Introduction
In a recent judgement1, the Supreme Court ("SC") emphasised on the importance of protecting foreign investments while upholding the rule of law which states that a person is innocent until proven guilty. The SC stressed on the judiciary's responsibility to ensure an impartial and transparent mechanism for dispute resolution, ensuring that fair, speedy and efficacious remedies are offered to foreign investors. This judgement accentuates how pivotal it is to protect the interests of foreign investors by establishing and maintaining a stable and predictable legal environment. The judgement, issued by a division bench comprising of Justice Sanjay Karol and Justice Ahsanuddin Amanullah, strives to deliver a message to foreign investors that the Indian economy is conducive to catering to the needs of such foreign investors by upholding the international standards of investor protection. This judgement allowed for an appeal challenging the Karnataka High Court's ("High Court") dismissal of the criminal charges filed against the persons accused of committing tax fraud and criminal breach of trust. This article aims to capture the rationale of the SC in allowing for the adjudication of the aforementioned appeal.
Background
Daechang Seat Automotive Private Limited ("Company"), is a private company incorporated in India and a subsidiary of a company incorporated in South Korea. In December, 2022, Mr. Moon June Seok, the former Chief Financial Officer (CFO) of the Company was accused of collaborating with the appointed Chartered Accountants of the Company to divert funds amounting to ₹ 9,73,00,000/- (Rupees Nine Crore Seventy-Three Lakhs only). The Company was informed by its former CFO and the Chartered Accountants that it had wrongly claimed input tax credits. The Company was further informed that the said amount was owed to the Goods and Services Tax Department and failure to pay the same would entail serious consequences.
Subsequently, an internal audit carried out by the current CFO of the Company found a discrepancy in the balance sheets of the Company. The transactions labelled as "GST payments", which were received by the Chartered Accountants, seemed to be particularly contentious. It was additionally discovered that the no payments had been made by the Chartered Accounts to the GST Department. The Company registered an FIR against the Chartered Accountants and the former CFO, and a chargesheet was subsequently filed under various sections of the Indian Penal Code, 1860, including Section 406 (criminal breach of trust), Section 408 (criminal breach of trust by clerk or servant), Section 418 (cheating with knowledge that wrongful loss may ensue), and Section 120B (criminal conspiracy).
The High Court took cognizance of the matter on April 6, 2023, when approached by Mr. Moon June Seok for the dismissal of the charges drawn up against him. This petition was adjudicated by the High Court, and the charges against Mr. Moon June Seok were dismissed, as prima facie no direct evidence or the presence of seized objects proved his involvement in the diversion of the funds or in any ancillary fraudulent activities. The Company filed an appeal against this dismissal of charges before the SC.
Observations of the SC
Upon being presented with the submissions made by both parties, the SC initially evaluated the application of the principles that were laid down in the judgement made in State of Haryana v. Bhajan Lal2. This judgement detailed the seven permissible events on the basis of which the High Court may exert its inherent power to dismiss criminal proceedings, as under Section 482 of the Code of Criminal Procedure, 1973. The SC noted that the current factual matrix failed to fall under any of the seven established exceptional categories wherein an appeal may be dismissed by the High Court. It was further noted that there appeared to be a connection between the diversion of funds and the interactions between Mr. Moon June Seok and the Chartered Accountants.
The SC held that, at the current juncture, the SC was unable to unable to convince itself that the accused parties were not engaged in any wrongdoing. It observed that reaching such a conclusion prior to an actual trial being carried out against the accused parties would not be just, reasonable, and proper, keeping in mind the quantum of the sum associated with the alleged wrongdoing. While permitting the appeal, the SC made an essential observation during the ruling process: "The rule of law has a responsibility to protect the investments of foreign investors, while at the same time ensuring that any person accused of mishandling such funds is really and fully protected by the power of the phrase 'innocent till proven guilty."
Conclusion
The judgement succinctly emphasises on the SC's intent to maintain investor confidence in the investment environment in India while ensuring judicial impartiality. Foreign investors require the courts to be cognizant of the high stakes involved in the setting up of subsidiaries. The SC has set a strong example by balancing criminal jurisprudence against the needs of the foreign investors, effectively emphasising on the need to protect foreign investments in India. It is reassuring to note that the rule of law stating that an accused is innocent until proven guilty, is balanced against the safeguarding of foreign investments against fraud, embezzlement, and other illegal activities that could jeopardize their investments and other business activities. This is a step forward in ensuring that the investor protection standards in India are in line with the best practices adopted by other countries. This is particularly important in a global economy where foreign investment play a pivotal role in economic growth and development of a nation.
Footnotes
1. HyeoksooSon Authorized Representative forDaechangSeat Automotive PrivateLimitedv. Moon June Seok & Another(2025 INSC 474).
2. (1992Supp (1) SCC 335).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
