2025 (1) TMI 484 - HC - Money Laundering

Money Laundring - proceeds of crime - seeking declaration that Section 420 IPC be declared as manifestly arbitrary and ultravires Article 14 and 21 of the Constitution of India - whether lodging of the impugned FIRs and the consequential ECIR is an abuse of the criminal process? HELD THAT - Sanction of loan is a commercial transaction. It is to be regulated by the terms of loan/contract and any dispute in respect thereof would require adjudication in the manner stipulated therein. It is undisputed that sanction of loan to the borrower is pursuant to loan agreement which contain an Arbitration clause. Even the pledge of shares of Kadam is in accordance with the pledge agreement dated 6.4.2018 which contains clause 20 as per which any dispute/disagreement/differences between the lender and pledger and/or confirming party (defined in the pledge agreement i.e. Indiabulls, borrower and Kadam) has to be resolved by way of arbitration. There is complete suppression in the complaint filed before the Chief Judicial Magistrate, Gautam Budh Nagar with regard to the terms of loan agreement; existence of Arbitration clause, therein; invocation of Arbitration clause by the borrower; rejection of application filed by borrower before the Delhi High Court under Section 9 of the Act of 1996 and many other relevant facts which have a material bearing on the issue in question. Suppression of material facts by the borrower while invoking criminal proceedings against the lender assumes greater significance in the facts of the present case as repeated attempts made by it to injunct the lender i.e. Indiabulls from proceeding against the pledged property had not succeeded. The non-disclosure of material facts would lead to an inference that criminal proceedings are maliciously instituted with the intent to avoid repayment of availed loan facility; to secure leverage in pending Arbitration and other proceedings inter-se between the parties; coerce the lender i.e. Indiabulls to succumb to the terms dictated by the defaulter borrower. There are substance in the petitioners argument that the conduct of borrower in initiating criminal action vide Complaint instituted under Section 156(3) Cr.P.C. on 23.3.2023 is lacking in bona fide. Admittedly, the borrower with open eyes had entered into commercial transaction with the Indiabulls and having prima facie defaulted in honouring the terms of contract, availed the remedy in respect of the coercive action taken against it. After having failed at it the borrower has initiated criminal action, concealing the orders of Delhi High Court in pending Arbitration proceedings as per which the issues raised are required to be resolved in Arbitration. Institution of criminal action can therefore be said to be with oblique motive. Conclusion - i) There are no hesitation in holding that initiation of criminal proceedings at the instance of borrower are instituted on the strength of suppression and concealment of relevant facts, with unexplained delay and malicious intent to thwart legitimate steps taken by Indiabulls to recover the financial assistance extended to the borrower. Such proceedings are also intended to create leverage in ongoing civil/arbitration proceedings inter se between the parties. The criminal proceedings are, therefore, clearly an abuse of the process of law and deserve to be quashed. ii) The FIRs and ECIR were quashed, the disputes were directed to be resolved through arbitration. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses the following core legal questions:

• Whether the lodging of the impugned FIRs and the consequential ECIR constitutes an abuse of the criminal process?
• Whether the issues raised in the FIRs are civil in nature and should be resolved through arbitration rather than criminal proceedings?
• Whether there has been a suppression of material facts by the borrower in the initiation of criminal proceedings?
• Whether the Enforcement Directorate's investigation and findings on undervaluation and round-tripping of funds are valid grounds for continuing criminal proceedings?
• Whether the 2nd FIR, based substantially on the 1st FIR, is sustainable?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Abuse of Criminal Process

• Relevant legal framework and precedents: The court referred to precedents such as K. Virupaksha v. State of Karnataka and M.N. Ojha v. Alok Kumar Srivastav, which emphasize that criminal proceedings should not be used to settle civil disputes.
• Court's interpretation and reasoning: The court found that the initiation of FIRs was an abuse of the process, as the issues were primarily civil and contractual, meant to be resolved through arbitration.
• Key evidence and findings: The court noted the suppression of arbitration proceedings and other material facts by the borrower in the FIRs.
• Application of law to facts: The court applied the principle that civil disputes should not be converted into criminal cases unless there is clear evidence of criminal intent, which was absent here.
• Treatment of competing arguments: The court dismissed the borrower's argument that parallel civil and criminal proceedings are permissible, emphasizing the need for context-specific analysis.
• Conclusions: The FIRs were quashed as they were deemed to be an abuse of the criminal process.

Issue 2: Civil Nature of Disputes

• Relevant legal framework and precedents: The court referenced the arbitration clause in the loan agreements and the Delhi High Court's previous rulings.
• Court's interpretation and reasoning: The court highlighted that the disputes were contractual and should be resolved through arbitration, as agreed by the parties.
• Key evidence and findings: The existence of arbitration proceedings and the borrower's failure to disclose them in the FIRs were critical.
• Application of law to facts: The court emphasized the binding nature of arbitration clauses and the need to respect contractual dispute resolution mechanisms.
• Treatment of competing arguments: The court noted the borrower's failure to substantiate claims of fraud or criminality in the loan transactions.
• Conclusions: The court concluded that the disputes were civil and should be addressed in arbitration, not criminal courts.

Issue 3: Suppression of Material Facts

• Relevant legal framework and precedents: The court cited Kusha Duruka v. State of Odisha, emphasizing the duty to disclose material facts in legal proceedings.
• Court's interpretation and reasoning: The court found that the borrower suppressed material facts, including previous arbitration proceedings and court rulings.
• Key evidence and findings: The borrower's failure to mention arbitration and related court decisions in the FIRs was pivotal.
• Application of law to facts: The court applied the principle that suppression of facts can invalidate legal proceedings.
• Treatment of competing arguments: The court rejected the borrower's claims due to the lack of transparency and full disclosure.
• Conclusions: The court determined that the suppression of facts invalidated the FIRs.

Issue 4: Enforcement Directorate's Investigation

• Relevant legal framework and precedents: The court considered the ED's findings on undervaluation and round-tripping but emphasized the primary role of arbitration.
• Court's interpretation and reasoning: The court found that the ED's concerns should be addressed within the arbitration framework first.
• Key evidence and findings: The ED's allegations of undervaluation and round-tripping were noted but deemed premature for criminal proceedings.
• Application of law to facts: The court stressed that arbitration should resolve valuation disputes before any criminal implications are considered.
• Treatment of competing arguments: The court acknowledged the ED's role but prioritized arbitration for resolving valuation issues.
• Conclusions: The court quashed the ECIR, directing that valuation issues be resolved in arbitration first.

Issue 5: Sustainability of the 2nd FIR

• Relevant legal framework and precedents: The court referenced the dependency of the 2nd FIR on the 1st FIR.
• Court's interpretation and reasoning: The court found that the 2nd FIR, being an extension of the 1st, could not stand independently.
• Key evidence and findings: The 2nd FIR's reliance on the 1st FIR's allegations was crucial.
• Application of law to facts: The court applied the principle that derivative claims cannot survive if the primary claim is invalid.
• Treatment of competing arguments: The court dismissed arguments for the 2nd FIR's independence.
• Conclusions: The court quashed the 2nd FIR as it was unsustainable without the 1st FIR.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Initiation of criminal proceedings at the instance of borrower are instituted on the strength of suppression and concealment of relevant facts, with unexplained delay and malicious intent."
• Core principles established: Civil disputes should not be converted into criminal cases; arbitration clauses must be respected; suppression of material facts invalidates legal proceedings.
• Final determinations on each issue: The FIRs and ECIR were quashed; the disputes were directed to be resolved through arbitration.