Digital Assets Like Data & Code Property Of Company; Shareholder Can’t Claim Ownership To Defeat Misappropriation Allegations: Karnataka High Court

The Court further held that a shareholder cannot invoke his status within the company to claim proprietary rights over its assets so as to defeat allegations of misappropriation.

The Court was hearing a criminal petition under Section 528 of the BNSS seeking quashing of an FIR registered for offences under the Information Technology Act, 2000 and the Bharatiya Nyaya Sanhita, 2023, alleging unauthorised access, copying and deletion of proprietary company data by a Director and shareholder.

A Bench of Justice M. Nagaprasanna observed: “In the contemporary digital age, the assets of a Company are not confined to physical or movable property. They extend, in significant measure, to data, code and intellectual propriety. Such digital assets, no less than physical ones, are owned exclusively by the Company. The petitioner, therefore, cannot seek refuge in his status as a shareholder to negate the allegations of misappropriation. This is sans countenance and is therefore repelled”.

Advocate Suraj Sampath appeared for the petitioner, while Additional State Public Prosecutor B.N. Jagadeesha represented the State and Advocate Angad Kamath appeared for the complainant.

Background

The petitioner, a founder Director and shareholder of a private limited company engaged in quantitative trading, challenged the registration of an FIR alleging offences relating to unauthorised access, copying, and deletion of proprietary software codes and confidential data belonging to the company.

It was contended by the petitioner that, being an equal shareholder and Director, the data of the company belonged to him as much as to the other Directors, and therefore allegations of theft or misappropriation were legally untenable. It was further contended that the dispute was essentially civil in nature, arising out of internal disagreements between Directors.

The respondents, on the other hand, contended that the company is a distinct juristic entity and that its data, algorithms, and proprietary codes are exclusive assets of the company. It was submitted that unauthorised access, copying, and deletion of such data constituted serious offences under the Information Technology Act and criminal law, and warranted full investigation.

Court’s Observation

The Court examined the foundational principle of corporate personality and held that a company, upon incorporation, acquires a distinct legal identity separate from its shareholders and Directors. It emphasised that ownership of the company’s assets vests solely in the company and not in its shareholders individually.

The Court rejected the contention that a shareholder could claim ownership over company assets, observing that such a proposition would undermine the very concept of corporate personality.

Referring to the Constitution Bench judgment in Bacha F. Guzdar v. Commissioner of Income Tax (1954), the Court reiterated: “a shareholder acquires merely a right to participate in the profits of the Company and does not… obtain proprietary interests in the assets of the Company.”

The Court further held: “The property of the Company, whether tangible or intangible, vests in the Company alone.”

Expanding this principle to the digital domain, the Court emphasised that proprietary trading algorithms, system logs, and source codes constitute valuable intellectual property and confidential assets of the company. It held that unauthorised access, copying or deletion of such data cannot be trivialised as an internal dispute.

The Court observed that the allegations involved acts such as unauthorised access to restricted code repositories, deletion of system logs, and copying of confidential data, which prima facie disclosed elements of cyber offences and breach of trust.

The Court also rejected the argument that the matter was purely civil in nature, holding that the allegations had “all the hues and forms of cybercrime” and required technical investigation, including forensic analysis of digital evidence.

On the scope of interference at the stage of investigation, the Court reiterated settled principles that the High Court should not undertake a detailed examination of disputed facts or evaluate evidence while exercising jurisdiction to quash proceedings.

“It is the allegation of downloading, copying, deletion of source code, proprietary data and confidential digital assets. All these are hues and forms of cybercrime, and cybercrime investigations are highly technical and complex, involving forensic reconstitution of data. Therefore, the projection of triviality of the offence by the petitioner, contending that it is purely civil in nature, cannot be acceded to at this juncture. Investigation must ensue, and to enable it, the petition must necessarily meet its dismissal”, the Court concluded.

Conclusion

The High Court held that the petitioner could not claim ownership over the company’s digital assets by virtue of his status as a shareholder, and that the allegations of unauthorised access and misappropriation of data required a thorough investigation.

Accordingly, the Court refused to quash the FIR and dismissed the petition, holding that the investigation into the alleged offences must proceed in accordance with the law.

Cause Title: Aashay Harlalka v. State of Karnataka & Anr.

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