Criminal Investigation Cannot Be Used To Exert Pressure In Commercial Disputes: M.P. High Court
The Madhya Pradesh High Court on 16 September held that criminal proceedings cannot be used to exert pressure in commercial disputes where allegations of fraud or diversion of funds do not disclose the essential ingredients of a criminal offence.
A Bench of Justice Himanshu Joshi quashed an Economic Offences Wing (EOW) complaint and consequential inquiry against Power Mech Projects Limited arising from a contractual dispute with Mapaex Minerals over sand mining projects, holding that the allegations did not disclose a criminal offence. The Court observed:
“In the present case, permitting the EOW inquiry to continue merely because the complaint uses allegations of fraud and diversion of funds, in circumstances where the underlying dispute is contractual and the essential ingredients of the alleged offences are not disclosed, would amount to permitting the criminal process to be utilised as a means of exerting pressure in a commercial dispute.”
The Madhya Pradesh State Mining Corporation on 7 October 2019 floated a tender for sand extraction projects in Narmadapuram, Sehore and Bhind.
On 25 January 2020, Power Mech Projects, Mapaex Minerals and Anshika Builders executed a Memorandum of Understanding (MoU) to share financial obligations, with Power Mech agreeing to bear 60% of the commitment.
Disputes subsequently arose over financial contributions and the utilisation of funds. Mapaex invoked arbitration on 21 September 2022 and lodged a complaint with the EOW on 9 November 2022, alleging financial irregularities and fraud.
On 21 April 2023, the High Court appointed former Justice Alok Verma as the sole arbitrator. In an arbitral award dated 6 July 2025, he dismissed both parties' claims and counterclaims. Mapaex subsequently challenged the award before the Commercial Court. Between September 2025 and February 2026, the EOW issued notices seeking financial documents from Power Mech.
Power Mech approached the High Court under Article 226 of the Constitution, contending that Mapaex had initiated criminal proceedings to exert pressure over contractual claims already examined in arbitration. Mapaex and the EOW, however, alleged criminal breach of trust and diversion of funds worth several crores, arguing that the arbitration proceedings did not preclude a criminal investigation.
The Court held that allegations of fraud, cheating or diversion of funds could not, by themselves, transform a contractual dispute into a criminal offence. It found insufficient material to establish dishonest intention at the inception of the transaction and clarified that failure to contribute agreed funds, refund money or account for expenditure did not, by itself, constitute cheating or criminal breach of trust.
It further clarified that an arbitral award does not automatically bar criminal prosecution, but its findings remain relevant in determining whether a complaint discloses genuine criminality or merely seeks to give a commercial dispute a criminal character. It observed:
“The contention that the Arbitral Award cannot have any bearing upon the criminal proceedings also requires some qualification. Certainly, an Arbitral Award cannot operate as an automatic bar to criminal prosecution. However, where the very dispute forming the foundation of the complaint concerns contractual rights and liabilities which have been placed before the agreed adjudicatory forum, the outcome of such proceedings and the nature of the findings recorded therein constitute relevant circumstances for determining whether the subsequent or parallel invocation of criminal law discloses genuine criminality or is merely an attempt to give a criminal colour to a commercial dispute.”
Further, the Bench rejected the objection that its intervention was premature because no First Information Report had been registered, holding that an inquiry could be terminated where the allegations failed to disclose a criminal offence.
Accordingly, the High Court allowed Power Mech's writ petition and quashed the EOW complaint and consequential proceedings, clarifying that the order would not affect the pending challenge to the arbitral award or the parties' civil and contractual remedies.
Appearances for petitioner (M/s Power Mech Projects Ltd.): Senior Advocate Amit Gupta, assisted by Advocate Mayank Upadhyay.
Appearances for respondent (State of Madhya Pradesh/EOW): Advocate A. Rajeshwar Rao.
Appearances for respondent (Mapaex Minerals): Senior Advocate Uday Gupta, assisted by Advocate Kapil Sharma.