miscarriage of justice resulted from it. The illustrations to that section require each case to be examined on its own facts; there is no automatic presumption that every error or omission in a charge necessarily prejudices the trial. From the long written statement filed on behalf of the appellant, the Court observed that the appellant clearly understood the essential gist (gravamen) of the charge and made efforts to meet it in all respects. Consequently, the Court was not persuaded by the argument that the omissions were material or that the case needed to be retried on a fresh charge. The Court also noted that the Division Bench of the High Court, which had earlier considered the appeal, issued separate but concurring judgments and did not record any argument concerning the illegality or irregularity of the charge. This indicated that the appellant had not raised the charge‑defect issue at that stage, even though the memorandum of appeal mentioned a vague and defective charge. In the Court’s view, the omissions did not materially affect the conduct of the trial, nor did they prejudice the appellant’s defence or cause a failure of justice. As all the grounds raised in support of the appeal were found to be untenable, the appeal was dismissed.

The judges of the High Court prepared their judgments but, in the course of their consideration, they observed that no argument had been advanced before them specifically challenging the legality or regularity of the charge that had been framed. This observation led the Court to conclude that the appellant had not presented the alleged defect in the charge as a grievance at the time the oral arguments were being heard, even though the written memorandum of appeal had indeed set out a ground that the charge, as it stood, was vague, defective and consequently infirm in law. In the view of the Court, the mere omission of certain particulars from the charge could not be said to have materially affected the conduct of the trial, to have prejudiced the appellant’s ability to mount his defence, or to have resulted in a failure of justice. After reviewing the material placed before it, the Court found that each of the grounds relied upon by the appellant to support the appeal failed to establish any substantive error that would warrant setting aside the conviction. Accordingly, having determined that none of the alleged infirmities in the charge met the threshold of material prejudice, the Court dismissed the appeal in its entirety.