Homebuyer Can’t Be Prosecuted For Builder’s Acts Contrary To Agreement Merely Because Loan Remains Outstanding: Karnataka High Court

Finding no material showing that the borrower participated in, benefited from or connived in the builder’s sale of the apartment to a third party, the Court quashed the FIR against him.

The Court was hearing a petition under Section 482 CrPC, filed with reference to Section 528 of the Bharatiya Nagarik Suraksha Sanhita, seeking the quashing of an FIR registered for multiple offences involving cheating, criminal breach of trust, forgery, use of forged documents, intimidation and allied allegations. The FIR followed a private complaint filed by an authorised officer of State Bank of India and a Magistrate’s direction for investigation under Section 156(3) CrPC.

A Bench of Justice Suraj Govindaraj observed: “What is rather disconcerting is the manner in which the Bank, despite being a party to the tripartite agreement and being fully aware of the obligations undertaken by the builder thereunder, has chosen to set the criminal law in motion against the petitioner. The very agreement on which the Bank relies clearly contemplated the consequences of the project not being completed and cast an obligation upon the builder to repay to the Bank the amounts received from the borrower. The Bank was, therefore, not unaware either of the nature of the transaction or of the respective obligations undertaken by the parties.”

The Court added: “The petitioner cannot, merely because he continues to be shown as the borrower in the loan account, be made to answer criminally for the acts of the builder in dealing with the property contrary to the terms of the tripartite agreement. The distinction between a subsisting contractual or financial liability and criminal liability cannot be lost sight of. The former cannot, in the absence of the ingredients constituting the latter, be permitted to assume the character of a criminal prosecution.”

Advocate Rajath appeared for the petitioner. High Court Government Pleader Rashmi Patel appeared for the State, while Advocate Chidamber G.S. appeared for the Bank.

Background

The Court noted that the petitioner had entered into a tripartite agreement with the Bank and the developer for purchasing an apartment. Under the arrangement, the Bank sanctioned a housing loan of ₹39.92 lakh to the petitioner.

The agreement recognised the Bank’s lien over the amounts paid by the borrower to the builder and permitted the proposed apartment to be mortgaged to the Bank. It also prohibited the builder from transferring the apartment to another person without the Bank’s prior written consent.

The agreement further provided that if the booking was cancelled, the project was shelved or the builder failed to complete it, the builder would repay to the Bank the entire amount received from the borrower.

The Bank alleged that the borrower stopped servicing the loan, while the builder neither completed the project nor registered the apartment in his favour. The builder subsequently sold the same apartment to a third party without repaying the loan.

The petitioner contended that he had not consented to or participated in the subsequent sale. He submitted that the transaction had left him without the apartment, the money paid towards it and the relevant title documents. He argued that the Bank’s grievance concerning the builder’s breach of the tripartite agreement could not justify criminal proceedings against him.

The Bank submitted that the loan had remained unpaid and that the subsequent sale of the apartment, coupled with non-servicing of the loan, required investigation into the knowledge and participation of every accused.

Court’s Observations

Tripartite Agreement Placed Repayment Obligation On Builder

The Court observed that the tripartite agreement expressly contemplated cancellation of the booking, shelving of the project and the builder’s failure to complete it. In each eventuality, the builder was required to repay the Bank the entire amount received from the borrower.

The Court held that the agreement was central to determining whether the borrower could be held criminally responsible for the outstanding amount.

“The material placed before this Court does not disclose any corresponding obligation upon accused No.1 to make good to the Bank the amounts which, under the terms of the tripartite agreement, the builder was required to repay to the Bank in the aforesaid circumstances,” the Court observed.

The Court stated that the Bank was fully aware of the nature of the transaction and the obligations undertaken by the respective parties because it was itself a party to the agreement.

Borrower Acquired Neither The Apartment Nor Any Benefit

The Court noted that no sale deed for the apartment had ever been executed in the petitioner’s favour. He consequently acquired no title to the property and obtained no benefit from its subsequent sale to the third party.

The Court observed that the material showed that the developer and its partners had dealt with the apartment that was intended to be conveyed to the petitioner.

“There is no material to indicate that the petitioner participated in the subsequent sale, derived any benefit therefrom, or acted in concert with accused Nos.2 to 5 to deceive or cause loss to the Bank,” the Court held.

The Court clarified that it was not examining whether any offence had been committed by the developer or its partners. The limited question was whether the complaint, even if accepted at face value, disclosed a criminal offence by the petitioner.

Outstanding Loan Did Not Establish Criminal Liability

The Court held that the continued existence of the petitioner’s name as the borrower and the non-payment of the loan did not establish the criminal elements alleged in the complaint.

It observed that the Bank could pursue the persons responsible for violating the tripartite agreement or exercise its available contractual and financial remedies. However, the failure of the underlying transaction or the existence of an outstanding loan could not, without more, establish criminal conduct by the borrower.

“The existence of an outstanding loan or the failure of the underlying transaction, by itself, cannot be treated as constituting a criminal offence,” the Court stated.

The Court further observed that criminal prosecution could not be used to secure the recovery of a financial liability unless the foundational ingredients of the alleged offences were prima facie disclosed.

Public Sector Bank Expected To Exercise Due Care

The Court deprecated the Bank’s decision to initiate criminal proceedings against the petitioner despite its knowledge of the tripartite agreement and the builder’s obligations under it.

“A financial institution, particularly a public sector bank, is expected to act with due care and circumspection before invoking the criminal process against a customer,” the Court remarked.

The Court found the Bank’s approach particularly difficult to accept because the petitioner had neither received the apartment nor benefited from the subsequent sale, while the agreement contemplated repayment by the builder in the very eventuality that had occurred.

Criminal Process Cannot Substitute Contractual Remedies

The Court held that a contractual or financial liability could not be transformed into criminal prosecution unless the complaint disclosed the ingredients of a criminal offence.

It found no material showing dishonest intention, deception, misappropriation or other criminal conduct by the petitioner.

“The criminal process cannot be permitted to become a substitute for remedies available to the Bank for enforcement of its contractual or financial rights,” the Court held.

The Court consequently found that continuing the proceedings against the petitioner would permit the criminal process to be used for enforcing a liability that could not be attributed to him as a criminal act.

The Court expressly confined its findings to the petitioner, who had been arrayed as the first accused. It clarified that its observations should not be treated as expressing any opinion on the allegations or possible criminal liability of the developer and its partners.

Conclusion

The Court allowed the petition after finding that the allegations and available material did not disclose the commission of the alleged offences by the petitioner. It held that continuing the criminal proceedings against him would amount to an abuse of the process of law.

Deprecating the Bank’s initiation of criminal proceedings in what the Court described as a civil dispute concerning recovery of money, the Court quashed the FIR insofar as it concerned the petitioner.

Cause Title: Pritesh Bari v. State of Karnataka and Another (Neutral Citation: 2026:KHC:53492)

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