Madras High Court Quashes CBI Case After Bank Accepted IBC Resolution Plan, Issued No Due Certificate

The Madras High Court has held that Union Bank of India ought not to have initiated criminal proceedings against Star Agro Marine Exports Private Limited and its directors after accepting the corporate insolvency resolution plan, accepting the settlement amount and issuing a No Due Certificate

The court held that the prosecution initiated thereafter amounted to an abuse of the process of law.

Justice G.K. Ilanthiraiyan passed the order while quashing criminal proceedings initiated by the Central Bureau of Investigation (CBI) against Star Agro Marine Exports Private Limited, its directors and associated entities in an alleged ₹284.84 crore bank fraud case.

The court also held that the ingredients of the offence of cheating were not made out and that the bank was estopped from pursuing the prosecution after voting in favour of the resolution plan and accepting the settlement under the Corporate Insolvency Resolution Process (CIRP).

“Further, after invoking Insolvency and Bankruptcy Code before National Company Law Tribunal, the defacto complainant ought not to have initiated criminal proceedings against the accused. After accepting the proposal and approval and after issuance of No Due Certificate stating that there are no dues payable by the corporate debtor, the initiation of criminal proceedings is nothing but clear abuse of process of law.”, the court ruled.

The case arose from a CBI case alleging that Star Agro Marine Exports, its directors and associated entities conspired to cheat Union Bank of India by fraudulently obtaining credit facilities using fabricated financial statements, inflated stock and receivables statements, and false sales and purchase invoices.

The agency alleged that diversion of the loan funds caused a wrongful loss of ₹284.84 crore to the bank. After investigation, the CBI filed a chargesheet, prompting the accused to approach the High Court seeking quashing of the proceedings.

The accused argued that the dispute arose out of a commercial transaction. They contended that the loan account turned into a non-performing asset because of the 2015 floods in Nellore and adverse market conditions.

They also pointed out that Union Bank subsequently initiated the CIRP, approved the successful resolution plan and issued a No Due Certificate. According to them, there was no dishonest intention at the inception of the transaction, an essential ingredient of the offence of cheating.

The CBI opposed the petitions, arguing that settlement of the bank's dues did not bar criminal prosecution in economic offences. Relying on Supreme Court decisions, it contended that civil proceedings and criminal prosecution could continue simultaneously where the ingredients of the alleged offenses were made out.

The High Court found those decisions inapplicable to the facts before it. It noted that the parties had maintained a banking relationship since 1998 and that the accused defaulted only in 2016.

The court also noted that Union Bank approved the resolution plan, accepted the settlement amount, issued a No Due Certificate and separately obtained a recovery certificate against the guarantors before the Debt Recovery Tribunal.

While examining whether the offence of cheating was made out, the court held that the petitioners had neither made any dishonest nor any fraudulent representation.

“...the petitioners neither made any dishonest nor any fraudulent representation. Therefore, the offence under Section 420 of IPC is not at all made out as against the petitioners.”

The court also noted that the trial court had found no evidence of forgery, due to which the prosecution did not invoke forgery charges.

Reiterating that every breach of contract does not amount to cheating, the court held that the prosecution had failed to establish that the accused possessed a fraudulent or dishonest intention when the transaction began. It accordingly allowed the petitions and quashed the criminal proceedings.

For Petitioners: Advocate S Elambharathi

For Respondents: Senior Advocate K Srinivasan and Advocate A.V Arun