No Vicarious Criminal Liability Without Specific Allegations: Delhi High Court Quashes Cheating Case Against Director In Commercial Dispute

“Mere Breach Of Contract Or Non-Payment Does Not Constitute Cheating Unless Dishonest Intention Is Proven At Inception” – In a significant judgment reiterating the settled principle that criminal law should not be weaponised to enforce civil claims, the Delhi High Court on 7 January 2026 quashed criminal proceedings against a Managing Director who had been charged under Section 420 IPC (Cheating) in a contractual dispute, holding that no offence was made out in the absence of dishonest intention at inception or any specific act of fraud attributable to the Director personally.

The Court observed that the allegations stemmed entirely from a commercial transaction, already the subject matter of a civil recovery suit, and that “continuation of criminal proceedings against the Director, after the company itself was dropped, amounted to an abuse of process.”

Justice Neena Bansal Krishna, sitting in writ jurisdiction under Article 226 read with Section 482 CrPC, quashed both the Order on Charge dated 04.09.2018 passed by the Metropolitan Magistrate and the Revisional Order dated 30.04.2019 of the Additional Sessions Judge, and discharged the petitioner from the offence under Section 420 IPC.

“Inducement Based On Fraudulent Intention At Inception Is Sine Qua Non For Cheating”

The petitioner, Arun Kumar Bagla, was the Managing Director of Creative Wares Ltd., which had purchased master batches worth ₹26.13 lakhs from the respondent, M/s SCJ Plastics Ltd., between 1999 and 2001. Upon alleged non-payment of dues, the Respondent initially filed a civil suit for recovery in 2002, which was later decreed. However, in 2005, a criminal complaint was filed against the company and its director, alleging cheating and “fraudulent inducement.”

The company was later struck off, and the complaint was dismissed against it. Nevertheless, the trial court framed charges against Bagla personally under Section 420 IPC, alleging he had induced the complainant to deliver goods while concealing the company’s precarious financial state and BIFR proceedings.

Rejecting this contention, the Court held:

“To hold a person guilty of cheating, it is necessary to show that he had a fraudulent or dishonest intention at the time of making the promise. From his mere failure to subsequently keep a promise, one cannot presume that he all along had a culpable intention.”

Citing Hridaya Ranjan Prasad Verma v. State of Bihar, (2000) 4 SCC 168, the Court reiterated that mere breach of contract or financial inability does not amount to cheating, unless it is shown that the accused never intended to honour the promise from the very beginning.

Complainant’s Own Witness Undermined Cheating Allegations

A key part of the Court’s reasoning was based on the testimony of CW-3/Deepak Kumar, a witness for the complainant, who admitted under cross-examination:

“The complainant company used to supply the material from time to time to the accused company as the complainant company was not wanting to lose the business relationship… not on account of any fraudulent representation or false promise.”

The Court found this admission to be fatal to the prosecution’s case, observing:

“This clearly demolishes the allegation of inducement. The complainant’s own witness admitted that the supplies were made to maintain business relations and not due to any misrepresentation or deception.”

Further, it was noted that the accused company had made partial payments of ₹2.25 lakhs, again rebutting any presumption of fraudulent intent.

No Personal Criminal Liability of Director When Company is Not an Accused

A crucial legal issue dealt with was the criminal liability of a company director, especially after the complaint against the company was dropped due to it being struck off. The Court held that vicarious liability is not recognised under the IPC unless specifically provided for by statute, as is the case under Section 141 of the NI Act.

“A Director cannot be held liable for the acts of the company solely by virtue of his position,” the Court ruled, adding that in the absence of specific allegations of personal fraud or deception, no charge could be sustained.

Relying on the decisions in Sushil Sethi v. State of Arunachal Pradesh, (2020) 3 SCC 240, and Sanjay Dutt v. State of Haryana, 2025 INSC 34, the Court observed:

“A Director may be vicariously liable only if the company itself is liable in the first place and if such Director personally acted in a manner that directly connects their conduct to the company’s liability.”

In the present case, the complaint alleged no more than that the Petitioner, as Managing Director, placed orders and promised payment, which the Court characterised as “standard commercial representations”, not fraudulent inducements.

Civil Recovery Already Decreed – Criminal Complaint Filed As Pressure Tactic

The High Court also found merit in the chronology of events, pointing out that the complainant had already filed a civil suit in 2002 (which was decreed), but filed the criminal complaint only in 2005, and that too after civil proceedings were stayed due to SICA/BIFR proceedings.

The Court noted:

“This timeline clearly reveals that the criminal complaint was an afterthought and a tool to exert pressure for the recovery of dues.”

Referring to Indian Oil Corporation v. NEPC India Ltd., (2006) 6 SCC 736, the Court cautioned against the misuse of criminal proceedings in purely civil disputes, observing:

“The machinery of criminal justice should not be allowed to be utilized for the settlement of civil disputes.”

Inherent Jurisdiction Invoked to Prevent Abuse of Process

Exercising its inherent powers under Section 482 CrPC and Article 226 of the Constitution, the Court invoked the Bhajan Lal principles and held that no prima facie offence was made out, stating:

“The allegations, even if taken at face value, do not disclose any offence having been committed by the Accused. The continuation of the criminal proceedings would amount to an abuse of the process of the court.”

Petition Allowed, Director Discharged

Accordingly, the Delhi High Court passed the following directions:

“The impugned Order on Charge dated 04.09.2018 passed by the Ld. MM and the Order dated 30.04.2019 passed by the Ld. ASJ are hereby quashed. The Petitioner, Arun Kumar Bagla, stands discharged from the offence under Section 420 IPC.”

All pending applications were also disposed of.

Important Ruling On Civil-Criminal Overlap In Commercial Disputes

This decision reinforces the long-standing judicial position that criminal prosecution should not be used as a substitute for enforcing civil contracts, especially when dishonest intention is not evident at the inception.

By ruling that a Director cannot be prosecuted alone once the company is dropped from the complaint, the Court affirms that corporate acts require corporate liability, and personal prosecution demands personal culpability—a clear message against abuse of criminal courts to pressurise settlement in commercial disputes.

Date of Decision: 07 January 2026