Arbitration Clause or Civil Remedy No Bar to Criminal Prosecution for Offences Disclosing Mens Rea

The petitioners, acting as agents for Hitachi Payment Services Pvt. Ltd. under a 'Polaris Model Master Franchisee Service Agreement', were entrusted with cash replenishment for an ATM in District Ghazipur.

An internal audit of ATM switch data revealed a shortfall of Rs. 3,08,400/-, suggesting the funds were withdrawn from the bank but not loaded into the machine.

The Company alleged that the petitioners misappropriated these funds for personal use in violation of Clause 1(m) and (o) of the agreement, which appointed them as custodians and trustees of the cash.

Consequently, an FIR was registered under Sections 316(5) (Criminal breach of trust by banker/agent) and 318(4) (Cheating) of the Bhartiya Nyaya Sanhita (B.N.S.), 2023.

The petitioners sought quashing of the FIR, arguing the dispute was purely contractual and subject to an arbitration clause.

1. Whether the existence of an arbitration clause and the civil nature of a contractual dispute bar the initiation of criminal proceedings for misappropriation of funds.

2. Whether the registration of multiple FIRs for similar transactions at different locations constitutes "the same cause of action" and warrants quashing.

The court primarily applied Section 316(5) and 318(4) of the B.N.S., 2023, regarding criminal breach of trust and cheating.

The principle that civil and criminal remedies are coextensive and not mutually exclusive, as established in Pratibha Rani v. Suraj Kumar and Kathyayini v. Sidharth P.S. Reddy.

The court cited Trisuns Chemical Industry v. Rajesh Aggarwal, holding that an arbitrator cannot conduct a trial for an act amounting to a criminal offence.

The standard for quashing FIRs as defined in Neeharika Infrastructure Pvt. Ltd. v. State of Maharashtra, which limits interference at the investigation stage if a prima facie offence is disclosed.

The court reasoned that while the dispute arose from a commercial contract, the allegations clearly established the necessary mens rea for a criminal offence.

It noted that the petitioners were "trustees" of the physical cash and their failure to replenish the ATM while retaining the funds resulted in wrongful gain to them and loss to the company.

The court rejected the argument that the arbitration clause ousted criminal jurisdiction, stating that an arbitrator can only adjudicate civil consequences of a breach, not criminal liability.

Addressing the "multiple FIRs" argument, the court observed that each FIR related to different ATM machines, different misappropriated amounts, and different jurisdictions, thus constituting distinct causes of action.

It held that the mere existence of an arbitration clause or the pendency of civil/commercial remedies is no justification to quash criminal proceedings if the facts prima facie constitute a cognizable offence.

The court refused to quash the FIR, concluding that the investigation must be allowed to proceed as the allegations disclosed a prima facie case of embezzlement under the B.N.S.