High Court order directing FIR over alleged diversion of loan funds is set aside; criminal proceedings held to be an abuse of process

A Bench of Justices Dipankar Datta and Augustine George Masih heard an appeal by Sunil Sharma against a Delhi High Court order that had directed registration of an FIR on a complaint by a financier. The appeal challenged the High Court’s use of its Section 482 CrPC powers to require the Economic Offences Wing to register a case for alleged criminal breach of trust arising out of loans taken for purchase of machinery.

The Supreme Court allowed the appeal and set aside the High Court’s direction to register an FIR. The Court held that the material on record did not disclose the essential ingredient of entrustment required for an offence under Section 405 IPC and that the facts indicated a creditor–debtor relationship and commercial disputes that gave rise primarily to civil remedies. The Court noted that the money had been paid back in instalments till April–May 2018, that a fire had destroyed machinery soon after disbursement, and that Hero had not objected to the manner of utilisation until insolvency proceedings began. The Court observed that criminal liability under Section 405 arises only where dishonest misappropriation or conversion is shown and that breach “occasioned because [the borrower] was forced by circumstances beyond his control” did not attract criminal culpability. The Court, in its reasoning, observed: "It does not admit of any doubt that the term 'entrusted' in Section 405, IPC is crucial ... Creation of the trust means the person to whom the property is handed over does not become its beneficial owner even when he is not using it according to the given directions at the time of entrustment of the property." The Court further held that continuation of criminal proceedings would be "an abuse of the process of law" and therefore exercised the High Court’s inherent jurisdiction to quash the impugned order.

Background The dispute arose after Benlon India Ltd, of which the appellant was a director, obtained three loans from the first respondent financier for purchase of machinery totaling Rs.37.25 crore between October 2014 and February 2016. Machines were purchased pursuant to the first two loans; a fire on 2 March 2016 destroyed much of the plant and machinery. A subsequent disbursement of Rs.15 crore in February 2016 was, according to Hero, converted into an unsecured loan and not used for machinery, though Hero did not raise objection until 2018. By May 2018 Benlon had repaid Rs.26.92 crore; insolvency proceedings under the IBC were initiated by a separate creditor in December 2018 and a resolution plan was later approved. Hero pursued multiple remedies: complaints under Section 138 NI Act (later withdrawn), arbitration, SARFAESI steps, a Section 9 petition under the Arbitration Act, and criminal complaints to the EOW and before the Chief Metropolitan Magistrate under Section 156(3) CrPC.

The EOW’s status report (28.08.2019) recommended closure, finding no cognizable offence under the guidance of Lalita Kumari v. State of U.P.; the CMM rejected registration of FIR and kept the matter for pre-summoning evidence under Section 202 CrPC. A revisional court dismissed the challenge to the CMM’s order but the High Court allowed Hero’s petition under Section 482 CrPC and directed the EOW to register an FIR. The appellant obtained special leave in this Court and the Supreme Court stayed the High Court’s order pending hearing.

In addressing Section 405/406 IPC, the Court emphasized that loans ordinarily create creditor–debtor relations and civil remedies, and that criminal breach of trust requires entrustment and dishonest misappropriation. The Court recorded that documentary evidence, including an assignment deed and the conduct of the parties, supported the view that dishonest misappropriation or conversion was "clearly non‑existent." Applying Lalita Kumari, the Court noted that preliminary inquiry was permissible in commercial offences and that the police inquiry here did not suffer legal infirmity. The Supreme Court therefore set aside the impugned High Court order and allowed the appeal, without costs. Pending applications stood disposed of and no further criminal proceedings were permitted in consequence of the quashing of the High Court direction.

Case Details: Case No.: Criminal Appeal No. 3467 of 2025 (Arising out of SLP (Crl.) No. 1577 of 2022) Case Title: Sunil Sharma v. M/s Hero Fincorp Limited & Another Appearances: For the Petitioner(s): Counsel not named in the reported judgment For the Respondent(s): Counsel not named in the reported judgment; learned senior counsel appeared for the State (NCT of Delhi)