A business deal can go wrong for many reasons. A buyer may fail to pay, a supplier may miss delivery, a partner may not follow agreed terms, or a borrower may default. These situations can cause serious financial loss, but financial loss by itself does not turn a commercial disagreement into a crime.
The difficult question is what happens when the conduct goes further. What if a party never intended to honour the promise when it was made? What if money or property was entrusted for a specific purpose and later diverted? That is where the line between civil liability and criminal exposure becomes important.
Indian courts have repeatedly cautioned against giving a criminal colour to what is essentially a contractual dispute. At the same time, the existence of a contract or a pending civil case does not protect conduct that independently satisfies the ingredients of a criminal offence.
The legal position after the BNS
The Bharatiya Nyaya Sanhita, 2023 (BNS) came into force on 1 July 2024 and replaced the Indian Penal Code for offences under the new regime. Two provisions are particularly relevant to business disputes: Section 318 on cheating and Section 316 on criminal breach of trust.
The distinction is relatively straightforward. Cheating focuses on deception and dishonest inducement. Criminal breach of trust focuses on entrustment of property or control over property, followed by dishonest misuse or misappropriation.
Section 318: When can a business dispute amount to cheating?
Section 318 covers cheating in different forms. Ordinary cheating can attract imprisonment of up to three years, fine, or both. Where cheating dishonestly induces a person to deliver property, or to make, alter or destroy a valuable security, Section 318(4) provides for imprisonment of up to seven years and fine.
But punishment is not the starting point. Intention is.
For a commercial transaction to amount to cheating, there must generally be deception followed by dishonest or fraudulent inducement. Most importantly, the dishonest intention must exist at the beginning of the transaction.
This distinction matters because a person may genuinely intend to perform a contract and later fail to do so. A sudden cash-flow problem, supply disruption or business failure may result in breach of contract, but that does not automatically make the person a criminal cheat.
The Supreme Court has consistently reaffirmed this principle. In 2025, the Court reiterated that a contractual dispute or breach of contract, by itself, should not result in criminal proceedings for cheating unless fraudulent or dishonest intention existed from the inception of the transaction.
Consider a simple example. A company takes an advance to manufacture goods and genuinely intends to fulfil the order, but later becomes financially incapable of doing so. The buyer may have a claim for refund, damages or other contractual relief.
The position changes if the company accepted the advance through false representations while already intending not to supply the goods. In that situation, the conduct may go beyond breach of contract and satisfy the ingredients of cheating.
Section 316: Criminal breach of trust
Criminal breach of trust works differently. Section 316 applies where a person has been entrusted with property, or with dominion over property, and dishonestly misappropriates or converts it, or dishonestly uses or disposes of it in violation of law or a legal contract.
This makes entrustment a central requirement.
Business relationships can create such situations in several ways. A director, employee, agent, partner, broker or warehouse operator may receive money or property for a specific purpose. If that property is later dishonestly diverted in breach of the terms governing the arrangement, criminal liability may arise.
For instance, a company may give an agent ₹20 lakh to purchase raw material on its behalf. If the agent instead diverts that money for personal use, the allegation is not simply that the agent failed to perform a contractual obligation. It concerns property that was entrusted to the agent and allegedly converted for another purpose.
Ordinary criminal breach of trust under Section 316(2) can carry imprisonment of up to five years, fine, or both. The BNS provides higher punishment for certain aggravated forms, including cases involving clerks or servants, carriers, and specified professionals or agents.
Where do courts draw the line?
The existence of a civil remedy does not automatically prevent criminal proceedings. Civil and criminal liability can arise from the same facts when the conduct satisfies the requirements of both.
However, criminal law cannot be used simply as a pressure mechanism for recovering money or enforcing contractual promises.
In 2024, the Supreme Court quashed criminal proceedings where the dispute was essentially a breach of contract and no criminal element was made out. The Court stressed that every failure to perform a contractual obligation should not be converted into a criminal prosecution.
This is why the surrounding facts matter. Courts may look at the representations made at the start of the transaction, the parties’ contractual arrangement, the movement of money or property, and the conduct that followed.
At the same time, a civil dispute does not provide immunity where the allegations disclose a genuine criminal offence. The Supreme Court has also recognised that civil and criminal proceedings may proceed from the same facts where the necessary criminal ingredients are present.
What facts may point towards criminal exposure?
Certain circumstances deserve closer scrutiny:
- False information used to obtain an advance, investment, loan or property.
- Concealment of a material fact to induce another party to part with money or assets.
- Diversion of specifically entrusted funds or property.
- Conduct showing that the person never intended to honour the promise when it was made.
- Documents, communications or transactions suggesting deliberate deception or dishonest conversion.
But simply using words such as “fraud”, “cheating” or “breach of trust” is not enough. The complaint must set out facts capable of satisfying the legal ingredients of the alleged offence.
What should businesses keep in mind?
The first step in any dispute is to separate non-performance from dishonest conduct.
A delayed payment, defective service, failed project or disagreement over contractual terms may support a civil claim. In such cases, the focus is normally on proving the agreement, breach and resulting loss.
Where criminal liability is being considered, the evidence is different. The original representations, knowledge and intention of the parties, purpose of the entrustment, bank records, invoices, emails and movement of funds may become critical.
The timing of the alleged misconduct can also matter. A genuine promise followed by an unexpected failure is legally different from a promise made as part of a dishonest scheme from the outset.
The practical takeaway
The boundary between civil liability and criminal exposure is not decided by the size of the financial loss or the seriousness of the commercial disagreement. It turns on what was done and what was intended.
A genuine business failure is not automatically cheating. A contract does not shield deliberate fraud. Equally, a criminal complaint cannot be used merely to give a creditor greater leverage in a payment dispute.
For businesses and their advisors, four questions are often a useful starting point: What was promised? What was represented? What property or money was entrusted? And what was the intention when the transaction began?
The answers can help determine whether the dispute belongs primarily in civil proceedings, has crossed into criminal territory, or potentially gives rise to both civil and criminal remedies.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. The content may not reflect the most current legal developments and is not guaranteed to be accurate, complete, or up-to-date. Readers should consult a qualified legal professional before taking any action based on the information provided. The authors and publishers disclaim any liability for any loss or damage incurred as a result of reliance on this article. This article does not create an attorney-client relationship.