Misuse of criminal law in commercial disputes: What the Rajasthan High Court held

In a notable decision, the Rajasthan High Court has set a significant precedent concerning the application of criminal law in cases related to commercial disputes.

The judgment in Rana Ram v. State of Rajasthan and Shiv Kumar Mandovra by Justice Arun Monga annulled a first information report (FIR) that had been lodged under Sections 406 (criminal breach of trust) and 420 (cheating) of the Indian Penal Code (IPC). The core issue in this case revolved around a commercial transaction, and the Court highlighted the inappropriate use of criminal law in matters that are primarily civil in nature.

This ruling has broad implications for both businesses and individuals engaged in commercial transactions. It establishes a clear distinction between civil and criminal liabilities and highlights the need for the police to avoid registering FIRs in purely commercial disputes without conducting a necessary preliminary inquiry.

Case background

The matter stemmed from a transaction involving the sale of guar gum by Shiv Kumar Mandovra to Ram Kishore Jhanwar and his son, Narendra Jhanwar. The seller alleged that while the buyers took delivery of the goods, they failed to make payment. During the investigation, it was revealed that the goods, valued at ₹25,54,807, were in the possession of Rana Ram, who had purchased them from Narendra Jhanwar. Rana Ram argued that he was an innocent purchaser and had fully paid for the goods.

Despite the dispute's civil nature, an FIR was filed under Sections 406 and 420 of the IPC. The Court found that this was an abuse of police power, with the intention of assisting the complainant in recovering his dues rather than addressing any actual criminal wrongdoing.

Key takeaways from the judgment

1. Abuse of police powers in civil disputes: Justice Monga criticised the registration of an FIR, noting that the dispute was clearly civil, involving a seller, a buyer, and a subsequent purchaser. He emphasised that police powers should not be misused to recover debts in commercial disputes through criminal law.

2. Failure to conduct preliminary inquiry: The Court referenced the Lalita Kumari vs. Government of Uttar Pradesh ruling, which mandates a preliminary inquiry before filing an FIR in civil disputes, particularly in commercial transactions. The lack of such an inquiry in this case resulted in unnecessary harassment of the petitioner.

3. Civil vs. criminal liability: The Court underscored the difference between civil and criminal matters, explaining that civil disputes should be addressed in civil courts. Criminal law should only be applied when there is clear intent to commit a crime. In this case, there was no evidence of criminal intent, as required under Sections 406 and 420 IPC.

4. Entrustment vs. inducement: Justice Monga also clarified the legal distinction between criminal breach of trust (entrustment) under Section 406 and cheating (inducement) under Section 420. He noted that the case involved a straightforward commercial sale, without any element of deception or breach of trust.

The Court directed the police to refrain from filing FIRs in commercial disputes without first conducting a mandatory preliminary inquiry. FIRs should only be lodged if there is prima facie evidence of criminal behaviour. This directive aims to curb the practice of police acting as recovery agents in civil disputes.

Significance of the ruling

This ruling will help safeguard businesses and individuals from the inappropriate application of criminal law in civil disputes. It discourages the common tactic of using criminal charges to pressure parties into settling commercial matters. By emphasising the necessity of preliminary inquiries and the clear distinction between civil and criminal issues, the judgment ensures that parties are not subjected to unwarranted criminal proceedings.

The judgment is expected to influence how commercial disputes are handled, not just in Rajasthan, but potentially across India. It could lead to a reduction in frivolous FIRs filed in commercial cases, easing the burden on the criminal justice system.

Additionally, the ruling safeguards the interests of bona fide purchasers, like the petitioner in this case, who may otherwise be caught up in the fallout of commercial disputes.

By quashing the FIR and issuing directives to law enforcement, the Court has protected individuals and businesses from undue legal harassment, ensuring that justice is pursued through the appropriate legal channels. The need of the hour is to completely nip in the bud the actions of the police in registering FIRs for civil/commercial disputes, which causes undue harassment to accused and adds to the burden of the courts. The directions in the judgment come at the time where India is seeing a paradigm shift in ease of doing business, and this will surely add to the sheen of the business environment in the country.

Vivek Mathur is an Advocate-on-Record practising before the Supreme Court and the Rajasthan High Court

Ivan is an Advocate-on-Record practising before the Supreme Court and the Delhi High Court.