Chhattisgarh HC Says Fraud Claims Need Trial Despite Arbitration Clause, Allows Sierra Takeover Dispute

On 29 July, the Chhattisgarh High Court held that the existence of an arbitration agreement does not bar criminal prosecution where the allegations prima facie disclose cognizable offences, and that allegations of fraud, concealment of liabilities and fabricated Board resolutions cannot be treated as a mere contractual dispute but must be tested at trial after appreciation of evidence.

A Division Bench of Chief Justice Ramesh Sinha and Justice Ravindra Kumar Agrawal dismissed a petition seeking to quash an FIR and charge sheet arising from a failed Rs. 50 crore takeover of the Seirra Group of Companies. It held:

“The existence of an arbitration agreement does not create an embargo upon criminal prosecution where the allegations disclose commission of cognizable offences.”

The dispute arose from a proposed acquisition of the Seirra Group of Companies, comprising Seirra Infraventure Private Limited, Seirra Mining Private Limited and Padmavati Abasan Private Limited. The companies were facing financial constraints while executing the Parsa East and Kanta Basin Coal Block Project.

To revive the business, the Board of Directors authorised Ashok Jain to identify investors and facilitate the transfer of management. Vinod Kumar Verma subsequently expressed interest in acquiring the group. After conducting due diligence, the parties executed a Memorandum of Understanding (MOU) on 21 February 2020 under which Verma agreed to acquire the group for Rs. 50 crore through phased capital infusion and gradual transfer of management.

The transaction later collapsed. Ajay Jain, Ashok Jain and Sidharth Munat alleged that Verma failed to infuse the agreed investment, abandoned the takeover and, instead of invoking arbitration under the MOU, demanded a refund of the amounts invested. After they refused, Verma lodged a criminal complaint alleging that they had induced him to invest through misrepresentations.

Verma alleged that after investing about Rs. 36 crore between February 2020 and March 2021, he discovered that the companies had concealed substantial liabilities, failed to disclose that nearly the entire shareholding of Seirra Infraventure Private Limited had already been pledged to SREI Equipment Finance Limited and relied on forged Board resolutions to falsely project Ashok Jain's authority to negotiate the transaction. He also alleged that these misrepresentations induced him to invest, resulting in the registration of the FIR and the filing of the charge sheet after investigation.

Aggrieved, Ajay Jain, Ashok Jain and Sidharth Munat approached the High Court under Section 482 of the Code of Criminal Procedure (which empowers the High Court to prevent abuse of the court process and secure the ends of justice) seeking to quash the charge sheet and all consequential proceedings. They argued that the dispute was purely contractual, governed by the MOU's arbitration clause, that the FIR had been registered without a preliminary enquiry and that the criminal proceedings were intended to pressure them into settling a commercial dispute.

The State of Chhattisgarh and Verma opposed the plea, contending that the investigation had uncovered material indicating concealment of liabilities, fabricated corporate records and false representations that induced Verma to invest substantial amounts. They argued that the allegations disclosed cognizable offences requiring a full trial.

The High Court agreed, observing that the allegations extended beyond a mere breach of contract and raised disputed questions of fact relating to concealment of liabilities, forged Board resolutions and dishonest intention, which could only be decided after appreciation of evidence. The Bench held:

“The contention that no preliminary enquiry was conducted before registration of the FIR, the allegation regarding fabrication of the Board Resolutions, the challenge to invocation of Section 201 IPC and the plea that respondent No. 2 himself committed breach of the MOU are all matters which are seriously disputed by the parties and necessarily require appreciation of evidence. This Court cannot undertake such an exercise while exercising its inherent jurisdiction.”

Accordingly, the High Court held that the investigation disclosed a prima facie case, dismissed the petition, and allowed the criminal proceedings to continue.

It noted that charges had been framed on 13 March 2024 and that the sessions trial was listed on 3 September 2026 for recording prosecution evidence. It clarified that its observations were confined to the quashing proceedings and recorded Verma's undertaking that all prosecution witnesses would cooperate in the expeditious conduct of the trial.

For the Petitioners: Senior Advocate Mr. S.C. Verma, assisted byAdvocate Mr. Ashish Tiwari.

For the State/Respondent No. 1: Government Advocate Mr. Sangharsh Pandey.

For Respondent No. 2 (Vinod Kumar Verma): Advocate Mr. Apurv Goyal