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On bank loans and defaulters, andA borrowers recourse to law
May, 02nd 2008

Muthuswamy borrowed money from a private bank. He managed to repay a substantial portion of the loan through regular monthly repayments. But because of certain adverse circumstances in his life, he could not repay a few instalments. He promised the bank he would repay as soon as his situation improved. The bank agreed. Or so he thought, until the postman delivered to him a summons issued by the local criminal court stating that he must respond to charges of having cheated and committed criminal breach of trust. What should he do? Meet a lawyer immediately.

Conversion of pure civil disputes into criminal litigations has increased manifold today despite the Supreme Court frequently frowning upon such a practice. This article deprecates the practice of private financial institutions or other money-lenders in attempting to recover money by dragging the borrower to the criminal court under the garb of having committed criminal breach of trust and cheating under Sections 406 and 420 of the Indian Penal Code respectively.

This process seems to be resorted to particularly in the case of personal loans granted by private banks. The borrower repays a few instalments and, on defaulting, he is dragged to the criminal court for having cheated and committed criminal breach of trust. The private financial institutions that resort to such methods seem to have a formatted complaint where the only difference from case to case is the name of the borrower and the amount remaining unpaid.

Some cases seem to reflect a contradiction, the complaint being that the money was lent as a personal loan but was used for buying a car. This may not be tenable as the personal loan can be used for any purpose the borrower wishes.

Purely civil

Of course, clever drafting in the criminal complaint may force the borrower to face the ordeal of a trial under certain situations but, in many cases, it is possible to establish that the criminal process is being used, or more accurately abused, to adjudicate disputes of a purely civil nature. The High Court is empowered to quash a complaint and relieve the borrower if it is established that the disputes are purely of a civil nature.

In many cases involving personal loans it is also seen that the loans are granted by one branch of the bank located in a particular State but the complaint is lodged in another State with a false allegation that the branch in whose jurisdiction the criminal complaint is lodged has granted the loan.

Cases are filed in hundreds, maybe even in thousands, by financial institutions in criminal courts.

There was a time when the financial institutions used extra legal measures to recover money by employing goondas as collection agents. Today, the criminal courts have become the legal substitute. It is unfortunate that the criminal courts take cognisance and issue process in such cases despite the complaint lacking in the necessary allegations.

Such cases are fit instances for invoking the inherent powers of the High Court to quash the process against the borrower.

To illustrate further, the Supreme Court, in the case of Alpic Finance v. Sadasivam, upheld an order of a High Court quashing a criminal complaint for cheating where the borrower had repaid substantial instalments.

The court held that it is difficult to discern that an honest man who borrows and subsequently fails to repay does not necessarily become a cheat. The doors of the High Court may be open in such cases to the distraught borrower.

Apart from quashing pure civil disputes which are given a criminal character, there remains one issue involving cheating and criminal breach of trust on which the Supreme Court is yet to give a pronouncement: Whether a person can be prosecuted for cheating and breach of trust for the same set of facts?.

It is the authors opinion that the offences of criminal breach of trust and cheating can never be clubbed together for the same grievance arising out of the same set of facts.

This is because the requirements for establishing the two offences are different. iIn Cheating, there must be an intention to deceive the lender at the very beginning and the money should have been lent on a fraudulent misrepresentation made by the borrower, thereby causing loss to the lender.

In Breach of Trust, there is confidence between the parties at the time of the transaction whereas the borrower subsequently breaches the confidence reposed on him by the lender.

There cannot be confidence between the parties at a time where one is falsely induced by another into doing an act which causes loss to the other. It has long been the practice of lawyers too, unfortunately, to file complaints under both Cheating and Criminal Breach of Trust on the same set of facts.

In Rex v. John Mciver, a full bench of the Madras High Court in the year 1936 explained in elegant English the incompatibility of the two offences for the same set of facts. This seems to have been lost sight of in the following decades.

For some strange reason, the Supreme Court too has not offered a finding on this issue, though it has repeatedly quashed complaints filed under breach of trust and cheating at the threshold on the ground that the criminal process is being abused for deciding a dispute purely of a civil nature.

Abuse of process

Needless to say the quashing of a complaint depends on the allegations made in each complaint.

The High Court will not embark on an enquiry into the truth of the allegations nor will it try balancing the probability of the allegations made by the parties. However, the Courts have frowned upon the practice of recovering unpaid loan instalments by abusing the criminal process.

To conclude, there are many cases where the necessary allegations are missing to even establish the borrower as a cheat or as having committed criminal breach of trust.

Persons thus charged must immediately consult a lawyer, who may be best suited to advise whether the prosecution is maintainable or not. Knocking at the doors of the High Court is an option the borrower may have in such cases, to be relieved from undergoing the arduous process of a trial.

V. P. Raman
(The author is a Chennai-based advocate.)
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