Bank Can't Lodge FIR Against Home Loan Borrower Over Dues Where Builder Shelves Project & Sells Flat To Third Party: Karnataka High Court

The Karnataka High Court has quashed criminal proceedings against a home loan borrower whose loan stood outstanding because the builder failed to complete the project and sold the flat to a third party, holding that an outstanding loan or failure of an underlying transaction “by itself” cannot be treated as a criminal offence.

Justice Suraj Govindaraj observed:

“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 existence of an outstanding loan or the failure of the underlying transaction, by itself, cannot be treated as constituting a criminal offence. The circumstances of the present case make the course adopted by the Bank all the more difficult to appreciate. The petitioner has neither obtained the apartment for which the loan was sanctioned nor derived any benefit from its subsequent sale. The petitioner is left without the apartment and without the benefit of the transaction, while the Bank seeks to proceed against him for recovery of the very amount which, under the terms of the tripartite agreement, was contemplated to be recovered from the builder in the eventuality which has, in fact, occurred”.

The Court added, “Criminal prosecution cannot be employed as a means of securing recovery of a financial liability unless the foundational ingredients of the alleged criminal offences are prima facie made out.”

The High Court was hearing a petition filed by the bank borrower seeking to quash an FIR against him for several offences including cheating, criminal breach of trust and forgery.

Builder fastened with liability to repay in case of default

The High Court further noted that the tripartite agreement between the borrower, the bank (State Bank of India) and the builder fastened the liability to pay the bank on to the builder in the event of cancellation of the booking by the builder on account of any default committed by the borrower, shelving of the project by the builder, or failure on the part of the builder to complete the project.

The Court observed that SBI's initiation of criminal proceedings against the petitioner was “unwarranted” and deserved to be “deprecated”, noting that the bank chose to set the criminal law in motion despite being a party to the tripartite agreement and fully aware of the builder's obligations.

“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 Court said.

It further observed, “If the Bank was aggrieved by the acts of the builder or by the failure to honour the obligations under the tripartite agreement, the same could have been pursued against the persons responsible in accordance with law. The Bank, however, has proceeded against the petitioner merely because the loan account remained outstanding, notwithstanding the circumstances in which the underlying transaction itself had failed.”

Taking into account the tripartite agreement, the obligation of the builder, the fact that no sale deed was ever executed in favour of the petitioner, and that the apartment was subsequently sold by the builder to a third party, the Court observed that the petitioner derived no benefit from the transaction and there was no material to attribute criminal liability to him.

Justice Govindaraj noted that contractual or financial liability cannot assume the character of a criminal prosecution in absence of the ingredients required to constitute an offence.

“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 court said.

The Court held that the initiation and continuation of criminal proceedings against the petitioner was wholly unjustified and quashed the FIR.