Mere Breach of Contract Cannot Constitute Fraud Unless Dishonest Intent Is Shown at the Beginning of the Transaction: Delhi High Court

Judge Dinesh Kumar Sharma He stated that a civil case cannot be given a “cloak of punishment by clever drafting” and that the Magistrate must ascertain from the complaint whether there is a prima facie valid case to proceed against the accused.

Background:

Education group Raffles Education Corporation Ltd (petitioner-company) signed a Master Joint Venture Agreement with Educomp Group in 2008 to create projects such as green space campuses, learning centers and education cities. One of the proposed initiatives was the establishment of a management and technical university with the Jai Radha Raman Educational Society (‘JRRES’) as the operating unit.

When disagreements arose between the parties, a Share Purchase Agreement (SPA) was signed in 2015. One of the preconditions for the completion of the SPA was that the Educomp candidates resigned from JRRES and all control was transferred to Raffles.

Raffles subsequently initiated arbitration proceedings against Educomp. The arbitration court ruled in favor of Raffles and found a breach of contract by Educomp.

However, in 2018, Raffles filed a complaint before the Magistrate, alleging that Educomp, run by the Chairman and MD (defendant no. 2), had defrauded the company.

Raffles claimed that Educomp Group entered into the SPA solely for fraudulent purposes and that they did not intend to comply with the terms of the SPA. Raffles claimed that the participant was no. 2 repeatedly stated that he retained control of the affairs of JRRES and misrepresented Educomp’s ability to transfer control of JRRES to him.

Raffles claimed that the participant was no. 2 and the Educomp group and its partners persuaded the company to invest significant funds in a joint venture. He also alleged that Educomp’s refusal to resign was a fraudulent scheme to retain unauthorized control over JRRES and gain financial advantage.

Upon the complaint, the Criminal Judgeship of Peace issued a summons to defendant no. 2 and associated persons of Educomp will be punished for offenses under Section 420 IPC (cheating and dishonestly promoting delivery).

However, in a revision petition, the Sessions Court quashed the summons on the ground that the complaint did not disclose the offense of cheating under Section 420 IPC.

Raffles therefore appealed the decision of the Court of Session.

Difference between breach of contract and fraud

The court stated that, when issuing the summons, the magistrate must determine the existence of a prima facie valid case based on the allegations contained in the complaint.

Referring to various decisions, the Court observed that the magistrate should not initiate proceedings on the basis of allegations alone. He stated that the judge must see whether a civil matter is being disguised as a criminal matter and act accordingly.

Regarding the crime of fraud, the court stated that there is a difference between breach of contract and the crime of fraud. It was stated that mere breach of contract could not give rise to an action for criminal fraud unless dishonest intent was shown.

He observed, “An intelligently prepared civil case cannot be disguised as a crime. When considering such matters, the court must keep in mind that there is a distinction between breach of contract and the crime of fraud. Although it is a subtle distinction, the same situation should be evaluated according to the behavior of the parties. The subsequent conduct of the alleged person cannot in itself be the test and mere breach of contract cannot give rise to criminal prosecution for fraud unless the intent to defraud or dishonest is shown at the outset of the transaction, i.e. at the time the offense is uttered. being committed.”

The court emphasized that the essence of the crime in terms of Section 420 of the IPC is ‘intent’. He stated that in order to issue a summons for the crime of fraud, the material in the record must show that fraud or fraudulent intent existed at the time the promise was made.

He mentioned the following case: MNG Bharatesh Reddy, Ramesh Ranganathan and anr. (2022 LiveLaw (SC) 701), The Supreme Court has observed that mere breach of contract cannot give rise to criminal prosecution for fraud unless fraudulent or dishonest intent is shown at the very outset of the transaction.

Here, the Court concluded that the crime of fraud was not regulated.

He noted that the Arbitral Tribunal ruled that Educomp’s failure to provide the resignations amounted to a breach of contract. He also noted that the SPA was executed in 2015, but the complaint was filed only in 2018. He stated that the delay in filing the complaint was not explained in any way by the petitioner.

He also stated: “The fact that the petitioner initially initiated the arbitration process also shows that this is merely a civil dispute.”

The court held that the complaint filed against Raffles did not even meet the essential ingredients of Section 420 of the IPC.

Therefore, the Court affirmed the Court’s decision quashing the subpoena.

Case title: Raffles Education Corporation Ltd. with NCT State of Delhi and Anr. (CRL.MC 5108/2022, CRL.MA 20383/2022)