Mere failure to repay a loan would not become a criminal offence

Mere failure to repay a loan would not become a criminal offence: Apex Court

The Supreme Court Bench of Justices NV Ramana and MM Shantanagoudar  held that the mere failure to repay a loan would not automatically become a criminal offence under section 420 IPC unless there is criminal intent underlying the same.
The appellant before the Court had failed to return a loan taken in 2008. The moneylender (respondent) filed a civil suit for recovery of money in 2011. In 2012, however, the respondent filed a criminal complaint levelling charges of criminal breach of trust and cheating against the appellant. The Magistrate also framed criminal charges to this effect under Sections 406, 409, 415 and 420 of the Indian Penal Code (IPC) thereafter.
Appellant plea unsuccessfully in High Court for quashing criminal charges. In turn, the Supreme Court found that the Magistrate and the High Court had erred in failing to recognize that there was no criminal element in the failure to repay the loan in this case.
The Court noted that in order to constitute the offence of criminal breach of trust, there must be an entrustment of money or property. As for the criminal offence of cheating, there must be a fraudulent or dishonest intention involved to implicate the accused. These elements were absent in the dispute before the Court.

Supreme Court observed in judgment:

The law clearly recognizes a difference between simple payment/investment of money and entrustment of money or property. A mere breach of a promise, agreement or contract does not, ipso facto, constitute the offence of the criminal breach of trust contained in Section 405 IPC without there being a clear case of entrustment…
Case referred Hridaya Ranjan Prasad Verma v. State of Bihar, (2000) 4 SCC 168
Charge under Section 415 punishable under Section 420 of IPC. In the context of contracts, the distinction between mere breach of contract and cheating would depend upon the fraudulent inducement and mens rea.
The mere inability of the appellant to return the loan amount cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, as it is this mens rea which is the crux of the offence.
Therefore, the Bench set aside the High Court judgment quashed the criminal charges framed by the Magistrate in the case. Before parting with the matter, the Bench also reiterated a warning against criminalising disputes that are civil in nature. It observed,
Case Refered Gian Singh v. State of Punjab, (2012) 10 SCC 303
” … this Court in a number of cases has usually cautioned against criminalizing civil disputes, such as breach of contractual obligations. The legislature intended to criminalize only those breaches which are accompanied by fraudulent, dishonest or deceptive inducements, which resulted in involuntary and in­efficient transfers, under Section 415 of IPC.