Supreme Court Says Criminal Prosecution After DRT-Recorded Loan Settlement Was Abuse of Process

The Supreme Court on Friday quashed criminal proceedings against a borrower accused of obtaining enhanced credit facilities using forged audit reports, holding that continuation of the prosecution would amount to an abuse of process after the loan account had been settled under a compromise approved by the bank, implemented by the parties and recorded before the Debts Recovery Tribunal (DRT).

A Bench of Justices B.V. Nagarathna and Ujjal Bhuyan passed the judgment while allowing an appeal filed by Vijay Kumar Kela and Mohan Traders. The appeal challenged a Chhattisgarh High Court order refusing to quash a chargesheet and a charge-framing order.

“Such a criminal proceeding in our view would not only be oppressive qua the appellants but would also amount to an abuse of the process of the court," the top court held.

The case arose from credit facilities extended by UCO Bank to Mohan Traders, a proprietary concern dealing in agricultural inputs. The firm's credit facilities were enhanced between 2006 and 2009 against primary and collateral security, including mortgaged properties.

Following the death of the firm's founder, Parmanand Kela, repayment became irregular. The loan account was eventually classified as a non-performing asset.

UCO Bank initiated proceedings under the SARFAESI Act. It also filed recovery proceedings before the DRT at Jabalpur.

During the pendency of those proceedings, the parties negotiated a compromise settlement. Under the settlement, the loan account was to be settled for ₹4.25 crore against outstanding dues of ₹6.49 crore.

The settlement was approved by the bank's competent authority. It was thereafter placed before the DRT through a joint application.

After the borrowers paid the entire settlement amount, UCO Bank issued a no-dues certificate. The certificate recorded that the account had been settled through compromise.

The DRT subsequently dismissed the bank's recovery proceedings as withdrawn. It noted that the entire compromise amount had been deposited.

More than two years later, UCO Bank lodged a complaint with the Central Bureau of Investigation. The bank alleged that the borrowers had obtained enhancement of credit facilities on the basis of forged audit reports and had substituted earlier mortgaged properties with an encroached property.

Following an investigation, the CBI filed a chargesheet against Vijay Kumar Kela for offences punishable under Sections 420 and 471 of the Indian Penal Code. The chargesheet stated that the investigation did not disclose any proactive role by bank officials and, therefore, none of them were chargesheeted.

Charges were framed against Kela in 2023. His petition seeking quashing of the chargesheet and the charge-framing order was dismissed by the Chhattisgarh High Court, leading to the appeal before the Supreme Court.

Before the Supreme Court, the appellants argued that the dispute arose out of banking transactions. They contended that it had already been settled through a compromise accepted by UCO Bank and recorded before the DRT.

The CBI opposed the appeal. It contended that the allegations disclosed a triable offence.

Allowing the appeal, the Supreme Court noted that the bank's complaint itself stated that fraud had been suspected in 2013. However, no criminal proceedings were initiated at that stage.

The Court also referred to the compromise proposal approved by the bank. The proposal recorded that there were “no lapses in documentation or irregularity observed as per legal audit dated 12.02.2009.”

The Court held that the bank had entered into a compromise settlement with the borrowers. The settlement was placed before the DRT, which recorded it. The bank subsequently received the settlement amount, issued a no-dues certificate and withdrew its recovery proceedings.

In those circumstances, the Court said it was not proper for the bank to initiate criminal proceedings against the borrowers more than two years later.

“We are afraid, such conduct of the respondent-Bank betrays lack of good faith. 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 top court noted.

"Further, having regard to the fact that the dispute between the parties arising out of banking transactions which are commercial transactions having overwhelmingly or predominantly civil flavour had ended in a compromise settlement, that too, in the manner which we have delineated above, in our view, the possibility of conviction of appellant No. 1 is remote and bleak. Therefore, continuation of the criminal case would cause grave prejudice and injustice to the appellants.", the top court observed.

The bench also observed,

“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).”

Accordingly, the court allowed the appeal. It set aside the High Court's order and quashed the chargesheet as well as the order framing charges.