Case Background
This case arises out of Complaint Case No. 2846(C) of 2012, registered in Begusarai district. The complainant is a business concern dealing in welding electrodes. The petitioner was stated to be the Director of M/s Harji Engg. Pvt. Ltd., a company executing work at NTPC, Kahalgaon.
According to the complaint, the petitioner approached the complainant at its branch office in Bhagalpur for supply of welding electrodes. After an oral agreement and signing on the firm’s pad, the complainant began supplying electrodes to the petitioner’s company at the NTPC, Kahalgaon site.
Supplies were allegedly made from 14.06.2006 to 06.07.2007. For these supplies, the complainant raised a bill for Rs. 21,13,513/-. It was further alleged that the agreement provided that if payment was not made within 30 days of receipt of goods, the petitioner would be liable to pay interest at 24% per annum.
The complaint itself recorded that the complainant received Rs. 5,00,000/- between 23.09.2008 and 28.04.2012. The complainant then claimed that interest at 24% per annum was payable from 14.06.2006 and that the remaining amount effectively represented the interest component. Despite repeated demands, the complainant alleged, the full dues were not paid.
On these allegations, the Chief Judicial Magistrate, Begusarai, by order dated 20.07.2013, took cognizance against the petitioner for offences punishable under Sections 420 and 406 of the Indian Penal Code.
Aggrieved by the cognizance order, the petitioner approached the Patna High Court under Section 482 of the Code of Criminal Procedure, seeking quashing of the criminal proceedings. Along with this main application (Criminal Miscellaneous No. 20168 of 2015), another connected matter, Criminal Miscellaneous No. 18467 of 2015, arising out of the same complaint case, was also before the Court.
What the Court Examined and Decided
Hon’ble Mr. Justice Chandra Shekhar Jha of the Patna High Court delivered an oral judgment on 28.02.2024. The Court carefully considered the complaint, the submissions of the petitioner’s counsel, and the legal position laid down by the Supreme Court.
Counsel for the petitioner argued that even if the complaint was taken at face value, it did not disclose the necessary elements of cheating under Section 420 IPC or criminal breach of trust under Section 406 IPC. The dispute, it was submitted, was plainly about non-payment of the full contractual amount and interest.
The petitioner did not dispute that the complainant had supplied electrodes and raised a principal bill of Rs. 21,13,513/-. It was pointed out that against this amount, payments totalling Rs. 5,00,000/- were made between 23.09.2008 and 28.04.2012.
The petitioner’s counsel further stated that the complainant later raised a claim for Rs. 44,49,614.76/-, based on adding 24% per annum interest to the unpaid dues. While the principal sum was not disputed, the core argument was that such a money dispute could not automatically be treated as cheating or criminal breach of trust.
An important factual aspect was that, in an earlier bail proceeding arising from the same complaint, the Patna High Court had imposed a condition. While granting anticipatory bail in Criminal Miscellaneous No. 18467 of 2015 by order dated 29.07.2015, the Court directed the petitioner to pay Rs. 16 lakhs to the complainant at the time of furnishing bail bonds.
In compliance with that order, the petitioner paid Rs. 16 lakhs to opposite party no. 2 through two bank drafts of Rs. 8 lakhs each. These drafts were drawn on Punjab and Sindh Bank on 11.09.2023 and on Canara Bank on 06.09.2023. Both drafts were acknowledged on behalf of the complainant, as they were handed over to the clerk of the complainant’s counsel.
The Court noted that, as a result, the principal amount for which the original bill had been raised now stood paid to the complainant. Together with the earlier payment of Rs. 5 lakhs, this satisfied the principal supply bill of Rs. 21,13,513/-, leaving the dispute essentially about interest.
The petitioner’s side also explained the reason for delay in full payment. They submitted that the petitioner’s company had to receive money from M/s Hindustan Steel Works Construction Ltd. However, because an arbitration proceeding was pending between NTPC, Kahalgaon and Hindustan Steel Works Construction Ltd., the petitioner’s company did not receive timely payment. This financial hardship, they argued, led to delay in paying the balance to the complainant and did not show any dishonest intention from the outset of the business dealings.
A further, crucial argument was raised on the legal status of the parties. M/s Harji Engg. (P) Ltd. (HEWPL) was stated to be a registered company under the Companies Act, 1956, and therefore an independent legal entity. The complaint, however, had not made the company itself a party. Only the Director (the present petitioner) was arrayed as accused. On this ground alone, it was argued, the criminal proceedings were not sustainable.
To support these submissions, the petitioner relied on the Supreme Court judgment in Sushil Sethi and Another v. State of Arunachal Pradesh and Others, reported in (2020) 3 SCC 240. The Patna High Court reproduced and relied upon key paragraphs (7.1, 7.2, 7.5, 8.1 and 8.2) of that decision.
In those passages, the Supreme Court had:
- Referred to State of Haryana v. Bhajan Lal, stating categories of cases where High Courts may quash criminal proceedings under Section 482 CrPC, including where allegations, even if taken at face value, do not make out any offence, or are inherently improbable.
- Clarified in Vesa Holdings (P) Ltd. v. State of Kerala that every breach of contract does not amount to cheating. Cheating requires proof that the accused had fraudulent or dishonest intention at the very start of the transaction.
- Explained in Sharad Kumar Sanghi v. Sangita Rane that when the main allegations are against a company, and the company is not arrayed as an accused, criminal proceedings cannot be sustained against the Managing Director or Director alone, especially in the absence of specific averments showing vicarious liability.
- Held in Sushil Sethi itself that where there are no specific allegations of fraudulent or dishonest intention at the time of entering into the contract, and where conduct such as replacement of defective goods shows otherwise, no prima facie case under Section 420 IPC is made out.
- Also emphasized, referring to Maksud Saiyed v. State of Gujarat, that the Penal Code does not itself create vicarious liability of company directors, and such liability can arise only where a specific statute so provides and the complaint contains clear averments attracting those provisions.
Applying these principles, the Patna High Court examined the facts of the present case. The Court found that the business relationship was between the complainant’s company and the petitioner’s company for supply of electrodes. The petitioner had made partial payments and, later, paid the remaining principal amount pursuant to the bail condition.
The Court noted that these payments, and the explanation regarding delayed receipt of funds from another company due to pending arbitration, indicated that the petitioner did not have a dishonest intention from the beginning of the transaction. This was significant because, under the law, an offence of cheating requires fraudulent or dishonest intention at the time of making the promise or representation.
The Court expressly observed that, in light of these facts, a prima facie case under Sections 406 and 420 IPC was not made out. The matter essentially concerned non-payment and interest, for which civil remedies are available, rather than criminal culpability.
The Court also took serious note of the fact that the petitioner’s company, a separate legal entity, had not been made a party in the complaint case. Relying on the legal position explained in Sushil Sethi and related Supreme Court judgments, the Court held that when the main allegations are against the company, criminal proceedings cannot proceed only against its Director without arraigning the company and without necessary allegations of vicarious liability.
On this combined factual and legal basis, the Patna High Court concluded that allowing the criminal case to proceed would amount to abuse of the process of the court and would not serve the ends of justice.
Accordingly, the Court quashed and set aside the order dated 20.07.2013 passed by the Chief Judicial Magistrate, Begusarai, in Complaint Case No. 2846(C) of 2012, by which cognizance had been taken against the petitioner under Sections 420 and 406 IPC, together with all consequential proceedings.
Since the main criminal miscellaneous application was allowed on these grounds, the connected Criminal Miscellaneous No. 18467 of 2015 was also disposed of, and no separate order was considered necessary.
Why This Judgment Matters
This judgment is important for businesspersons and small traders who get drawn into criminal cases over unpaid bills and interest. The Patna High Court has made it clear that every delay in payment or breach of a business agreement does not automatically become a criminal case for cheating or criminal breach of trust.
The Court highlighted that to treat a civil money dispute as a criminal offence, there must be clear material to show that the accused had dishonest intention right from the start of the transaction. Mere financial hardship or late payment, even over a long period, is not enough.
The decision also underlines that when dealings are between two companies, the company itself must be made a party. Directors cannot be prosecuted alone unless there are specific legal provisions and specific allegations creating vicarious liability.
For victims of delayed payments, the judgment implicitly points towards using proper civil remedies for recovery of money and interest, instead of misusing criminal law. For accused persons, it shows that the Patna High Court will use its powers under Section 482 CrPC to stop criminal proceedings that do not disclose the necessary ingredients of an offence.
Legal Issues and Answers
- Issue: Do the allegations in the complaint, relating to non-payment of the full price and interest for welding electrodes supplied under a business arrangement, disclose offences under Sections 420 and 406 IPC against the company’s Director?
Answer: No. The Court held that the facts did not show dishonest intention from the beginning or criminal breach of trust, especially when substantial payments had been made and the entire principal amount was later cleared. - Issue: Can criminal proceedings for cheating and breach of trust be sustained against a Director when the main business transaction was with his company, and the company itself is not made an accused?
Answer: No. Following the Supreme Court’s rulings, the Court held that where the main allegations are against the company, and the company is not arrayed as a party and there are no specific averments of vicarious liability, proceedings against the Director alone are not maintainable. - Issue: Should the High Court exercise its inherent powers under Section 482 CrPC to quash the cognizance order in such circumstances?
Answer: Yes. Treating this purely commercial dispute as a criminal case would be an abuse of the process of court, so the Patna High Court quashed the cognizance order and all consequential proceedings.
Cases Cited by the Court
- Sushil Sethi and Another v. State of Arunachal Pradesh and Others, (2020) 3 SCC 240 (key paragraphs 7.1, 7.2, 7.5, 8.1, 8.2 relied upon).
- State of Haryana v. Bhajan Lal, 1992 Supp (1) SCC 335 (categories for quashing criminal proceedings under Article 226/Section 482 CrPC).
- Vesa Holdings (P) Ltd. v. State of Kerala, (2015) 8 SCC 293 (breach of contract does not by itself constitute cheating; need for dishonest intention at inception).
- Sharad Kumar Sanghi v. Sangita Rane, (2015) 12 SCC 781 (requirement of arraying company and pleading vicarious liability for prosecuting directors).
- Maksud Saiyed v. State of Gujarat, (2008) 5 SCC 668 : (2008) 2 SCC (Cri) 692 (no vicarious liability of directors under IPC without specific statutory provision and allegations).
Case Details
Case Number: Criminal Miscellaneous No. 20168 of 2015 with Criminal Miscellaneous No. 18467 of 2015
Case Title: Gyan Singh v. The State of Bihar & Anr.
Coram: Hon’ble Mr. Justice Chandra Shekhar Jha
Citation: 2024 (2) PLJR 533
Advocates:
- For the petitioner: Mr. Alok Kumar @ Alok Kr. Shahi, Advocate; Mrs. Archana Shahi, Advocate
- For the State (in Criminal Miscellaneous No. 20168 of 2015): Mr. Jharkhandi Upadhyay, APP
- For the State (in Criminal Miscellaneous No. 18467 of 2015): Mr. Madhuranand Jha, APP
Nature of the Case: Petition under Section 482 CrPC seeking quashing of the cognizance order in a complaint case alleging offences under Sections 420 and 406 IPC.
Date of Judgment: 28.02.2024
Trial Court Order Challenged: Cognizance order dated 20.07.2013 passed by the Chief Judicial Magistrate, Begusarai in Complaint Case No. 2846(C) of 2012.
Link to Judgment: Patna High Court Judgment – Criminal Misc. No. 20168 of 2015
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