Existence Of Arbitration Clause Doesn't Automatically Bar Criminal Proceedings: Jharkhand High Court

The bench held that merely because there is a remedy available for breach of contract through arbitration does not automatically lead the court to conclude that civil remedy is the sole recourse. This does not render the initiation of criminal proceedings an abuse of the court's process, warranting the use of inherent powers to quash such proceedings.

Brief Facts:

Petitioner No. 1 is a company registered under the Companies Act, of 1956, and operates as a SEBI-registered stockbroker and depository participant. Petitioners No. 2 and 3 are the company's Managing Director and Whole Time Director, respectively, while Petitioner No. 4 is a SEBI-registered sub-broker conducting business under the name M/s Mangalam Securities. The O.P. No. 2, who has a demat account with the Petitioner company, entered into an agreement to trade in shares and stocks. The dispute, which pertained to share transactions, was already adjudicated through arbitration under the supervision of the National Stock Exchange of India (NSE), resulting in an award in favor of the Petitioner company, directing O.P. No. 2 to pay Rs. 1,56,017.64. Therefore, the Petitioners approached the Jharkhand High Court (“High Court”) to quash the entire criminal proceeding, including the cognizance order by which the Judicial Magistrate took cognizance of offenses under Sections 409, 420, and 120-B of the Indian Penal Code against them.

The Petitioners contended that the matter was inherently a civil dispute and not criminal in nature. It emphasized that O.P. No. 2 was informed to comply with the arbitration award, following which the Petitioner company ceased transactions as per the agreement upon O.P. No. 2's instructions. It further argued that O.P. No. 2 initiated PCR Case under Section 409 of the IPC, despite the absence of any interim order or stay on the arbitration award.

Contrarily, O.P. No. 2 argued that the existence of an arbitration clause does not preclude the maintenance of a criminal case if criminality is established.

Observations by the High Court:

The High Court noted that the Petitioner company's intentions were questionable, establishing that there was a prima facie case of entrustment and cheating. It held that such determinations, however, are best left to trial. It held that quashing the proceedings based on the argument of a civil nature arising from arbitration is unwarranted, as the criminality aspect must be assessed independently.

The High Court held that arbitration provisions do not negate criminal liability if criminality is evident (referred to Priti Saraf vs State NCT of Delhi). Thus, it held that the existence of an arbitration clause does not automatically bar criminal proceedings.

The High Court held that there were elements of criminal breach of trust in the case: entrustment of property and its dishonest misappropriation.

Therefore, it held that exercising power under Section 482 Cr.P.C. to quash the criminal proceedings was inappropriate. Consequently, all petitions were dismissed, and any pending interlocutory applications were also dismissed.

Case Title: Asit C. Mehta Investment Intermediates Ltd. And ors vs The State of Jharkhand and Anr. And Connected Matters

LL Citation: 2024 LiveLaw (Jha) 80

Case Number: Cr.M.P. No. 1241 of 2016

Advocate for the Petitioner: Mr. Jitendra S. Singh, Advocate, and Mr. Onkar Nath Tewari, Advocate.

Advocate for the Respondent: Ms. Nehala Sharmin, Spl. P.P.: Mr. Navin Kumar Singh, A.P.P.: Mr. Jitendra Pandey, A.P.P. For the O.P. No. 2: Mr. R.S. Mazumdar, Sr. Advocate. : Mr. Rishav Kumar, Advocate.

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