Recently, the Delhi High Court was seized of a petition seeking quashing of criminal proceedings initiated against a banking institution and its officials in connection with the presentation of a cheque issued under a commercial loan transaction. The petition raised questions on the applicability of penal provisions of the Indian Penal Code, 1860 in a dispute arising out of contractual obligations governed by banking and negotiable instruments law.
Brief Facts:
The case arose from a working capital demand loan of Rs.15 crore sanctioned in 2011 to a company under a duly executed loan agreement. In terms of the agreement, a signed cheque was issued by the borrower as part of the security towards repayment of the loan. Upon default in repayment, the bank initiated recovery proceedings and presented the cheque for encashment, which was dishonoured. While proceedings under Section 138 of the Negotiable Instruments Act, 1881 were pending, the respondent filed a criminal complaint invoking Sections 409, 465, 467, 468, 471, 109, 120-B and 34 of the Indian Penal Code, 1860, alleging misuse of a security cheque.
Contentions of the Petitioner:
The counsel for the Petitioners submitted that the criminal complaint was a counterblast to lawful recovery proceedings initiated under banking and insolvency mechanisms. The counsel argued that no offence under Section 409 IPC was made out as there was no “entrustment” in the criminal sense, the cheque having been issued voluntarily pursuant to a commercial loan agreement. Reliance was placed on Section 20 of the Negotiable Instruments Act, 1881, contending that the holder of a signed but incomplete cheque is authorised to fill in particulars and present it for payment. The Petitioners asserted that the dispute was purely civil in nature and that the criminal proceedings amounted to an abuse of the process of law.
Contentions of the Respondents:
The counsel for the Respondent opposed the petition, contending that the cheque was entrusted only as a security instrument and was never meant to be presented without prior intimation. The counsel argued that the act of filling in the date and presenting the cheque, despite alleged knowledge of the account being blocked, disclosed dishonest intention attracting offences under the Indian Penal Code, 1860. The Respondent submitted that the summoning order was passed after due compliance with Sections 202 and 204 of the Code of Criminal Procedure, 1973, and that the pleas raised by the Petitioners involved disputed questions of fact requiring trial.
Observation of the Court:
The Court observed that the foundational requirement for invoking Section 409 of the Indian Penal Code, 1860, is the existence of entrustment coupled with dishonest misappropriation. The Court noted that a cheque issued as part of a commercial loan transaction, even if termed as a “security cheque”, does not by itself create a fiduciary relationship between the borrower and the bank.
Referring to the loan agreement, the Court recorded that the cheque formed an integral part of the contractual security mechanism and was intended to be presented in the event of default. The Court observed that “issuance of a security cheque pursuant to a commercial loan does not amount to entrustment in its criminal sense but is merely a contractual arrangement between creditor and debtor.”
Placing reliance on State of Gujarat v. Jaswantlal Nathalal and CBI v. Duncans Agro Industries Ltd., the Court reiterated that entrustment under Sections 405–409 IPC presupposes that the property remains that of the complainant and is held in trust by the accused. The Court further noted that presentation of a cheque strictly in accordance with contractual terms cannot, in the absence of dishonest intention at inception, constitute criminal breach of trust.
The Court also took note of the timing of the complaint and observed that the criminal proceedings appeared to have been initiated during the pendency of proceedings under Section 138 of the Negotiable Instruments Act, 1881, with the apparent objective of projecting defences available in the cheque dishonour case. It remarked that “a purely civil dispute arising out of loan default cannot be permitted to be clothed with criminal colour.”
The decision of the Court:
In view of the above, the Court held that no prima facie offence under Section 409 IPC or allied provisions was made out. The Court set aside the summoning order as well as the subsequent issuance of warrants, holding the criminal complaint to be an abuse of the process of law. Consequently, the complaint and all proceedings arising therefrom were quashed.
Case Title: China Trust Commercial Bank v. State
Case No.: CRL. M.C. 4979/2017
Coram: Hon’ble Mr. Justice Neena Bansal Krishna
Counsel for the Petitioner: Adv. Sanjay Gupta, Adv. Rajnish Gaur, Adv. Ateev Mathur and Adv. Amol Sharma
Counsel for the Respondent: APP Utkarsh for the State. Adv. Ayush Jindal, Adv. Harsh Vashisht, Adv. Harshita Bansal, Adv. Pankush Goyal and Adv. Mayank Sharma
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