Once Arbitration Invoked, Criminal Prosecution Cannot Be Weaponised in Civil Disputes: Supreme Court Quashes FIR Against Former Director in Rent Row

“Where the dispute is civil in nature and arbitration remedy has been availed, the registration of FIR against a former director—after resignation and without mens rea—is nothing but an abuse of process”, In a significant ruling that reiterates the sanctity of arbitration proceedings and draws a clear line between civil disputes and criminal prosecution, the Supreme Court of India set aside criminal proceedings initiated against a former company director in a rent dispute that had already been adjudicated through arbitration.

A Bench comprising Justice J.K. Maheshwari and Justice Vijay Bishnoi allowed the appeal against the Karnataka High Court’s refusal to quash the FIR registered under Sections 406, 420 read with 34 of the Indian Penal Code, observing that the dispute stemmed entirely from a civil lease agreement and that the continuation of criminal proceedings—especially against a director who had resigned before the arbitral award—was unjustified and legally unsustainable.

Arbitration Already Concluded the Dispute; Criminal Law Cannot Be Used for Reruns

The apex court noted with disapproval the criminalisation of what was plainly a civil breach arising from a lease agreement. The property in question was leased by M/s. Confident Dental Equipment Ltd. to M/s. Nippon Infrastructure Pvt. Ltd. with monthly rent agreed upon and escalations duly stipulated. However, after the property was sealed by municipal authorities for non-payment of tax, the lessee company failed to pay rent, leading the lessor to initiate arbitration.

An arbitral award dated October 1, 2017, had directed the company to pay Rs. 75,01,528.60 in arrears along with Rs. 6,00,000 per month as damages for continued possession after lease expiry. Mamatha Duggal, the appellant, had resigned from her position as Director on April 3, 2017, i.e., before the award was passed or possession was taken.

Despite this, an FIR was registered on December 7, 2017, without naming the company as an accused, and alleging cheating and criminal breach of trust under the IPC, naming Mamatha Duggal and three others as accused. The complainant (lessor) claimed continued unlawful possession and dishonestly induced financial loss of over Rs. 2.7 crore.

The Supreme Court was unequivocal in its stance:
"Once the lessor opted for appointment of Arbitrator and took recourse under Section 9 of the Arbitration Act... for non-payment by the company, [the appellant] cannot be held responsible... Registration of FIR... against the appellant, who was not the Director on the date on which the Arbitral Award was passed, is denial of quashing of such FIR justifiable?" [Para 11]

Absence of Mens Rea and No Role Post-Resignation Critical for Quashing FIR

The court observed that the complaint lacked allegations of fraudulent intent at the inception of the lease or any specific role of the appellant after her resignation. The FIR was filed not only after the arbitral award but also after restitution of possession of the leased property, making the criminal process appear as a retaliatory or coercive measure.

The Bench held:
"In particular, looking to the fact that prior to passing of the Arbitral Award, she has already resigned from the Directorship of the company... nothing has been brought on record to demonstrate that any amount has been received in the account of the appellant after resigning... FIR... against and qua the appellant stands quashed." [Para 17]

Importantly, the Court pointed to the absence of mens rea, observing that mere non-payment of rent, without deceit from the inception, cannot constitute an offence under Section 420 IPC. Similarly, Section 406 could not be invoked absent clear entrustment and dishonest misappropriation—none of which was evident on record.

High Court’s Refusal to Quash FIR Held Legally Erroneous

The High Court of Karnataka had earlier dismissed Mamatha Duggal’s petition under Section 482 CrPC, holding that the appellant, being one of the directors, could not escape liability merely because the company wasn’t named in the FIR, and that arbitration proceedings do not preclude criminal liability. The Supreme Court reversed this reasoning.

Referring to its own precedents including Neetu Singh v. State of U.P. and Shailesh Kumar Singh v. State of U.P. [2025 SCC OnLine SC 1462], the Court reaffirmed the principle that criminal prosecution cannot be sustained when the allegations are civil in nature and arbitration has already been resorted to.

The Bench added:
“It is a matter in which the premises... was closed by the Palika... arbitration clause was invoked... Award was passed... prior to which the appellant resigned... The dispute being civil, criminal action against the appellant after resignation, cannot be taken by the police.” [Para 15–16]

With this decision, the Supreme Court has once again signalled a strong warning against misuse of criminal law in purely civil disputes, especially when the complainant has already availed arbitral remedies. By shielding a former director who had neither active involvement post-resignation nor received any personal gains, the Court has reaffirmed that criminal law cannot be used as a pressure tactic after failure to secure satisfaction through civil means.

The Court allowed the appeal, quashed the FIR dated 07.12.2017, and categorically held that no offence was made out under Sections 406 or 420 IPC against the appellant.

Date of Decision: November 17, 2025