Frivolous criminalisation of commercial disputes in India: recent trends

I. Introduction

There is a growing tendency in business circles to press frivolous criminal charges in commercial disputes that would otherwise have attracted a purely civil liability. The motivation behind filing such frivolous charges is to use it as a bargaining chip and expedite the recovery of dues, delay legitimate proceedings, or simply intimidate, harass and threaten the opposite party. This seriously impacts the ease of doing business, particularly because there is practically nothing that a company can do (either contractually or otherwise) to nip such frivolous proceedings in their bud. The onus thus shifts on the state machinery to ensure that these frivolous proceedings are dismissed at the very threshold and companies are able to carry out their businesses without any fear of harassment.

This article seeks to analyse the recent trend of criminalisation of commercial disputes in India, with a particular focus on remedies that corporates have in situations where such a frivolous criminal case has been lodged against them. This article also sets out the need for legislative and/or judicial intervention/guidance at various stages of a criminal investigation to ensure robust and speedy justice to a wrongly accused corporate party.

II. Separating the wheat from the chaff: need for a stricter scrutiny of criminal complaints

In the recent past, an increasingly common trend in commercial disputes has been to see a contracting party seek the registration of a criminal case[1] alleging offences of cheating, criminal breach of trust, forgery, conspiracy[2] etc. under the Indian Penal Code, 1860 (“IPC”) instead of (or in addition to) invoking its regular remedies under the contract. Such practices are adopted even for disputes, which involve a mere breach of contract.[3] As these criminal offences are often intrinsically linked to commercial transactions and since there is practically no effective screening process before the police registers a criminal case in India, a well-drafted complaint often results in the registration of a criminal case. This leads to a wide host of potential ramifications for a corporate counter-party, which risks suffering damage not only to its goodwill but also puts at risk the liberty of its senior executives who are often arrayed as offenders in these complaints. In fact, creative complainants have run a full media splash as a part of their strategy to subject their counter-party to the added harassment of having to field media queries related to the registration of a criminal investigation. Since the criminal machinery in India is quite alien to foreign businesses, it is all the more puzzling for them to comprehend how a purely civil dispute can suddenly pose serious criminal ramifications to its senior foreign executives who may have to not only appear and depose before a criminal court in India[4] but also potentially face arrest during investigation.[5] In a country like India, this situation is exacerbated as access to police stations across the country is easy. Given the state machinery’s notoriety in “looking the other way”, malicious/frivolous criminal cases are very common. This malaise begs the question of why there exists no mechanism through which frivolous criminal cases can be prevented from being registered.

It is pertinent to note that the Code of Criminal Procedure, 1973 (“CrPC”) stipulates that a police officer has to mandatorily register a criminal case if the information before him discloses the commission of a cognizable offence.[6] Nevertheless, the courts have, over time, realized that there are loopholes in the statutory framework, which are frequently misused to harass and intimidate the accused. The Indian Supreme Court[7] has clarified that in certain situations (including in frivolous cases arising from commercial disputes)[8] a police officer ‘may’ conduct a preliminary enquiry prior to the registration of a criminal case if the information does not disclose a cognizable offence and indicates the necessity for an enquiry.[9] If no cognizable offence can be discerned even after conducting a preliminary enquiry, then the criminal case ought not to be registered. The scope of a preliminary enquiry in such cases is not to verify the genuineness of the information received but only to ascertain whether the information reveals a cognizable offence.[10]

A preliminary enquiry has the potential of acting like an elixir for uprooting frivolous criminalisation of commercial disputes before their inception. An efficient and robust preliminary enquiry, which weeds out frivolous/malicious complaints will likely eliminate an infliction of adverse publicity and the nuisance of defending a long-drawn criminal investigation.[11] Acknowledging the benefits of a preliminary enquiry and the rising trend of frequent criminalisation of commercial disputes, courts have now directed the practice of conducting a preliminary enquiry to be ‘desirable’[12] and ‘mandatory’[13] prior to the registration of a criminal complaint in cases arising out of commercial disputes. The Indian Supreme Court has also recently upheld the authority of a police officer to examine all documents and witnesses (including the accused) whilst conducting a preliminary enquiry.[14] To ensure proper checks and balances in the process, it has been held that preliminary enquiry must be conducted in a time-bound manner and be accurately recorded in the daily diary[15] of the concerned police station.[16]

While these developments are welcome, it is necessary that the judicial safeguards are streamlined and applied consistently across the length and breadth of the country to instil confidence in the business community that every commercial dispute would not be criminally prosecuted. In the absence of a statutory requirement or a ruling by the Indian Supreme Court making a preliminary enquiry mandatory for cases arising out of commercial disputes, it may be difficult to consistently expect a police officer to defer to the wisdom of a few judicial decisions and carry out the practice of conducting preliminary enquiry as a part of their routine scrutiny of complaints received. Be that as it may, doubts exist on police officers conducting a preliminary enquiry industriously considering the rampant corruption of police forces in India who may themselves benefit once a criminal case has been registered against top corporate honchos.[17]

III. Remedies available to corporate counter parties against frivolous criminal complaints

Should a criminal case be registered in what is essentially a commercial dispute, the affected party is either compelled to settle the dispute to get rid of the nuisance value associated with the criminal investigation or contest the criminal charges before the courts. For an honest counter party, while adopting the first remedy would mean playing into the strategy of the complainant i.e., exert pressure and benefit from the settlement of the “dispute”. The second remedy would entail preparing for a legal battle in courts. A party contesting registration of criminal charges may approach an appropriate High Court with the view that a purely commercial dispute has been given the colour of a criminal matter, and resultantly the criminal proceedings instituted against it deserve to be quashed. Apart from the remedy of quashing, a motivating factor to approach a High Court is also the associated relief to seek an interim order restraining the police from conducting further investigation including taking any coercive steps of summons, raids, arrest etc.

In this regard, the High Courts in India are vested with broad inherent powers to pass orders necessary to secure the ends of justice and have used such powers to quash and/or issue a stay on vexatious and malicious criminal proceedings.[18] However, in practice courts generally feel reluctant to scuttle the investigation in the initial stage itself and at best only protect the affected party from potential arrest by the police if a strong prima facie case is made out in favour of the accused. This is because there are certain situations where criminal law and civil law remedies can legitimately run side by side,[19] and it is difficult for the courts to identify from a prima facie limited examination if the case filed is indeed vexatious/frivolous. As quashing of proceedings is dependent on a subjective analysis of facts and circumstances of each complaint at hand, courts across India have struggled to ensure consistency in quashing criminal proceedings and/or issuing an interim orders restraining further investigation by the police.

Recently, the Indian Supreme Court took stock of this trend in Neeharika Infrastructure Private Limited v. State of Maharashtra and propounded certain general principles for the High Courts to consider during quashing petitions.[20] The court reiterated the well-established principles that the power of quashing must be exercised sparingly and with circumspection, and only in cases where non-interference would result in a miscarriage of justice. Similarly, interim orders restraining the police from conducting investigation should not be passed routinely and/or mechanically, but only in exceptional circumstances. Even in situations where the court believes that an investigation must be stayed it has to pass a reasoned order with proper justification recording its intervention.[21] The test to determine if a criminal case merits interference and quashing of proceedings is to assess if the allegations in the complaint even if taken at face value and accepted in their entirety constitute the offence alleged.[22] Thus, criminal proceedings will be interdicted by courts if the ingredients of the alleged offence are not made out in the complaint. Quashing of proceedings can also be sought if the complaint fails to attribute specific criminal intent against the persons so named in the complaint.[23] This may particularly be relevant for multi-national companies as generally criminal charges are levied against directors, including foreign directors without specifically attributing a whisper of dishonest/fraudulent intent against them.

While courts in India have attempted to strike a balance between protecting the right of legitimate litigants to pursue genuine criminal remedies and the right to be free from frivolous criminal proceedings, there is a glaring disparity in the interpretation and application of the standards at various rungs of the judicial machinery. One cannot be confident about quick and consistent relief across the three-tiered judicial appellate stage that a criminal proceeding may go through in India. By the time a criminal proceeding may be successfully quashed, absent an interim order, an accused person may already have spent countless hours in a police station facing a rigorous investigation at the hands of an inexpedient police force.  There is thus an urgent need for the state machinery to integrate these judicial principles into statutes and sensitise the police force of the need to weed out frivolous complaints during the process of a preliminary enquiry.

Further, it is only when frivolous criminalisation of commercial disputes is dealt with an iron fist will an unethical hostile counter-party think twice before registering a false criminal case.  For this, courts must dependably start exercising their powers to impose deterrent costs against complainants for falsely criminalising commercial disputes during the quashing proceedings itself.[24] The expectation that a separate remedy of initiating proceedings of malicious prosecution[25] is available with a wrongly accused person may not be practical. If innocent persons who have been maliciously dragged into criminal proceedings need to enter into another long-drawn legal battle and file a fresh case of malicious prosecution for recovering  losses suffered by them due to a fault in the state machinery, the ease of doing business in India is bound to suffer.

Conclusion

While malicious criminalisation of commercial disputes is a practice evident in most countries,[26] an accused in India is particularly inflicted with it because of the slow rate of disposal of cases by the Indian judiciary.[27] Consequently, there is a strong need for devising efficient solutions to ensure robust and speedy justice to the wrongly accused. Strengthening the existing criminal investigation machinery by sensitising police officers about the desirability of conducting preliminary enquiry industriously before registration of a criminal case is the need of the hour.  The aim of conducting such a preliminary enquiry should be to eliminate at the very threshold all complaints, which do not disclose a premeditated dishonest/fraudulent intention against the accused or satisfy the essential ingredient of the alleged offence. Even if a misconceived criminal case is ultimately registered, courts should not only be swift in quashing frivolous criminal proceedings, but also impose necessary costs on the complainant as a deterrent for falsely criminalising commercial disputes. In the same light, it is critical for companies to explore all possible remedies available with them once a criminal case is registered. For this, it may be necessary to weigh in the opportunity cost of successfully winning the case against the benefit of quickly settling the matter.

References

[1] In India, the first step towards initiation of criminal proceedings is the registration of a First Information Report (“FIR”). An FIR is a written document prepared by the police when they receive information about the commission of a cognizable offence. It typically includes particulars such as date, time, place, incident details and a description of the parties involved.

[2] The IPC has classified these offences as cognizable in nature i.e. a police offer has the power to arrest the accused without taking permission of the relevant criminal court.

[3] Anand Kumar Mohatta v State (2019) 11 SCC 706; R. D Shah v State of Maharashtra (2017) SCC OnLine Bom 9322.

[4] For instance, the Chairperson of Samsung Electronics was issued a summons order to appear before a magistrate’s court in Uttar Pradesh in relation to a criminal case filed by an Indian supplier against Samsung Dubai alleging misconceived offences of cheating, criminal breach of trust etc. even though the dispute purely emanated from alleged contractual breaches. See, Lee Kun Hee, President, Samsung Corporation, South Korea and Others v. State of Uttar Pradesh & Others, SLP (Crl) No(s), 4905/2013 (Order dated 30.05.2013).

[5] For instance, recently a top journalist in India was arrested when a false criminal case was registered against him in a dispute regarding alleged failure to pay dues.  See, Arnab Manoranjan Goswami v. State of Maharashtra (2021) 2 SCC 427.

[6] CrPC categorizes offences into cognizable offences and non-cognizable offences. A cognizable offence is where police officer can arrest an accused during the pendency of an investigation without a warrant. In a non-cognizable offence, the prior permission of a Magistrate (a court) is necessary. See, §154 CrPC.

[7] India has an integrated system of administration of justice as opposed to separate hierarchies of federal and state judiciary. The Supreme Court is the highest court of the land. Immediately subordinate to the Supreme Court are the High Courts of various states, which in turn exercise control over sessions and magistrate courts constituted at the state level.

[8] The other situations that may warrant a preliminary enquiry are: (a) corruption cases; (b) cases of abnormal delay (of over 3 months) in initiating criminal prosecution; (c) matrimonial/family disputes; and (d) medical negligence cases.

[9] Lalita Kumari v. Government of Uttar Pradesh (2008) 7 SCC 164.

[10] Ibid.

[11] The harassment and stigmatisation that one suffers from police, media and society is well documented in India. For instance, See Financial Times, “Frivolous” arrests and other pitfalls of doing business in India: time for change? ((May 29, 2014) available at https://www.ft.com/content/bb0a28d9-f0d6-3bc4-94c0-389152188a90 (Last visited on May 11, 2021); Bloomberg Quint, NDTV Founders Detained at Mumbai Airport (August 9, 2019) available at https://www.bloombergquint.com/business/ndtv-founders-detained-at-city-airport-roys-say-fake-case (Last visited on May 11, 2021).

[12] Charansingh v. State of Maharashtra 2021 SCC OnLine SC 251.

[13] S. Ranjan Raju v. State of Odisha 2020 (II) OLR 278.

[14] Charansingh v. State of Maharashtra 2021 SCC OnLine SC 251.

[15] A daily diary is an internal police document wherein every event or incident occurring in the police station area is recorded in a chronological manner. It includes recording details such as complaints received, cases registered, and arrests made by the staff of a police station.

[16] Charansingh v. State of Maharashtra 2021 SCC OnLine SC 251.

[17] Law Commission of India, Expeditious Investigation and Trial of Criminal Cases Against Influential Public Personalities (Report No. 239, 2012) available at http://www.wbja.nic.in/wbja_adm/files/Report%20of%20Law%20Commission%20of%20India%20%20about%20expeditious%20Investigation%20and%20Trial%20of%20Criminal%20Cases%20against%20Influential%20Public%20Personalities.pdf (Last visited on May 11, 2021).

[18] §482 of CrPC.

[19] Indian Oil Corporation v NEPC India Ltd. & Ors. (2006) 6 SCC 736.

[20] Neeharika Infrastructure Private Limited v. State of Maharashtra, 2021 SCC OnLine SC 315.

[21] Ibid.

[22] State of Haryana v. Bhajan Lal 1992 AIR 604l R.P. Kapur v. State of Punjab AIR 1960 SC 866.

[23] Sunil Bharti Mittal v. Central Bureau of Investigation (2015) 4 SCC 609.

[24] §482 of CrPC. See also, §250 of CrPC.

[25] §211 read with § 182 of IPC. There is also a remedy to institute a proceeding of malicious prosecution under tort law.

[26] Mary B. Neumayr, LeBoeuf Lamb Greene & MacRae, An Examination of the Criminalization of Commercial Activity (July 25, 2002) available at https://fedsoc-cms-public.s3.amazonaws.com/update/pdf/ElzlRBJ1Vv1o67SzSgWsAnNNoziXckQEXY7rr8zI.pdf (Last visited on May 11, 2021).

[27] Law Commission of India, Arrears and Backlog: Creating Additional Judicial (wo) manpower (Report No. 245, 2014) available at https://lawcommissionofindia.nic.in/reports/report245.pdf (Last visited on May 7, 2021).