In a significant judgment, a bench of Justice Arvind Singh Sangwan and Justice Mohd. Azhar Husain Idrisi of the Allahabad High Court reinforced the principle that a breach of contract, in the absence of fraudulent intent, cannot be criminalized. The decision came in response to two petitions challenging an FIR filed against prominent business executives for alleged forgery, fraud, and criminal breach of trust in a financial dispute. The court’s ruling emphasizes the importance of distinguishing between civil and criminal liabilities, particularly in cases involving commercial transactions.
Background of the Case
The Allahabad High Court delivered its judgment on 31st August 2024 in the matter of Criminal Misc. Writ Petition No. 5280 of 2023 and Criminal Misc. Writ Petition No. 2140 of 2023, both arising from an FIR lodged on 21st November 2022 at Police Station Sector 113, Commissionerate, Gautam Buddha Nagar, Uttar Pradesh. The FIR was registered against eight individuals, including directors and senior executives of Omega Infovision Private Limited and DMI Finance Private Limited, under Sections 406, 409, 420, 467, 468, 471, 504, and 506 of the Indian Penal Code (IPC).
The FIR followed a complaint filed by M/s Abhi Compusoft Private Limited (the informant company), alleging a complex conspiracy involving financial misappropriation, forgery, and issuing threats.
Legal Issues Involved
The central legal issues before the court included:
1. Forgery and Validity of Documents: The informant alleged that the accused forged documents, including a sanction letter dated 2nd April 2018, to facilitate the fraudulent transfer of funds meant for a building construction project.
2. Alleged Criminal Conspiracy and Misappropriation of Funds: The informant accused the directors of a lender company and a contractor company of conspiring to misappropriate funds totaling ₹67.8 crore, which were meant for the construction project. The allegations included awarding a work order to a subsidiary before formal agreements were signed and transferring additional funds under the Emergency Credit Line Guarantee Scheme (ECLGS) without executing any real construction work.
3. Misuse of the Criminal Justice System: The petitioners contended that the FIR was an abuse of the criminal justice system, attempting to convert a purely civil dispute concerning contractual terms into a criminal case.
Observations by the Court
In its detailed observations, the court underscored several key points:
– Civil Nature of the Dispute: The court observed that the allegations primarily stemmed from a contractual dispute over the non-payment of dues and the alleged breach of agreement terms. Referring to various Supreme Court judgments, the bench highlighted, “A mere breach of contract does not give rise to criminal prosecution unless there is evidence of fraudulent or dishonest intention from the very inception of the transaction.” It noted that in this case, no such intention was evident.
– Absence of Criminal Intent: The court elaborated on the lack of criminal intent required to establish the offences alleged under Sections 406 (criminal breach of trust), 409 (criminal breach of trust by a public servant or by banker, merchant or agent), 420 (cheating and dishonestly inducing delivery of property), 467 (forgery of valuable security), 468 (forgery for purpose of cheating), and 471 (using as genuine a forged document) of the IPC. The court stated, “For an offence of cheating to be made out, there must be a fraudulent or dishonest intention from the start of the transaction. Here, no such intention is evident at the time the agreements were made.”
– Questionable Grounds for Criminal Charges: Addressing the specific grounds for the FIR, the court found that the work order issued before the formal loan sanction was signed was not sufficient to constitute forgery or fraud. The court stated, “The work order’s issuance before the formal loan agreement does not, by itself, constitute a criminal offence, particularly since all parties were aware and had consented to the terms.”
– Completion of the Project: The court noted that the project for which the funds were allegedly misappropriated had already been completed, with the informant company itself occupying a part of the completed building. The court stated, “The fact that the informant company is using the premises negates the claim of misappropriation of funds.”
– Misuse of Criminal Proceedings for Civil Disputes: The bench criticized the misuse of criminal proceedings in commercial transactions, emphasizing that such practices erode the integrity of the criminal justice system. It stated, “Commercial disputes should not be converted into criminal cases to exert pressure for settling civil disputes.”
– Arbitration as an Appropriate Forum: The court also pointed out that the loan agreement contained an arbitration clause, which provided a clear framework for resolving such disputes. “The appropriate remedy for the parties lies in arbitration as provided in the contract, rather than in initiating criminal proceedings,” the court noted.
Court’s Decision
After thoroughly examining the case details and arguments from both sides, the bench of Justice Arvind Singh Sangwan and Justice Mohd. Azhar Husain Idrisi decided to quash the FIR filed against the petitioners. The court emphasized that the facts presented did not disclose the commission of any cognizable offence that warranted a criminal investigation.
Key Quotes from the Judgment:
– The court reiterated, “Mere breach of contract cannot be criminalized unless there is clear evidence of fraudulent intent at the inception of the contract. The current FIR appears to have been filed with the intent of misusing criminal proceedings to settle a civil dispute.”
– The judgment further noted, “The involvement of criminal law should not be invoked merely to exert undue pressure in the context of a civil dispute, especially when a contractual relationship exists and the appropriate remedy lies in arbitration or civil litigation.”
– In concluding, the court stated, “It is imperative that commercial entities resort to appropriate legal remedies for resolving their disputes rather than misusing the criminal justice system.”
Case Details
– Case Titles: Criminal Misc. Writ Petition No. 5280 of 2023 and Criminal Misc. Writ Petition No. 2140 of 2023
– Bench: Justice Arvind Singh Sangwan and Justice Mohd. Azhar Husain Idrisi
– Petitioners in Criminal Misc. Writ Petition No. 5280 of 2023: Ravi Mohan Sethi (Chairman, Omega Infovision Pvt. Ltd. and Stellar Group), Akshay Mohan Sethi (Director, Omega Infovision Pvt. Ltd.), Nirmanshu Mathur, and Arvind Kumar Singh (Former Directors, Square Infrastructure Pvt. Ltd.)
– Petitioners in Criminal Misc. Writ Petition No. 2140 of 2023: Puninder Bhatia (Vice President, DMI Finance Pvt. Ltd.), Shishir Chatterjee (Joint Managing Director, DMI Finance Pvt. Ltd.), Yuvraj Chankya Singh, and Vivek Gupta (Executives, DMI Finance Pvt. Ltd.)
– Respondents: State of Uttar Pradesh, represented by Swetashwa Agarwal and Subir Lal
– Counsel for Petitioners: Senior Advocates Himadari Batra, Pranshu Gupta, Rajrshi Gupta, assisted by Vinayak Mittal
– Counsel for Respondents: Swetashwa Agarwal and Subir Lal
