Bank Cannot Belatedly Initiate Criminal Proceedings After Approving Loan Settlement & Withdrawing DRT Proceedings: Supreme Court Quashes Criminal Case Against Borrowers
The Court held that where a bank consciously enters into a negotiated compromise settlement, certifies that there were no irregularities in documentation, accepts the settlement amount and withdraws recovery proceedings before the DRT, subsequent criminal prosecution on the same allegations may amount to abuse of process and lack of good faith.
Justice B.V. Nagarathna, Justice Ujjal Bhuyan, Supreme Court
The Supreme Court has held that a bank cannot belatedly initiate criminal proceedings against borrowers after approving a compromise settlement, accepting the settlement amount in satisfaction of dues and withdrawing proceedings before the Debts Recovery Tribunal (DRT).
The Court observed that where allegations of fraud were already suspected by the bank before the settlement, failure to initiate criminal action at that stage and subsequent prosecution after closure of the loan account depicts “lack of good faith” and amounts to abuse of the process of the court.
The Court was hearing an appeal challenging a judgment of the Chhattisgarh High Court refusing to quash criminal proceedings initiated against the appellants under Sections 420 and 471 IPC following a complaint lodged by UCO Bank before the Central Bureau of Investigation (CBI).
The dispute arose out of cash credit facilities granted by the bank to a proprietary concern, subsequent settlement proceedings before the DRT and criminal allegations relating to forged audit reports and substitution of mortgaged properties.
A Division Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan observed: “After entering into a compromise settlement with the appellants wherein it was clearly stated that there was no tampering of any of the documents and after filing joint application before the DRT to record the compromise settlement, it was not proper on the part of the respondent-Bank to belatedly initiate criminal proceedings against the appellants, that too, after withdrawing the proceedings from the DRT on execution of the compromise settlement leading to closure of the loan account”.
Such a criminal proceeding, the Bench added, “would not only be oppressive qua the appellants but would also amount to an abuse of the process of the court”.
Senior Advocate Dr Vineet Kothari represented the appellant, while Additional Solicitor General Rajkumar Bhaskar Thakare appeared on behalf of the respondent.
Background
The appellants had availed of cash credit and letter of credit facilities from UCO Bank between 2006 and 2009 for running a trading concern dealing in agricultural products. The facilities were secured through mortgaged properties and personal guarantees. Over time, the credit limits were enhanced after valuation and inspection of the mortgaged properties by the bank’s approved valuers and officials.
Following financial difficulties and irregular repayment, the loan account was declared a Non-Performing Asset (NPA). The bank then initiated proceedings under the SARFAESI Act and also instituted recovery proceedings before the DRT.
During the pendency of the DRT proceedings, the parties negotiated a compromise settlement whereby the appellants agreed to pay Rs. 4.25 crores towards full and final settlement against outstanding dues exceeding Rs. 6 crores.
The compromise proposal was approved by the competent authority of the bank. In the settlement proposal, the bank specifically recorded that there were “no lapses in documentation or irregularity observed” as per the legal audit report. The bank also certified that the compromise amount conformed with RBI policy guidelines and was not lower than the distress sale value of the securities available.
A joint application was thereafter filed before the DRT, recording the compromise. Upon payment of the settlement amount by the appellants, the bank issued a “no dues certificate” and sought withdrawal of the original recovery proceedings before the DRT. The DRT dismissed the proceedings as withdrawn after recording that the entire compromise amount had been deposited and the loan account stood liquidated.
More than two years later, the bank lodged a complaint before the CBI alleging that the appellants had cheated the bank by submitting forged audit reports and substituting mortgaged properties with encroached land. Based on the complaint, the CBI registered an FIR and subsequently filed a chargesheet under Sections 420 and 471 IPC. The High Court refused to quash the criminal proceedings, following which the matter reached the Supreme Court.
Court’s Observation
The Supreme Court examined the nature of the allegations and the legal effect of the compromise settlement accepted by the bank and endorsed by the DRT. The Bench observed that the present dispute had predominantly overtones of a civil dispute arising out of commercial and financial transactions between the parties.
The Court referred extensively to precedents, including Nikhil Merchant v. Central Bureau of Investigation (2008), Gian Singh v. State of Punjab (2012), Narinder Singh v. State of Punjab (2014), Parbatbhai Aahir v. State of Gujarat (2017) and K. Bharthi Devi v. State of Telangana (2024).
The Bench reiterated that criminal proceedings having an overwhelmingly civil flavour, particularly those arising out of commercial and financial disputes, may be quashed where parties have settled the dispute and continuance of prosecution would amount to oppression or abuse of process.
The Court noted that the bank had itself approved the compromise settlement through its highest competent authority and had jointly approached the DRT seeking the recording of the settlement. It was only after the appellants deposited the entire compromise amount and the DRT proceedings were withdrawn that the bank initiated criminal proceedings alleging fraud.
“In clause 9.1.9 of the compromise settlement, it was clearly mentioned by the Bank that there were no lapses in documentation or any irregularity was observed in the cash credit proposal of the appellants as per legal audit”, the Bench observed.
The Bench found it significant that the bank’s own compromise proposal specifically certified the absence of irregularities in documentation and stated that there had been no tampering with documents. The Court observed that the subsequent allegation of fraud was inconsistent with the bank’s own stand during settlement proceedings.
The Supreme Court further observed that the bank had itself admitted in the complaint that fraud had first been suspected several years earlier, but no criminal action was initiated because the bank wanted to maximise recovery. The Court held that such conduct demonstrated the absence of bona fides.
“If the Bank had suspected fraud in 2013 itself, it should have lodged complaint at that stage itself. However, such stand of the Bank that fraud was committed by appellant No. 1 is not supported by the contents of the compromise settlement itself”, the Bench remarked.
The Bench also noted that although allegations had initially been made against bank officials as well, the CBI chargesheet ultimately concluded that the investigation did not reveal any proactive role of bank officials in sanction or enhancement of the credit facilities, and consequently, no charges under the Prevention of Corruption Act were pressed.
The Court ultimately held that the present case was squarely covered by K. Bharthi Devi v. State of Telangana (2024), wherein criminal proceedings initiated after the settlement of bank dues before the DRT had been quashed by this Court.
The Court concluded: “If the respondent-Bank is permitted to go ahead with the criminal prosecution initiated after settlement of the loan account before the DRT, it would adversely impact the sanctity of such settlement, which has become part of the judicial proceeding and which had the approval of a judicial forum like the DRT”.
“If such a conduct is overlooked and prosecution is allowed to continue, many persons, including commercial entities, would be hesitant to come forward and seek resolution of their disputes arising out of banking transactions, which are, after all, commercial transactions, having predominantly elements of civil dispute(s)”, the Bench added.
Conclusion
The Supreme Court held that continuation of the criminal proceedings after a full and final compromise settlement, acceptance of the settlement amount by the bank, issuance of a no dues certificate and withdrawal of DRT proceedings would amount to oppression and abuse of process.
Accordingly, the Court allowed the appeal, set aside the judgment of the Chhattisgarh High Court and quashed the criminal proceedings against the appellants.
Cause Title: Vijay Kumar Kela & Anr. v. Central Bureau of Investigation & Anr. (Neutral Citation: 2026 INSC 588)
Appearances
Appellants: Senior Advocate Dr Vineet Kothari; Advocates Prashant Mishra, Aniket Sancheti, Sumeir Ahuja, Rohit Jain and Nilanjan Sen; Advocate-on-Record Dhawesh Pahuja.
Respondents: Additional Solicitor General Rajkumar Bhaskar Thakare; Advocates Rohit Khare, Sarthak Karol, Khushal Kolwar and Udit Dedhiya; Advocates-on-Record Mukesh Kumar Maroria and S.N. Terdal.