Mere Forgery In Loan Papers Can't Implicate Bank Manager Without Criminal Intent: Telangana High Court

The Telangana High Court on 17 September held that merely processing or forwarding loan proposals cannot, by itself, establish criminal conspiracy or other offences against a bank officer in the absence of material showing knowledge, dishonest intention or conscious participation in fraudulent transactions.

A Bench of Justice N. Tukaramji quashed the criminal proceedings against Dr. V. Raja Gopal Reddy, a former Branch Manager of Indian Bank, Osmangunj Branch, Hyderabad, who was arrayed as Accused No. 7 in a case involving allegations of fraudulent loan transactions based on forged title documents. The Court held:

“…the mere fact that certain documents were subsequently found to be forged does not, in the absence of further material, establish that every officer, who processed or dealt with the loan transaction necessarily had knowledge of the forgery or shared the dishonest intention behind it….Criminal liability cannot be imposed merely by reason of a person's designation, office or supervisory position.”

Reddy had approached the High Court seeking quashing of the proceedings in which he faced charges of criminal conspiracy, cheating, forgery and offences under the Prevention of Corruption Act.

The CBI alleged that the proprietor of PDM Industries, in conspiracy with other accused including Reddy, obtained various credit facilities from Indian Bank by submitting fake and forged title deeds and other documents. The facilities included an Overdraft Cash Credit (OCC) limit of up to Rs. 4.50 crore, a Rs. 40 lakh housing loan and other term loans. The funds were allegedly diverted for purposes other than those for which they were sanctioned.

During the investigation, 11 of 14 property documents examined were allegedly found to be fake or forged. The CBI alleged that Reddy failed to properly verify the documents, business transactions, stock position and end-use of funds, thereby facilitating the sanction of the loans. The alleged wrongful loss to the Bank was approximately Rs. 7.18 crore.

Reddy contended that he had sanctioned only the initial Rs. 15 lakh OCC facility within his delegated powers, while subsequent enhancements were sanctioned by the Circle Office. He submitted that his role was limited to forwarding proposals supported by legal opinions and valuation reports.

The CBI and Indian Bank opposed the plea, alleging that Reddy had actively participated in processing and recommending the facilities and failed to ensure proper verification of the securities and compliance with banking procedures, including verification of title documents and prior mortgages.

The Court noted that the enhanced credit facilities were beyond Reddy's delegated powers and were sanctioned by the Circle Office. It also noted that the proposals were prepared by the Credit Officer and that the housing loan was sanctioned by the Circle Office. It held:

“The petitioner cannot be attributed criminal liability merely by reason of the office held by him as Branch Manager. To sustain allegations of conspiracy, cheating, criminal breach of trust, forgery, use of forged documents or criminal misconduct, there must be material connecting the petitioner with the essential elements of the respective offences. The mere fact that the petitioner processed or forwarded proposals, which were subsequently considered and sanctioned by the competent authority cannot, in the absence of further material, by itself be construed as participation in the alleged fraudulent transactions.”

The Bench found no specific material showing that Reddy fabricated or caused the fabrication of any title document or knew that the documents were forged. It emphasised that the subsequent discovery of forged collateral documents could not, by itself, implicate every officer who dealt with the transactions. It observed:

“The mere fact that the securities were subsequently found to be defective or fabricated cannot, by itself, establish that the petitioner possessed knowledge of such forgery or acted with dishonest intention at the time when the loan proposals were processed and forwarded for consideration along with the legal opinion.”

On the allegation that photocopies were used to obtain the Panel Advocate's legal opinion, the Court observed:

“A mere procedural lapse or deviation, without the requisite criminal intent and without a demonstrable nexus with the alleged fraudulent acts, cannot, by itself, be converted into an offence of cheating, forgery or conspiracy.”

While noting that a Branch Manager is expected to exercise due care and diligence, the Bench held that a lapse in official duties cannot attract criminal liability unless there is material showing the requisite criminal intent and a link to the alleged criminal acts.

It also clarified that the subsequent One Time Settlement (OTS) and recovery of amounts by the Bank could not, by themselves, extinguish criminal liability in cases involving allegations of cheating, forgery and conspiracy. It held:

“The decisive factor in the present case is not the OTS by itself. Rather, it is the absence of sufficient material establishing the petitioner's conscious participation in the alleged fraudulent transactions and conspiracy.”

Accordingly, the High Court allowed the petition and quashed the criminal proceedings insofar as they related to Reddy.

For Petitioner: Senior Advocate Raja Sripathi Rao and Advocate G Aditya Goud

For Respondents: Advocates Srinivas Kapatia, Special Public Prosecutor (CBI), Hemanth Kumar Vemuri and Srinivas Survi