The Delhi High Court in the case of China Trust Commercial Bank vs State Government [CRL. M.C. 4979/2017] dated January 06, 2025, has held that a mere breach of contractual terms, absent fraudulent or dishonest misappropriation, does not satisfy the ‘mens rea’ required under Sections 405 or 409 of IPC. Therefore, in the absence of entrustment in its criminal sense, the existence of a fiduciary relationship, and specific allegations of dishonest misappropriation, the basic requirements for invoking Section 409 IPC are wholly lacking.
The High Court observed that the cheque was admittedly handed over to the petitioner Bank by the respondent Company as security for the loan of Rs. 15 crores under a Working Capital Demand Loan Agreement. The Loan Agreement, particularly Clause 16, specified that upon an ‘Event of Default’, the bank was entitled to enforce its security. The Court thus clarified that a security cheque is a guarantee for a future obligation, intended to be used only if the issuer fails to meet the agreed obligation.
As the complaint is conspicuously silent on any specific averment demonstrating dishonest intention at the inception of the transaction, the Court analysed the foundational elements of criminal breach of trust under Section 405 IPC, which are ‘entrustment’ of property and ‘dishonest misappropriation’ of that property, and explained that ‘entrustment’ implies the creation of a fiduciary relationship where the owner of the property retains ownership.
The Court found that the presentation of the cheque was strictly in terms of the Loan Agreement following a default by the borrower. The complainant’s grievance that there was no legally enforceable liability for which the cheque could have been presented may serve as a defence in the proceedings under Section 138 of the NI Act, but it does not constitute a criminal breach of trust.
The Court, therefore, held that the voluntary issuance of a security cheque as part of a commercial loan transaction does not create a fiduciary relationship but merely evidences a contractual arrangement between a creditor and a debtor. Pointing out that the complaint was filed as a counterblast to the proceedings initiated by the bank under Section 138 of the NI Act, the Court quashed the summoning order as well as the Non-Bailable Warrant. The Court also set aside the Complaint Case and discharged the petitioners.
