Wednesday, October 31, 2012

SC reverses its earlier ruling and nods initiation of prosecution on successive dishonour of cheque

In the instant case, the respondent-company issued some cheques in favour of the appellant which were dishonored twice for insufficiency of funds. The appellant presented the issue before the Metropolitan Magistrate. During proceedings, the respondent contended that complaint had not been filed within 30 days of the expiry of the notice based on the first dishonour of the cheque. The Magistrate dismissed the application of respondent. On filing of revision petition before the High Court, it allowed the revision petition and quashed the orders passed by the Magistrate relying upon the decision of the Supreme Court in Sadanandan Bhadran v. Madhavan Sunil Kumar [1998] 6 SCC 514, according to which a complaint based on a second or successive dishonour of the cheque was not maintainable, if no complaint based on an earlier dishonour of cheque, followed by the statutory notice issued on the basis thereof, had been filed. Matter reached to the Supreme Court.

The Supreme Court held in favour of appellant as under:

1) Holder or payee of the cheque has the right to present the same any number of times for encashment during period of six months or during period of its validity, whichever is earlier: Even Sadanandan Bhadran's case (supra) upheld the same;

2) There is nothing in provisions of Act that forbids holder of a cheque to demand amount covered by cheque, by serving fresh notice under clause (b) of proviso to section 138, should there be a second or successive dishonour of cheque on its presentation;

3) So long as the cheque is valid and it is dishonored upon presentation to the bank, the holder's right to prosecute the drawer remains valid and exercisable;

4) By reason of a fresh presentation of a cheque followed by a fresh notice in terms of section 138, the drawer gets an extended period to make the payment and thereby benefits in terms of further opportunity to pay to avoid prosecution. Such fresh opportunity cannot help the defaulter on any juristic principle to get a complete relief from prosecution;

5) There is no real or qualitative difference between a case where default is committed and prosecution immediately launched and another where prosecution is deferred till cheque presented again gets dishonored.

Thus, the decision in Sadanandan Bhadran's case (supra) was overruled and it was held that prosecution based upon second or successive dishonour of the cheque was also permissible so long as the same satisfies the requirements stipulated in the proviso to section 138 - MSR Leathers v. S. Palaniappan [2012] 26 332 (SC)

US Court hails Rajat Gupta’s ‘big heart and helping hand’ but jails him for insider trading

Rajat Gupta was the director of Goldman Sachs. He was privy to information which would affect company’s share prices but not known to public. Gupta was found guilty by the jury for insider trading i.e. for leaking some unpublished price sensitive information in 2008. Gupta tipped off Rajaratnam about Warren Buffett’s soon-to-be-announced infusion of $5 billion into Goldman Sachs. Rajaratnam purchased large quantities of Goldman stock just before the market closed and booked a gain of $1,231,630 by selling the stock next morning when the Buffett investment was announced and stock prices surged. The crimes merited a prison sentence of 78-97 months under the Sentencing Guidelines of the US. Given Gupta’s exemplary humanitarian record, the US District Court of New York let him off with a ‘non-Guidelines’ sentence of 2 years prison.

The Court noted Gupta’s devotion of a huge amount of time and effort to a very wide variety of socially beneficial activities, such as the Global Fund to Fight AIDS, TB and Malaria, the Public Health Foundation of India etc. Such activities were illustrations of his big heart and helping hand. The Court hailed Gupta’s “extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need”.

On the other hand, Gupta's criminal acts represented the very antithesis of his humanitarian record. With Goldman Sachs in turmoil but on the verge of being rescued by an infusion of $5 billion, Gupta, within minutes of hearing of the transaction, tipped Rajaratnam, so that the latter could trade on this information in the last few minutes before the market closed. This was the functional equivalent of stabbing Goldman in the back.

The Court had to balance both extremes while awarding a sentence to Mr. Gupta. Taking Court observed that “meaningful punishment is still necessary to reaffirm society's deep-seated need to see justice triumphant. No sentence of probation, or anything close to it, could serve this purpose.”

The Court took note of the provisions of the United States Code which require that the Court had to consider the need to afford specific deterrence and general deterrence. As to specific deterrence (i.e. deterring the convict repeating it in future), the Court held that loss of reputation suffered by Mr. Gupta would deter him from repeating his transgressions in future and no further punishment is needed to achieve this result. The need for general deterrence (i.e. to set an example to others), however, suggested different conclusion. Insider trading is an easy crime to commit but a difficult crime to catch. It was necessary to send out the message “when you get caught, you will go to jail”. After carefully weighing the above, the Court sentenced Rajat Gupta to 24 months' imprisonment, concurrent on all counts, to be followed by one year of supervised release and a fine of $5,000,000.

Indians need not despair that, unlike US, legal system moves slowly in India. Two recent instances offer rays of hope. One, the death sentence of Ajmal Kasab for terrorist acts on 26-11-2008 upheld by the Supreme Court in 2012. The other being two Sahara companies found guilty by the Supreme Court of public issue of securities (Optionally Fully Convertible Debentures) in the garb of private placement in 2008. Companies ordered to refund amounts collected from public. This whole case was successfully handled by SEBI, Securities Appellate Tribunal and the Supreme Court in two years flat from 2010 to 2012.