Mere Breach Of Contract Cannot Constitute Cheating Unless Dishonest Intention Is Shown At Beginning Of Transaction: Delhi High Court

Update: 2024-11-15 12:15 GMT
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The Delhi High Court has observed that a mere breach of contract does not give rise to criminal prosecution of cheating unless a fraudulent or dishonest intention is shown at the beginning of the transaction.In doing so the high court upheld the sessions court's order which had quashed the summons issued by the magistrate to the Chairman and MD of educational technology company Educomp and...

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The Delhi High Court has observed that a mere breach of contract does not give rise to criminal prosecution of cheating unless a fraudulent or dishonest intention is shown at the beginning of the transaction.

In doing so the high court upheld the sessions court's order which had quashed the summons issued by the magistrate to the Chairman and MD of educational technology company Educomp and its associated persons in alleged case of cheating. 

Justice Dinesh Kumar Sharma remarked that a civil case cannot be given a "criminal cloak by smart drafting" and that a Magistrate has to ascertain from the complaint whether there is a prima facie case to proceed against the accused.

Background:

Education group Raffles Education Corporation Ltd (petitioner-company) entered into a Master Joint Venture Agreement Educomp Group in 2008 for setting up projects like green field campuses, learning centres and education cities. One of the proposed ventures was the establishment of a management and technical university, using Jai Radha Raman Education Society ('JRRES') as the operating entity.

When disputes arose between the parties, they entered into a Share Purchase Agreement (SPA) in 2015. One of the preconditions for completion of SPA was resignation of Educomp nominees from JRRES, allowing full control to be transferred to Raffles.

Subsequently, Raffles initiated arbitration proceedings against Educomp. The arbitral tribunal ruled in favour of Raffles and held that there was a breach of contract on the part of Educomp.

However, in 2018, Raffles filed a complaint before the Magistrate alleging that Educomp, led by its Chairman and MD (respondent no.2), defrauded the company.

Raffles alleged that Educomp Group entered into SPA only with fraudulent intent and that they had no intention of complying with the terms of the SPA. Raffles claimed that respondent no. 2 repeatedly represented that he had control of the affairs of JRRES and misrepresented Educomp's ability to transfer control of JRRES to it.

Raffles claimed that respondent no. 2 and Educomp group and its associates enticed the company to invest substantial funds into a joint venture. It also alleged that Educomp's refusal to provide resignation was a cheating scheme to retain unauthorized control over JRRES and gain financial advantage.

In view of the complaint, the Magistrate issued summoning order to respondent no. 2 and associated persons of Educomp for offences under Section 420 IPC (cheating and dishonestly inducing delivery).

However, in a revision petition, the Sessions Court set-aside the summons on the ground that the complaint did not disclose the offence of cheating under Section 420 IPC.

Raffles thus challenged the order of Sessions Court.

Distinction between breach of contract and cheating

The Court noted that while issuing summons, the Magistrate must determine that there is a prima facie case based on assertions in the complaint.

Referring to various judgments, the Court observed that the magistrate must not commence proceedings merely based on allegations. It stated that the magistrate must see whether a civil matter has been cloaked as a criminal matter and then proceed accordingly.

Concerning the offence of cheating, the Court stated that there was a difference between a breach of contract and an offence of cheating. It stated that a mere breach of contract cannot give rise to a criminal cheating case unless dishonest intention is shown.

It observed, “A civil case cannot be given a criminal cloak by smart drafting. While dealing with such matters, the Court has to keep in mind that there is a distinction between breach of contract and offence of cheating. Though the distinction is a fine one the same has to be judged by the conduct of the parties. Subsequent conduct of the alleged cannot be a sole test, and a mere breach of contract cannot give rise to criminal prosecution for cheating unless the fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed.”

The Court emphasised that for Section 420 IPC, 'intention' is the gist of offence. It stated that for issuing summons for offence of cheating, the material on record should indicate that there was fraudulent or dishonest intention at the time of making the promise.

It referred to the case of MNG Bharatesh Reddy vs. Ramesh Ranganathan & anr. (2022 LiveLaw (SC) 701), where the Supreme Court observed that that mere breach of contract cannot give rise to criminal prosecution for cheating unless the fraudulent or dishonest intention is shown right at the beginning of the transaction.

Here, the Court opined that the offence of cheating was not made out.

It noted that the Arbitral Tribunal held that Educomp's failure to ensure resignations constituted a breach of contract. It also noted that the SPA was executed in 2015, but the complaint was only filed in 2018. It stated that the delay in filing the complaint has not been explained in any manner by the petitioner.

It also remarked, “The fact that the petitioner initially initiated the arbitration proceedings also indicates that it was merely a civil dispute.”

The Court held that the complaint filed Raffles did not fulfill even the basic ingredients of Section 420 IPC.

It thus upheld the Session's Court order, which quashed the summons.

Case title: Raffles Education Corporation Ltd vs. State Of NCT Of Delhi & Anr.

Citation: 2024 LiveLaw (Del) 1242

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