Criminal Courts Are Not Debt Recovery Forums: Calcutta High Court Quashes Cheating, Forgery Case Arising from Share Pledge Transaction

“Absence of Fraudulent Intent From Inception Defeats Criminal Prosecution”, In a landmark ruling Calcutta High Court delivered a decisive verdict emphatically quashing the criminal proceedings arising from a commercial share-pledge transaction. Justice Rai Chattopadhyay, delivering a meticulously reasoned judgment, observed that “the criminal process cannot be permitted to degenerate into a tool for coercion in civil disputes arising from business transactions governed by valid contracts.”

The case revolved around allegations of cheating, criminal breach of trust, and forgery under Sections 406, 420, 467, 468, 469, 120B, and 34 of the Indian Penal Code. The Court ruled unequivocally that the dispute was entirely civil in nature and did not satisfy the essential legal requirements to attract criminal liability.

No Mens Rea, No Cheating

At the heart of the decision lay a foundational principle of criminal jurisprudence: the requirement of dishonest intention or mens rea at the inception of the transaction. Justice Rai Chattopadhyay remarked,

“Fraudulent or dishonest inducement must exist from the very inception of the transaction for an offence of cheating to be made out. Business contracts breached due to market risks cannot be artificially dressed up as criminal offences to exert pressure.”

The Court found no evidence to show that the accused had any dishonest motive when they entered into the loan agreements dated 8th and 19th March 2013. On the contrary, the terms of the agreements explicitly permitted the sale of shares upon default without requiring prior notice to the borrower.

No Prima Facie Evidence of Criminal Breach of Trust

Relying on settled legal principles, the Court held that the essential ingredient of criminal breach of trust under Section 406 IPC—dishonest misappropriation—was wholly absent.

Justice Chattopadhyay succinctly articulated,
“Entrustment of property, without dishonest misappropriation or violation of contractual terms with criminal intent, cannot give rise to prosecution for criminal breach of trust.”

The High Court observed that the sale of pledged shares followed a chain of commercial events, including price depreciation and defaults, within the contractual framework duly agreed upon by the parties.

On Forgery Allegations: “Forgery Cannot Be Alleged in Absence of False Document”

The Court categorically rejected the allegations of forgery under Sections 467, 468, and 469 IPC, clarifying the legal position by holding:

“Forgery, by definition, requires the creation of a false document. The agreements were mutually executed, and the documents relied upon were neither fabricated nor altered by the accused. Mere execution of commercial documents does not convert business defaults into penal offences.”

Justice Chattopadhyay further observed that neither the dematerialization records nor the sale transactions suggested fabrication of any false securities.

Civil Dispute Camouflaged as Criminal Offence: Bhajanlal Doctrine Applied

The Court squarely applied the classic Bhajanlal doctrine, as laid down in State of Haryana v. Bhajanlal (1992 Supp (1) SCC 335), to conclude that the FIR and the resultant proceedings were nothing but a civil dispute veiled under criminal allegations.

In powerful words, the Court declared, “This is a textbook example of a civil dispute being mischievously camouflaged in the garb of criminal allegations after the complainant failed to obtain relief from civil courts. The criminal justice system cannot be weaponized to coerce a commercial settlement.”

The High Court pointed out that the complainant had pursued civil litigation before the Bombay High Court and the Supreme Court, both of which had effectively dealt with the dispute, including the appointment of a Receiver for disputed shares.

Business Risks Do Not Constitute Cheating

Justice Chattopadhyay clarified the fundamental distinction between civil breaches and criminal offences, stating,

“Voluntary commercial engagements, where parties are fully conscious of the risks involved, cannot be retrospectively criminalized merely because one party later suffers commercial losses.”

The Court noted that the complainant not only voluntarily pledged shares but also availed part-repayment mechanisms under the contract, received back 40,700 shares upon partial repayment, and initiated civil litigation before resorting to criminal prosecution as a last-ditch attempt.

Judicial Condemnation of Misuse of Criminal Law

Invoking judicial conscience, the Court observed, “It would be an abuse of the process of Court to allow the criminal law machinery to be pressed into service to settle a dispute arising solely from commercial transactions.”

The Court underscored that coercing parties through criminal proceedings when no criminal intent is shown undermines the sanctity of both criminal and civil legal systems.

Quashing of FIR and Criminal Proceedings

Concluding with finality, the Calcutta High Court allowed the revision petition and quashed the FIR registered in Howrah P.S. Case No. 124 of 2014, along with G.R. Case No. 887 of 2014 pending before the Chief Judicial Magistrate, Howrah.

In the emphatic closing words of the judgment, the Court stated,

“Criminal prosecution is not a substitute for recovery mechanisms under civil law. Allowing this prosecution to continue would perpetuate injustice rather than remedy it.”

The judgment stands as a reaffirmation of the principle that criminal courts are not to be misused as recovery forums or coercive instruments in civil business disputes.

Date of Decision: 7th July 2025