The Supreme Court of India, in a significant ruling, has set aside a Delhi High Court order that directed the registration of an FIR for criminal breach of trust in a loan default case. A bench of Justices Dipankar Datta and Augustine George Masih held that a mere breach of a loan agreement does not automatically constitute a criminal offence under Section 405 of the Indian Penal Code (IPC), especially when dishonest intention is absent. The Court emphasised the distinction between civil liability arising from a debtor-creditor relationship and a criminal offence of breach of trust.
Background of the Case
The appeal was filed by Sunil Sharma, a director of M/s. Benlon India Ltd. (“Benlon”), challenging a Delhi High Court judgment dated January 4, 2022. The High Court had directed the Economic Offences Wing (EOW) to register an FIR against Sharma based on a complaint by M/s Hero Fincorp Limited (“Hero”).
The dispute originated from three separate loan transactions between 2014 and 2016, through which Benlon availed financial assistance totalling Rs. 37.25 crore from Hero for the purchase of machinery. While machinery was purchased from the first two loans, a major fire at Benlon’s plant on March 2, 2016, destroyed machinery worth Rs. 180 crore. The final loan of Rs. 15 crore, disbursed on February 25, 2016, was subsequently converted into an unsecured loan and not used for purchasing machinery.
Hero did not raise any objection to this until May 2018, by which time Benlon had been duly paying its installments and had repaid Rs. 26.92 crore of the total loan amount.
In May 2018, insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) were initiated against Benlon by another creditor. Following this, Hero initiated a series of legal actions against Benlon and the appellant, including 32 complaint cases under Section 138 of the Negotiable Instruments Act, 1881, arbitration proceedings, and proceedings under the SARFAESI Act, 2002. Hero also lodged a complaint with the EOW and subsequently filed an application under Section 156(3) of the Code of Criminal Procedure, 1973 (Cr.PC) before the Chief Metropolitan Magistrate (CMM), Patiala House Courts, seeking registration of an FIR.
Proceedings in Lower Courts
The EOW, after conducting an inquiry, submitted a Status Report on August 28, 2019, recommending the closure of the complaint, stating that no cognizable offence was made out. The CMM, vide an order dated November 10, 2020, concurred with this report, rejected the application for FIR registration, and posted the matter for pre-summoning evidence under Section 200, Cr.PC. A criminal revision against the CMM’s order was dismissed by the District and Sessions Judge on January 22, 2021.
However, the Delhi High Court, upon a petition by Hero under Section 482, Cr.PC, overturned the lower courts’ orders. The High Court held that the facts prima facie disclosed a cognizable offence of criminal breach of trust and, applying the principles laid down by the Supreme Court’s Constitution Bench in
Lalita Kumari v. State of Uttar Pradesh, directed the EOW to register an FIR.
Supreme Court’s Analysis and Decision
The Supreme Court, after granting leave to appeal, examined the central question of whether the complaint lodged by Hero disclosed the essential ingredients of criminal breach of trust as defined under Section 405 of the IPC.
The Court dissected Section 405, IPC, highlighting that the provision requires: (i) entrustment with property or dominion over it, and (ii) dishonest misappropriation or conversion of that property in violation of a legal contract or direction of law.
The judgment drew a clear line between a loan transaction and an entrustment of property. Justice Datta, writing for the bench, observed:
“The section would not normally cover the case of a loan where the lender advances money to the borrower who intends to use or utilise the money, for the time being, till he is in possession of it, although he may have to return an equivalent amount later on to the lender… When a loan is advanced, a relationship of creditor and debtor is created and the money lent is generally to be utilised by the borrower for the purpose it is handed over.”
The Court found that in this case, a debtor-creditor relationship was established, and beneficial ownership of the money was transferred to Benlon.
Critically, the Court found no evidence of “dishonest” intent. It concluded that the failure to purchase machinery with the third loan was not due to dishonest misappropriation but was a consequence of circumstances beyond the appellant’s control, namely the fire that ravaged the plant. The Court noted, “so long Hero received the monthly instalments for repayment of the loan on time, i.e., till April/May 2018, it did not even inquire in terms of the loan agreement as to whether the money lent was being used for the stated purpose.” On this basis, the Court concluded that “dishonest misappropriation or conversion is clearly non-existent.”
The Supreme Court also held that the High Court had erred in its application of the Lalita Kumari judgment. It pointed out that
Lalita Kumari permits a preliminary inquiry in cases of ‘commercial offences’ before FIR registration. Such an inquiry was indeed conducted by the EOW, which found no cognizable offence, a fact the High Court failed to properly consider.
Taking into account these reasons and other mitigating circumstances, including the subsequent assignment of the debt and withdrawal of the cheque bounce cases by Hero, the Supreme Court held that the continuation of criminal proceedings would be an abuse of the process of law.
Consequently, the Supreme Court allowed the appeal and set aside the impugned order of the Delhi High Court.
