The Viewpoint: Criminal Actions in Commercial Matters – An ‘Unholy Trend’?

The Viewpoint: Criminal Actions in Commercial Matters – An ‘Unholy Trend’?

by Satyajit Gupta 


It is not uncommon for parties to a commercial dispute in India to initiate criminal action to pressurize the other side to reach a favourable settlement. The motivation to do so could be due to many reasons – including speedier remedies from a criminal court and of course the threat and nuisance value of a criminal action vis-à-vis a civil one. Sometimes a case may apparently look to be of civil nature or may involve a commercial transaction but such disputes may also contain ingredients of criminal offences and such disputes have to be entertained notwithstanding they are also civil disputes.

The Indian judicial system is plagued by lack of adequate judges leading to delays of severe proportions. It also enables persons of influence to delay and derail the administration of justice. Delays are also caused by the parties not adhering to timelines laid down by law and seeking strategic adjournments. While this is largely in small towns and rural geographies, it has permitted abuse of judicial process in many ways and due to many reasons.

The criminalization of commercial disputes also arises when one party cannot understand the other’s perspective. When there is a dispute, there are significant informational barriers. Parties are not able to understand the others’ perspectives and motives, therefore they impute criminality. Additionally, counsels are unlikely to take a stand and will in all likelihood oblige clients by filing criminal prosecution in purely commercial matters.

Judicial approach

The judiciary has never concealed its contempt for actions that abuse the court process. While litigants continue to misuse the criminal legal system, the High Courts and the Supreme Court have never shied away from using the inherent powers vested in them to quash such matters.

In this context, I find it apt to quote from a judgment of the Supreme Court of India in the matter of Mohammed Ibrahim and others v. State of Bihar and another, (2009) 8 SCC 751:

This Court has time and again drawn attention to the growing tendency of the complainants attempting to give the cloak of a criminal offence to matters which are essentially and purely civil in nature, obviously either to apply pressure on the accused, or out of enmity towards the accused, or to subject the accused to harassment. Criminal courts should ensure that proceedings before it are not used for settling scores or to pressurize parties to settle civil disputes. But at the same time, it should be noted that several disputes of a civil nature may also contain the ingredients of criminal offences and if so, will have to be tried as criminal offences, even if they also amount to civil disputes.

The courts ruled similarly in the matters of Alpic Finance Ltd. v. P Sadasivan & Anr., (2001) 3 SCC 513 and All Cargo (I) Pvt. Ltd. & Ors. v. Dhanesh Badarmal Jain & Anr. (2007) 14 SCC 776.

It is possible to characterize a breach of contract as a case of cheating provided the ingredients thereof are made out. In this context a reference to the judgment in the matter of Hridya Rajan Pd. Verma & others v. State of Bihar and another, AIR 2000 SC 2341, may be made. The judges were clear that the element of mens rea was essential for a criminal offence to be made out –

In determining the question it has to be kept in mind that the distinction between mere breach of contract and the offence of cheating is a fine one. It depends upon the intention of the accused at the time of inducement which may be judged by his subsequent conduct but for this subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed. Therefore, it is the intention which is the gist of the offence. To hold a person guilty of cheating it is necessary to show that he had fraudulent or dishonest intention at the time of making the promise. From his mere failure to keep up promise subsequently such a culpable intention right at the beginning, that is, when he made the promise cannot be presumed.

Courts have, on numerous occasions, refused to encourage criminal prosecution when it is found to be mala fide or otherwise an abuse of the process of the court. High Courts have the inherent power under Section 482 of the [Indian] Code of Criminal Procedure 1973 to quash any offences where the ingredients of the offence alleged is not made out. In this context, the Supreme Court has in the matter of State of Haryana & Ors. v. Bhajan Lal & Anr., 1992 Supp (1) SCC 335, set out certain categories of cases which need to be quashed, including “where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge.”

In numerous cases where disputes arise in relation to valuation, enforcement of exit/ buy-back provisions, contractual terms etc., the logical course of action would be to look at provisions of statute involved and policies/ circulars/ regulations issued thereunder along with provisions of contract law; instead parties try to use criminal law provisions pertaining to fraud, criminal breach of trust, criminal conspiracy and the like to pressurize the counterparties, impede their freedom and ability to travel.

Professional Ethics

As mentioned above, legal counsels are unlikely to take a stand in such matters and will in all likelihood oblige clients by filing criminal prosecution in purely commercial matters. This goes against the standards of professional ethics issued by the Bar Council of Act pursuant to Section 49(1)(c) of the [Indian] Advocates Act 1961.

Illustratively, an advocate is expected to refuse to act illegally or improperly towards the opposition. He is also expected to restrain his client from adopting illegal or improper means. An advocate is also expected to refuse to represent clients who insist on improper or unfair means to get to what they want. He is expected to exercise his own judgment and not blindly follow instructions of his client.

Unfortunately, these standards only remain in the statute books and are not borne out by the way lawyers in India act vis-à-vis their clients and opposite parties. They are more than happy to give a wide berth to ethical and proper conduct and instead encourage their clients to bend the rules at their whims and fancies. It is difficult to reform the system if the guardians of the law enforcement mechanism are pilfering from the treasury.

In Conclusion

While it is clear that courts have taken a strong and principled stand in case it finds criminal actions are being used in purely commercial disputes, there remains a time lag between the initiation of criminal proceedings and quashing of the same. Keeping this in mind, the ideal solution would be a systemic overhaul of the entire system, starting from expediting resolution of commercial disputes, reforming the arbitral mechanism, ensuring filling up of vacancies on the bench and so on.

A number of these steps have been commenced lately and it would not be unfair to expect the landscape to change gradually for the better. Finally, an example must be made of litigants who abuse the process of law – by way of prosecution for the tort of abuse of court process to penalties of various forms. Disciplinary action against relevant advocates are also equally to blame.

Satyajit Gupta is leading the Corporate/ M&A team at Advai

ta Legal.

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