No Bar On Pursuing Criminal Proceedings After Arbitration Has Commenced: Delhi High Court

Dismissal of a cognizable case

The Petitioner, a Non-Banking Finance Company, had disbursed loans to the tune of around Rs. 7 crores to the Respondents, the Directors of a company. The loans were towards the purchase of machinery for Respondents' business, per the terms of the Agreements executed between the Parties. Respondents were paying back the loans in installments until they started defaulting. Respondent alleged break-out of fire at their premises and consequent inability to repay the debts.

The company was liquidated, and proceedings were initiated before the NCLT, in which the Petitioners also filed their claim. The Petitioner invoked the arbitration clause per the Agreements. Further, proceedings were pending before a Debts Recovery Tribunal (DRT). In the meantime, the Petitioners also filed a criminal complaint before the Deputy Commissioner of Police, Economic Offences Wing alleging criminal conspiracy, misappropriation of loans, and fabrication of documents by the Respondents.

The Assistant Commission of Police communicated the closing of the complaint due to not having established the complaint.

The Petitioner later filed an application under S. 156(3) Cr.P.C. before the Magistrate seeking directions to Police to register an FIR against the Respondent on charges of cheating, forgery, criminal breach of trust, and misappropriation. The Magistrate however dismissed the application citing in her Order that not every cognizable offense requires investigation by the Police in terms of S. 156(3) Cr.P.C.

The Order was challenged before the PDJ Judge. The Revisionist Court upheld the Order of the Magistrate, citing lack of a finding of infirmity, impropriety, or illegality in the Order.

Directions to Investigate the case

The Revisionist Court's Order was challenged in the present petition before the Delhi High Court.

The Court found the Respondents had defaulted on loan agreements. Further, it had misappropriated the loans towards alternative ends. Accordingly, a prima facie case was made out under Sections 405/406 of the Indian Penal Code for Criminal Breach of Trust, following Supreme Court precedents on the IPC provisions. Thus, a cognizable case was established under Section 156(3) of the CrPC.

Further, citing the Supreme Court precedent Lalita Kumari v. State of U.P (2014), the Court held that "the Police is duty bound to register an FIR on receiving information on the commission of a cognizable offence. The Police has no other option but to register an FIR when such information pertaining to a cognizable offence and has to mandatorily investigate into the allegations of the FIR." Accordingly, the concerned authorities had erred in not directing the registration of the FIR as the offence discloses a cognizable nature, ie., criminal breach of trust in terms of the contracts.

Citing the Supreme Court in Trisuns Chemical Industry V. Rajesh Agarwal (1999), the Court held that "invoking an arbitration clause does not preclude filing of criminal proceedings and these two proceedings can be pursued parallely and independently, without affecting each other."

The Court elucidated that citing a pending arbitration proceeding is no ground for barring initiating criminal proceedings. Accordingly, the Court maintained that the FIR investigation must be conducted despite the arbitral proceedings, pending NCLT and DRT proceedings.

In its final remarks, the Court directed the Police, Economic Offences Wing to register an FIR against the Respondent under the appropriate Sections.

The Ratio that comes from this judgment is: The Police is duty bound to investigate cognizable offences notwithstanding arbitration/civil proceedings and other mitigating factors.

Case Title: M/S. Hero Fincorp Limited v. The State (NCT of Delhi) & Anr.

Case No: CRL.M.C.-736/2021

Citation: 2022 LiveLaw (Del) 51

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