2026 (1) TMI 315 - HC - Indian Laws

Security cheque presented under loan agreement-no 'entrustment' or breach of trust under IPC s.409; complaint quashed

The dominant issue was whether presentation of a security cheque issued under a loan agreement could constitute criminal breach of trust by an agent ... Dishonour of Cheque - misappropriation of the cheque - security cheque or otherwise? - Challenge to summoning Order - whether presentation of the Security Cheque for realization of alleged outstanding amount, would constitute an offence of criminal breach of trust by Agent, which is punishable under Section 409 IPC? - HELD THAT:- The offense of criminal breach of trust under Section 406 IPC requires two foundational elements: first, an 'entrustment' of property, and second, a dishonest misappropriation of that property. The Apex Court in Central Bureau of Investigation, SPE, SIU(X), New Delhi vs. Duncans Agro Industries Ltd., Calcutta, [1996 (7) TMI 552 - SUPREME COURT] held that the expression 'entrusted with property' used in Section 405 of the IPC, connotes that the property in respect of which criminal breach of trust can be committed, must necessarily be the property of some person other than the accused or that the beneficial interest in or ownership thereof must be in the other person and the offender must hold such property in trust for such other person or for his benefit. As observed in the case of N. Raghavender vs. State of Andhra Pradesh, CBI [2021 (12) TMI 1490 - SUPREME COURT], the entrustment of public property and dishonest misappropriation or use thereof in the manner provided under Section 405 IPC, are a sine qua non for making an offence punishable under Section 409 IPC. From the facts as narrated, it emerges that there was no entrustment of property by the Complainant to the Petitioners; rather the very fact that it was a security cheque under the Loan Agreement, which was intended to secure any debt and liability which may arise under the Loan Agreement in future and for the realization of the same, the cheque would be presented - The cheque was voluntarily issued as part of a commercial transaction and formed an integral component of the contractual security mechanism, intended to be encashed in case of default of Loan liability. The issuance of a security cheque pursuant to a commercial loan transaction, does not create a fiduciary relationship, but merely evidences a contractual arrangement between creditor and debtor. There is neither any entrustment nor any misappropriation of the cheques; the presentation of which was strictly in terms of the Loan Agreement. Thus, no prima facie offence under Section 409 IPC is made out in the Complaint. Rather it is evident that the present Complaint had only been filed as a counterblast to the Complaint under Section 138 NI Act. Also, by way of this Complaint, the Complainant intended to prove its defences which is required to be done in the Complaint under Section 138 NI Act. The present Complaint is blatantly an abuse of the process of law on which ground as well, it is liable to be quashed. The impugned Order of the Ld. MM dated 12.07.2017 summoning the Petitioners under Section 409 IPC, and the Order whereby NBWs were issued are hereby, set aside - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the complaint, on its admitted and pleaded facts, disclosed the essential ingredients of criminal breach of trust by banker punishable under Section 409 IPC, in relation to the presentation of a cheque stated to be a 'security cheque' under a loan arrangement. (ii) Whether continuation of the criminal complaint and the consequential summoning order under Section 409 IPC amounted to an abuse of the process of law warranting quashing, and whether the consequential order issuing non-bailable warrants could survive. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Disclosure of offence under Section 409 IPC on allegations of misuse of a 'security cheque' Legal framework (as discussed by the Court): The Court examined Section 409 IPC read with the ingredients of 'criminal breach of trust' under Section 405 IPC, identifying two foundational requirements: entrustment of property (or dominion over it) and dishonest misappropriation/conversion or dishonest use/disposal in violation of a legal direction or contract. The Court held that, for Section 409 IPC, it is additionally essential that the accused (including a banker) was entrusted with property in that capacity and committed criminal breach of trust in respect of that property. Interpretation and reasoning: The Court treated it as admitted and undisputed that the cheque bore genuine signatures of the borrower's authorised signatories and was handed over to the bank as part of the loan arrangement. The Court examined the loan agreement terms and found that the 'security cheque' formed part of a contractual security mechanism intended to be enforced upon default. On the borrower's default, presenting the cheque was viewed as action 'strictly in terms of the Loan Agreement.' The Court reasoned that issuance of a security cheque in a commercial loan transaction does not, by itself, create a fiduciary relationship amounting to 'entrustment' in the criminal sense; rather, it evidences a creditor-debtor contractual arrangement. On these pleaded facts, the Court found no 'entrustment' and no 'misappropriation' because the cheque was voluntarily given as security to be used in the event of default. The Court further noted that the complaint lacked specific averments showing dishonest intention at the inception of the transaction and reaffirmed that mere breach of contractual terms, without dishonest misappropriation, does not satisfy the mens rea under Sections 405/409 IPC. Even accepting the allegation that the cheque was a 'security cheque' at face value, the Court held this did not generate an offence under Section 409 IPC. Conclusions: No prima facie offence under Section 409 IPC was made out because the complaint did not establish criminal 'entrustment,' a fiduciary relationship, or dishonest misappropriation. The gravamen, at best, raised a defence regarding enforceable liability, which belonged to the proceedings relating to cheque dishonour and could not be converted into a criminal breach of trust prosecution. Issue (ii): Abuse of process; quashing of complaint, summoning order, and consequential non-bailable warrants Legal framework (as applied by the Court): The Court applied its power to prevent abuse of process and to secure the ends of justice by examining whether the complaint, even if accepted at face value, disclosed the offence for which summoning was ordered. Interpretation and reasoning: Having held that the complaint did not disclose the ingredients of Section 409 IPC, the Court found the prosecution to be legally untenable. The Court also recorded a clear finding that the complaint functioned as a 'counterblast' and was used to press what were essentially defences to the cheque dishonour proceedings, thereby constituting an abuse of process. Since the summoning order itself was unsustainable, the Court held that the consequential order issuing non-bailable warrants could not stand. Conclusions: The Court set aside the summoning order under Section 409 IPC and the order issuing non-bailable warrants, quashed the complaint in entirety, and discharged the accused persons.