Criminal Prosecution After Settlement Of Loan Before DRT Abuse Of Process : Supreme Court Quashes Cheating & Forgery Case

The Supreme Court on Friday (May 29) quashed the criminal proceedings initiated against a borrower under Sections 420 and 471 of the Indian Penal Code, holding that continuation of prosecution after a settlement of the loan account by way of an approved compromise settlement before the Debts Recovery Tribunal (DRT) would amount to abuse of process of court.The Court framed the central issue as whether a criminal prosecution for cheating and forgery could continue after the loan account had been settled through a compromise approved by the bank and endorsed by the Debts Recovery Tribunal (DRT).The Court noted that the bank had entered into a negotiated settlement with the borrower, accepted the entire compromise amount, issued a no-dues certificate, and secured dismissal of its recovery proceedings before the DRT. It held that the present case was squarely covered by its earlier decision in K. Bharthi Devi v. State of Telangana, where criminal proceedings arising from a settled banking dispute were quashed.The Bench found it significant that the bank itself had recorded in the compromise proposal that no lapses in documentation or irregularities had been noticed as per a legal audit. It also observed that although the bank claimed to have suspected fraud as early as 2013, it chose not to initiate criminal action at that stage and instead proceeded with a compromise settlement.Criticising the bank's conduct, the Court observed:“If the respondent-Bank is permitted to go ahead with the criminal prosecution initiated after settlement of the loan account before the DRT, it would adversely impact the sanctity of such settlement which has become part of the judicial proceeding and which had the approval of a judicial forum like the DRT. 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). This in turn would have a debilitating effect on the overall economy, more so, when the focus is on settlement of commercial disputes. This is the larger picture we need to keep in mind.”, observed a bench of Justice BV Nagarathna and Justice Ujjal Bhuyan. The Court reiterated that criminal proceedings arising out of commercial and financial disputes having an overwhelmingly civil flavour may be quashed where parties have settled their disputes and the possibility of conviction becomes “remote and bleak.” The Court found the present case to be squarely covered by the principles laid down in K. Bharthi Devi Vs. State of Telangana, (2024) 10 SCC 384, where criminal proceedings were similarly quashed following a DRT-approved settlement. “…criminal cases having overwhelmingly and predominantly civil character, particularly those arising out of commercial transactions or arising out of matrimonial relationships or family disputes should be quashed when the parties have resolved their entire disputes among themselves.”, the court observed. The case arose from credit facilities granted by UCO Bank to Raipur-based M/s Mohan Traders. The firm obtained enhanced cash credit and letter of credit limits between 2006 and 2009, but the account later turned NPA in December 2010. The CBI alleged that forged audit reports were used to secure enhancement of the loan limits by concealing an existing ICICI Bank liability of about ₹2.03 crores. It also alleged that valuable collateral was replaced with an encroached property, though bank officials had inspected and approved the substituted property. During recovery proceedings before the DRT, the parties entered into a compromise settlement in March 2015, which was approved by UCO Bank and recorded by the DRT. After the borrowers paid the settlement amount, the bank issued a “no dues certificate” and the DRT dismissed the recovery proceedings. The settlement itself recorded that no lapses or irregularities were found in the loan documentation. However, over two years later, UCO Bank lodged a complaint with the CBI, leading to registration of an FIR and filing of charges under Sections 420 and 471 IPC. Bank officials were given a clean chit. The appellants' quashing plea was rejected by the Chhattisgarh High Court, following which they approached the Supreme Court. Setting aside the High Court's decision, the judgment authored by Justice Bhuyan observed: “…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.” In view of the ...

Criminal Prosecution After Settlement Of Loan Before DRT Abuse Of Process : Supreme Court Quashes Cheating & Forgery Case

Yash Mittal

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Yash Mittal

Criminal Prosecution After Settlement Of Loan Before DRT Abuse Of Process : Supreme Court Quashes Cheating & Forgery Case

Yash Mittal

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Yash Mittal

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