Cheating Case Cannot Be Filed Against Party Bound By Valid Contract Over Performance-Related Dispute: Karnataka High Court

The Karnataka High Court has reiterated that criminal proceedings for cheating cannot be initiated against parties bound by a valid and subsisting contract.Justice Sachin Shankar Magadum held thus while allowing a petition filed by one Sailen Das, a Director in a private limited company. The court said, “The admitted position remains that the parties are bound by a valid and subsisting contract and the controversy essentially pertains to the performance of obligations arising therefrom. Such disputes are, in their nature, civil and are amenable to adjudication before an appropriate forum in accordance with law.” As per the complaint filed by A One Steels India Private Limited, it had entered into a sale–purchase agreement with Jambu Odisha Trade Private Limited. Despite the execution of the agreement between the two companies, Jambu Odisha Trade Private Limited, after receiving delivery of 20,000 Metric Tonnes of Iron Ore Fines, failed to deliver the same to the complainant.Following this, it lodged a complaint with the police, asserting that the company and its officials had committed offences punishable under Sections 420 and 506 of the Indian Penal Code. The petitioner seeking quashing of the offence argued that he, merely by virtue of being a Director, could not have been prosecuted unless the company itself was arrayed as the principal accused. A plain reading of the written complaint demonstrates that the dispute, at its core, arises out of a contractual transaction, and therefore, Respondent No.2 was not justified in giving a civil dispute the colour of a criminal prosecution. The complainant opposed the plea saying “Materials placed on record disclose sufficient grounds to infer that the petitioner harboured a dishonest intention to cheat respondent No.2 at the inception of the transaction, thereby attracting the ingredients of the alleged offences.” FindingsReferring to Supreme Court judgment in the case of S.N.Vijayalakshmi v. State of Karnataka, AIR 2025 SC 3601 and referring to the complaint the court said, “If these facts, as set out in the complaint, are taken at their face value, this Court is of the considered opinion that the law declared by the Hon'ble Supreme Court in S.N. Vijayalakshmi v. State of Karnataka (supra) is squarely attracted to the case on hand.” It said, “The Apex Court has categorically held that, in the absence of any element of criminality or dishonest intention at the inception of the transaction, a party cannot be permitted to pursue both civil and criminal remedies simultaneously, for such parallel proceedings would amount to an abuse of the process of law.” Court noted that recitals in the complaint itself disclose that a substantial portion of the contractual obligations was, in fact, performed by Jambu Odisha Trade Private Limited, of which the petitioner is one of the Directors.It said “Therefore, in the absence of any material to prima-facie indicate that the company, acting through the petitioner, entertained a fraudulent or dishonest intention to deceive the complainant at the inception of the contract, the basic ingredients of the offence of cheating under Section 420 IPC are not satisfied. Even if the allegations contained in the complaint are assumed to be true in their entirety, no offence, as alleged, can be said to have been made out against the petitioner.” Allowing the petition, the court said “The respondent No.2, albeit inadvertently, has been ill-advised in setting the criminal law in motion in respect of what is, at its core, a contractual dispute. Allowing the prosecution to proceed in these circumstances would clearly amount to permitting an abuse of the process of law.” Appearance: Advocate Shravanth Arya Tandra for Petitioner.HCGP Anoop Kumar for R.1. Senior Advocate K Divakara for Advocate Aditya D for R2. Citation No: 2025 LiveLaw (Kar) 311Case Title: Sailen Das AND State By Kodigehalli Police Station & ANR Case No: WRIT PETITION NO.26873 OF 2024.Click Here To Read/Download Order

Cheating Case Cannot Be Filed Against Party Bound By Valid Contract Over Performance-Related Dispute: Karnataka High Court

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