L&T Finance and Edelweiss vs. State of NCT of Delhi – Loan Dispute over Gurugram Project

The Delhi High Court recently dealt with two petitions filed by L&T Finance Ltd. and Edelweiss Asset Reconstruction Company Limited, both seeking to set aside an order of the Chief Judicial Magistrate, South, Saket Courts, New Delhi, which had directed registration of an FIR against them. The FIR, registered on 16 January 2025 at the Economic Offences Wing (EOW), was based on allegations of criminal breach of trust, cheating, and conspiracy in connection with financing arrangements for a residential project in Gurugram.

The dispute originated from a joint complaint filed by the owners of 24.1563 acres of land in Village Dhankot, Gurugram. They alleged that Raheja Developers Limited, with whom they had entered into collaboration agreements in 2012 and 2013 for development of housing and commercial projects, later executed a Memorandum of Understanding (MoU) in October 2016. This MoU stipulated that any mortgage or financing over the licensed land would only be for the construction of the agreed project. The complainants alleged that Raheja Developers, in collusion with L&T Finance, used the licensed land as cross-collateral to secure a ₹450 crore loan for purposes unrelated to the project. They further claimed that this loan was subsequently increased to ₹620 crores without their consent and later assigned to Edelweiss, all in violation of the agreements.

It was alleged that both L&T and Edelweiss knowingly enabled financial irregularities, including diversion of project funds, round-tripping of money, and evergreening of loans, while disregarding provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA). The complainants accused the financiers of issuing consents and NOCs that allowed Raheja Developers to sell units to third parties despite breaches of the MoU and defaults in agreed revenue payments.

L&T Finance argued that the complaint gave a criminal colour to what was essentially a civil dispute over revenue sharing and loan terms. They pointed out that the police’s preliminary inquiry had already found no cognizable offence, and that there was no privity of contract between them and the complainants. Edelweiss similarly contended that the FIR contained no specific allegations against it and that the matter was entirely civil in nature. Both petitioners accused the complainants of suppressing facts and misleading the court.

The complainants, however, maintained that the financing and loan enhancements were undertaken in deliberate violation of contractual restrictions, with full knowledge of the rights they held over the land. They argued that criminal proceedings were warranted due to the intentional misuse of security and diversion of project receivables, which caused wrongful loss to them. They also stressed that ongoing insolvency or arbitration proceedings did not bar criminal investigation.

The Court examined the scope of a Magistrate’s powers under Section 156(3) of the Code of Criminal Procedure (Cr.P.C.), reiterating that such powers must be exercised with application of mind and reasons must be recorded. In this case, the Magistrate had considered the complaint, noted the seriousness of the allegations, and decided that a police investigation was necessary since the complainants could not gather evidence independently. While the Magistrate did not provide extensive reasoning for disregarding the police’s Action Taken Report, the Court found that the order nonetheless showed satisfaction that cognizable offences were disclosed.

The Court emphasised that the existence of a civil remedy does not automatically prevent criminal proceedings where allegations suggest elements of criminality, such as cheating or conspiracy. At the pre-investigation stage, it was not the Court’s role to assess the truth of the allegations or examine disputed facts in detail. The investigation would involve collecting documents from various sources, recording witness statements, and analysing financial transactions to determine whether offences had been committed.

Relying on recent Supreme Court rulings, the Court held that where the Magistrate has recorded satisfaction that a cognizable offence is disclosed, interference under Section 482 Cr.P.C. or Article 226 of the Constitution is not warranted merely because some aspects of the dispute are civil in nature. The petitions were therefore dismissed, with the Court clarifying that no conclusive finding had been made on the merits of the allegations. If, after investigation, the police found no case, they would file an appropriate report, and if a chargesheet were filed, the petitioners would still have the right to pursue legal remedies.

The ruling underscores the principle that serious allegations involving financial transactions and contractual arrangements, when intertwined with claims of deceit and conspiracy, warrant a thorough police probe before judicial intervention to quash proceedings can be considered.