6 May 2019

LEGAL UPDATE | SUPREME COURT ON CRIMINAL ACTION FOR LOAN DEFAULTS

The Supreme Court of India recently in Satishchandra Ratanlal Shah v. State of Gujarat and Another considered whether criminal action could be taken in cases where the accused has defaulted in repayment of a loan.

Facts of the Case:

• The appellant had taken a loan from the respondent company (``Lender``). The loan was to be repaid with interest within a year. The appellant failed to repay the loan with interest.

• The Lender filed a summary suit for recovery of the loan and simultaneously registered a complaint against the appellant for criminal breach of trust and cheating. The appellant filed an application for quashing the criminal charges. This application was dismissed by the High Court of Gujarat. Hence, the appeal.

Decision of the Supreme Court:

• Criminal breach of trust can only be proved if there is an entrustment of property. The law clearly recognises a difference between simple payment / investment of money and entrustment of money or property. A mere breach of promise, agreement or contract does not ipso facto constitute the offence of criminal breach of trust. Nothing in the facts on record suggest that the Lender had entrusted the money to the appellant which he dishonestly converted to his own use. Hence, the offence of criminal breach of trust was not made out.

• The mere inability of the appellant to return the loan amount cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, as it is this mens rea which is the crux of the offence. Even if all the facts in the complaint and material are taken on their face value, no such dishonest representation or inducement could be found or inferred. Moreover, the Supreme Court in a number of cases has usually cautioned against criminalising civil disputes, such as breach of contractual obligations. The legislature intended to criminalise only those breaches which are accompanied by fraudulent, dishonest or deceptive inducements, which resulted in involuntary and inefficient transfers.

• The Supreme Court, therefore, quashed the criminal proceedings against the appellant.

MHCO Comments: The Supreme Court in this case has reiterated the law on criminal action for civil wrongs. Criminal action will only lie if there is an entrustment of property or a dishonest intention at the commencement of the transaction. Given the serious consequences of criminal action, the stand taken by the Supreme Court appears to be justified.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.