The Supreme Court has observed that when a relation of debtor and creditor is created by a loan transaction and the monies are not repaid according to the terms agreed upon, it gives rise to a civil liability. The Apex Court also held that section 405 of the IPC would not normally cover the case of a loan where the lender advances money to the borrower who intends to use or utilise the money, for the time being, till he is in possession of it.

The appellant challenged the judgment of the Delhi High Court passed on a petition filed by Hero Fincorp Limited (first respondent) under Section 482 of the Code of Criminal Procedure.

The Division Bench of Justice Dipankar Datta and Justice Augustine George Masih observed, “The underlying idea which we find in Section 405, IPC is undoubtedly this, that the property, which is entrusted, or in respect of which dominion is passed over, to another person does not even become such person’s property, even temporarily, for him to use as he wishes. Thus, the section would not normally cover the case of a loan where the lender advances money to the borrower who intends to use or utilise the money, for the time being, till he is in possession of it, although he may have to return an equivalent amount later on to the lender with or without interest or compensation for the use thereof. The position could be otherwise if a different intention appears in the relevant loan agreement.”

“Also, when a relation of debtor and creditor is created by a loan transaction and the monies are not repaid according to the terms agreed upon, it gives rise to a civil liability. A criminal liability would arise in addition to the civil liability when all the ingredients of Section 405, IPC are satisfied”, it further added.

Advocate Kapil Gupta represented the Appellant while Advocate Sanjeev Singh represented the Respondent.

Factual Background

The appellant happened to be a Director of M/s. Benlon India Ltd. Benlon had availed financial assistance for purchasing machinery from Hero vide three separate loan transactions followed by several agreements, including execution of personal guarantees and mortgage of movable and immovable properties of Benlon and the appellant. Machines were purchased in pursuance of the first two loan agreements; however, an incident of fire which ravaged the plant of Benlon resulted in the destruction of machinery worth Rs 180 crore. Contrary to the conditions of the Sanction Letter, the loan of Rs 15 crore was converted into an unsecured loan and not for the purchase of machinery.

In 2018, a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016, was filed against Benlon by a creditor before the National Company Law Tribunal. By that time, Benlon had paid Rs 26.92 crore against the entire loan amount of Rs 37.25 crore. However, Hero initiated various actions against Benlon. A complaint was lodged by Hero under Section 156(3) of the Cr. PC before the Chief Metropolitan Magistrate. EOW submitted a detailed Status Report that no cognizable offence was made out in terms of the decision in Lalita Kumari v. State of Uttar Pradesh (2014) and, therefore, recommended closure of the complaint.

The CMM, rejected the application for registration of FIR and posted the matter for pre-summoning evidence. The revisional application was dismissed by the District and Sessions Judge but the High Court allowed the appeal. The appellant questioned the impugned order by invoking the jurisdiction of this Court under Article 136 of the Constitution, whereupon a coordinate Bench stayed the impugned order; however, liberty was reserved for Hero to proceed in terms of the order passed by the CMM under Section 202, Cr. PC.

Reasoning

Since the offence alleged was of criminal breach of trust as provided under Section 405 of the IPC, the Bench explained that an offence of criminal breach of trust is committed if the accused being entrusted with ‘property’ or ‘dominion over property’, dishonestly misappropriates such property or converts thereof for own use, or, dishonestly uses or disposes of such property, violates any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract which the accused has made touching the discharge of such trust; or willfully suffers any other person to do so.

Coming to the facts of the case, the Bench noted that a relation of debtor and creditor was created between the appellant and Hero, respectively. The beneficial ownership of the money so advanced to Benlon was intended to be transferred to it, and it was not intended that it was to keep the money intact in its possession and make no use of it at all, whether or not interest was paid on it. “In our opinion, on the plain terms of the loan agreement and the facts that have unfolded, the appellant or, for that matter, Benlon could not be said to have committed any offence”, it said.

The Bench was also aware of the fact that the assertion of appellant that the machinery loan was converted to a corporate loan immediately after the incident of fire found support from the assignment deed by which the debts owed by Benlon to Hero were assigned to Prudent. “On facts, therefore, dishonest misappropriation or conversion is clearly non-existent”, it added.

As per the Bench, the High Court fell in error in not truly appreciating the dicta of this Court in Lalita Kumari (supra). “The impugned order of the High Court did not examine the report to ascertain whether it suffers from any infirmity. Keeping in view such report of inquiry, which did not suffer from any infirmity, we feel that the High Court was not justified in directing the second respondent to register a complaint against the appellant for criminal breach of trust”, it said.

Thus, holding that the continuance of proceedings before the criminal court would be an abuse of the process of law, the Bench allowed the appeal and set aside the impugned order.

Cause Title: Sunil Sharma v. M/s Hero Fincorp Limited & Another (Neutral Citation: 2025 INSC 1001)

Appearance

Appellant: Advocate Kapil Gupta, AOR Anindita Mitra

Respondent: Senior Advocate Nachiketa Joshi, Advocates Sanjeev Singh, Sandipa Bhattacharjee, Meenakshi S., Naina Jacob, Anshita Argal, Joginder Singh Berwal, AOR Sudhansu Palo, Advocates Gaurav Kumar, ASG Vikramjeet Banarjee, AOR Mukesh Kumar Maroria, Advocates Sanjay Kumar Tyagi, Amit Sharma-B, Sarthak Karol, Saumya Sinha

Click here to read/download Judgment



Justice Dipankar DattaJustice Augustine George Masih

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.