Directors Not Criminally Liable For Company's Contractual Breach Without Proof Of Fraud: Delhi High Court

The Delhi High Court has said that a company's inability to pay its dues because of financial distress is a civil issue, not a criminal offense. A director cannot be prosecuted for cheating unless there is clear proof of personal fraud or personal gain.

Justice Neena Bansal Krishna quashed cheating charges against a former managing director of Creative Wares Limited, a manufacturing company that later ran into financial trouble and was declared a sick industrial company by the BIFR.

The court said the complainant is “required to show specific acts of personal fraudulent intention or personal gain, distinct from the corporate entity's business operations.”

The court also held that once proceedings against the company itself are dropped, continuing the case against its director is not legally sustainable.

“The Director cannot be held criminally liable for the Company's financial status or its corporate debts when the Company itself is no longer being prosecuted" the bench observed.

The dispute relates to supplies made by SCJ Plastics Limited to Creative Wares Limited between 1999 and 2001. Goods worth about Rs. 26.13 lakh were supplied on credit. When payments were not fully made, SCJ Plastics filed a civil recovery suit in 2002.

Creative Wares was later declared a sick company by the BIFR. In 2005, three years after the civil suit, SCJ Plastics filed a criminal complaint alleging cheating. It claimed the managing director had concealed the company's financial condition while placing orders.

A magistrate later dropped the case against the company after it was struck off. However, cheating charges were framed against the director personally. Those charges were challenged before the High Court.

The director argued that the dispute was purely commercial. He said he acted only on behalf of the company. He also pointed to partial payments and the earlier civil suit.

The complainant argued that the director was the “alter ego” of the company. It claimed he dishonestly induced supplies by hiding the BIFR proceedings.

The High Court rejected this argument. It said an assurance of payment is a normal commercial representation. It is not, by itself, fraudulent.

The court noted that the complainant continued supplies to “maintain business relations.” This showed there was no dishonest inducement. It also noted that partial payments had been made.

The bench held that dishonest intention at the start of the transaction was missing. It called the criminal complaint an afterthought, filed to pressure recovery.

In the absence of any specific allegation of personal deception or misappropriation, the court said a cheating case could not be made out. It held that continuing the trial would be an abuse of process.

The High Court accordingly discharged Arun Kumar Bagla from the offense under Section 420 (Cheating) of the IPC. 

For Petitioner: Advocates Rohit Priya Ranjan and Aayushi

For Respondent: Advocate Smita Maan