Does mere inability to repay loan constitute as cheating?

Does mere inability to repay loan constitute as cheating?

A burning question that often knocks the doors of a court of law is whether the inability to repay a loan can be prosecuted as cheating? The doubt gained depth when, in a recent case, the Supreme Court answered the question when it was presented with a dispute revolving around loan transaction between two parties. On January 3, 2019, the Supreme Court, after hearing the case of Satishchandra Ratanlal Shah v State of Gujarat and Another, stated that the inability to repay loans cannot give rise to criminal prosecution for cheating unless the fraudulent or dishonest intention is shown while lending the money.

The case – in brief

The case was about a loan transaction and a succeeding default on it. The court mentioned undisputed facts before giving out the judgement which included that the parties knew each other before the transaction took place and that the complainant has instituted a civil suit which has not yet been adjudged. There was no entrustment of property either. The complainant was the director of a company called Darshan Fiscal Pvt. Ltd and appellant, Satishchandra Ratanlal Shah, was a retired bank employee who borrowed INR 27, 00,000 from the said company yet failed to repay it.

The appeal to the Supreme Court was made after the High Court called in for prosecution for cheating.

What was the judgement passed?

Justice NV Ramana and Justice Mohan M Shantanagoudar, who authored the judgement, wrote, “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”.

The court also emphasized on Section 415 of Indian Penal Court which only criminalizes transactions with fraudulent, deceptive or dishonest inducements. This case included none of the aforementioned.

The Apex Court subtly chastised the High Court, stating, “However, the High Court appears to have been carried away by the moral element involved in the breach of promise and made certain observations. Being a policy consideration, such suggestion needs to be restricted. The aforementioned observations of the High Court were not only unnecessary for the adjudication of this matter, but the same could have been understood as casting some kind of aspersions on the accused. This clearly reflected a loaded dice situation against the appellant herein.”

When to quash charges?

The judgement clearly stated (and was supported by Section 415 of Indian Penal Court) that charges can be quashed only when deceptive or fraudulent inducements are noticed at the very beginning of the transaction. At one point, it also stated, “…the court therein cannot base the decision of quashing the charge on the basis of the quality or quantity of evidence rather the enquiry must be limited to a prima facie examination…” and went on to refer to the State of Bihar vs Ramesh Singh case of the year 1977 and Hridaya Ranjan Prasad Verma v. State of Bihar, 2000.  

A similar judgement was passed by Justice Bharat Bhushan in 2016 at the High court of Allahabad. The case of K.L. Agarwal vs the State of U.P. and another where the applicant accused the opponent of not giving back the security deposit amount and rent of food products supplied was settled by the Justice. The statement said that evidence of cheating, deceptiveness or fraud were missing which made it a non-criminal case and will not call for action on accounts of cheating.

Analysing the reasoning of Supreme Court

A similar case as the ones discussed above in 1985 titled K. Periasami v. Rajendran was brought before the Madras High Court. In light of the total absence of “cheating”, the court ruled that this identified as a civil case and required no criminal action.

Clearly, the courts of India have, for a long time, emphasized the difference between civil versus criminal wrongs, promises not fulfilled versus con committed and agreements violated versus fraudulent activities. In fact, the case of Vitoori Pradeep Kumar v. Kaisula Dharmaiah (2001) is a stunning example of a criminal and civil case going hand in hand but dealt righteously.

As per the SC, it is the duty of the judge to investigate the matter and bring out the sine qua non for the offence of cheating, if it exists. If not, the party involved should not be harassed unnecessarily.