Breach Of Agreement Sought To Be Given A Colour Of Crime: Karnataka HC Quashes Criminal Case Against Construction Company

The Karnataka High Court has quashed criminal proceedings against a construction company reiterating that a breach of agreement can never be a subject matter of criminal law set into motion.

In that context, the Bench of Justice M Nagaprasanna said that, "I deem it appropriate to exercise the jurisdiction under Section 482 of the Cr.P.C. and obliterate the Damocles sword that hangs on the head of these petitioners, in the light of the fact that a pure commercial transaction or breach of an agreement between the parties is sought to be given a colour of crime".

The petitioners, accused 1 to 6, approached the court to challenge a criminal case registered under Crime No. 422 of 2024 for offenses under Sections 406, 420, and 506(2) of the Indian Penal Code (IPC), pending before the II Additional Civil Judge (Junior Division) and JMFC, Anekal, Bengaluru. The first petitioner, Patel Engineering Company, a public limited company listed on the Bombay Stock Exchange and the National Stock Exchange, owned approximately 103 acres of land in various survey numbers in Hulimangala, Thirupalya, and Maragondanahalli, Jigani Hobli, Anekal Taluk, Bengaluru. The company had plans to develop an integrated township on this property, named "Neotown."

In 2016, Gulam Mustafa, representing Gulam Mustafa Enterprises Pvt. Ltd., expressed interest in developing the property. Consequently, Patel Engineering Company and Mustafa signed a Memorandum of Understanding (MoU) on March 15, 2016. Following the MoU, the parties entered into a sale deed and Joint Development Agreements (JDAs) for various parcels of the land, with the dispute centering on specific agreements related to certain survey numbers in Maragondanalli Village and Hullimangala Village.

In November 2017, Patel Engineering Company and GM Infinite Dwelling (India) Private Limited secured a loan from the State Bank of India, with Patel Engineering Company providing a corporate guarantee. However, as disputes arose over the development project, GM Infinite later expressed an intention to purchase the disputed property through its group company, Azeem Infinite Dwelling (India) Private Limited. On December 8, 2022, a term sheet was signed for the buyout of certain parcels of land, but the bank initiated SARFAESI proceedings due to a default on the loan, seeking to invoke the corporate guarantee given by Patel Engineering Company.

Amid these developments, the company sought arbitration and filed a petition under Section 9 of the Arbitration and Conciliation Act and a Commercial Original Suit in Bengaluru to contest the liability under the corporate guarantee. Meanwhile, the State Bank of India filed an insolvency petition against Patel Engineering Company before the NCLT, Mumbai, and during the pendency of these proceedings, the second respondent/complainant filed a criminal complaint on June 26, 2024, alleging breach of agreements and coercion in signing documents.

The complainant, representing Zumera Construction Pvt. Ltd., claimed to have paid Rs. 36 crores as sale consideration for specific properties, but the sale deed was not executed as agreed. Alleging fraud, coercion, and a breach of trust, the complainant accused the petitioners of criminal conspiracy and cheating, leading to the registration of the impugned crime. The petitioners, in response, argued that the matter was purely a commercial transaction and did not warrant criminal prosecution, seeking the quashing of the complaint.

The High Court observed that, "breach of agreement can never be a subject matter of criminal law set into motion, as such cases would be unjustifiably of a civil nature. In the light of the facts obtaining in the case at hand, as narrated hereinabove and the judgments rendered by the Apex Court... if further proceedings are permitted to continue, it would undoubtedly become an abuse of the process of law and result in miscarriage of justice."

In light of the same, the petitions were allowed and the criminal proceedings were quashed.

Cause Title: Patel Engineering Limited & Ors. vs The State of Karnataka & Anr.

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