Mere breach of contract not criminal offence, says SC

New Delhi, Mar 22 (PTI) Mere breach of contract is not in itself a criminal offence and gives rise to the civil liability of damages, the Supreme Court said on Tuesday.

A bench of Justices S.A. Nazeer and Krishna Murari said the distinction between mere breach of contract and cheating, which is a criminal offence, is a fine one.

"While breach of contract cannot give rise to criminal prosecution for cheating, fraudulent or dishonest intention is the basis of the offence of cheating," the bench said.

The court made these observations while hearing an appeal filed by the Managing Director and the Directors of a company challenging an order of the Calcutta high court which refused to quash proceedings against them in a case of cheating and criminal breach of trust.

In January 2008, Respondent No. 2, an authorised representative of SMC Global Securities Ltd, Delhi desired to make an investment on its behalf with the appellants.

It was mutually decided between the parties that Respondent No. 2 would invest an amount of Rs. 2.5 crore with the company in lieu of which they will be issued 2,50,000 equity shares of Priknit Apparel Pvt. Ltd. Subsequently, Respondent No. 2 filed their share application form along with the cheque of Rs. 2.5 crore.

Later, an allotment letter was issued in favour of Respondent No. 2 whereby 2,50,000 shares were issued in lieu of the investment made by him.

Having failed to bring the Initial Public Offering as per the memorandum of understanding, Respondent No. 2 issued a legal notice dated to the appellants, who duly replied to the legal notice denying all the allegations contained in the legal notice. Later, a criminal case was filed against the appellants.

The top court said that in the case at hand, the complaint filed by the Respondent No. 2 does not disclose dishonest or fraudulent intentions of the appellants.

"Having gone through the complaint/FIR and even the charge sheet, it cannot be said that the averments in the FIR and the allegations in the complaint against the appellant constitute an offence under Sections 405 (Criminal breach of trust) & 420 (cheating) of Indian Penal Code, 1860.
Even in a case where allegations are made in regard to failure on the part of the accused to keep his promise, in the absence of a culpable intention at the time of making the promise being absent, no offence under Section 420 IPC can be said to have been made out," the bench said.

The Supreme Court said that in the instant case, there is no material to indicate that appellants had any mala fide intention against the respondent, which is clearly deductible from the Memorandum of Understanding arrived between the parties.