The Supreme Court has ruled that criminal prosecution arising from a bank loan transaction cannot be allowed to continue when the dispute was already settled through a compromise approved by the competent banking authority and endorsed by the Debts Recovery Tribunal (DRT).
A Bench comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan set aside the Chhattisgarh High Court's order and quashed the chargesheet filed by the Central Bureau of Investigation (CBI) against businessman Vijay Kumar Kela.
The Court held that permitting the prosecution to continue after a full and final settlement would not only be unfair to the borrowers but would also undermine confidence in commercial dispute resolution mechanisms.
Background of the Case
The dispute arose from credit facilities granted by UCO Bank to M/s Mohan Traders, a proprietary concern engaged in agricultural input trading. Between 2006 and 2009, the bank sanctioned and later enhanced various cash credit and letter of credit facilities after accepting mortgaged properties as security.
Following business difficulties after the death of the firm's founder, the loan account turned irregular and was eventually classified as a Non-Performing Asset (NPA). UCO Bank initiated recovery proceedings before the DRT and under the SARFAESI Act.
In 2015, the parties negotiated a compromise settlement under which the borrower agreed to pay ₹4.25 crore against outstanding dues of ₹6.49 crore. The settlement was approved by the bank's competent authority and later placed before the DRT.
After the settlement amount was paid, UCO Bank issued a "No Dues Certificate" and the DRT dismissed the recovery proceedings as withdrawn.
More than two years after the settlement, UCO Bank lodged a complaint with the CBI alleging that the borrower had obtained enhanced credit facilities using forged audit reports and had substituted valuable mortgaged properties with an allegedly encroached property.
The CBI registered an FIR and eventually filed a chargesheet alleging offences under Sections 420 and 471 of the Indian Penal Code. Charges were framed against Vijay Kumar Kela in 2023.
The borrower challenged the prosecution before the Chhattisgarh High Court, but the petition was dismissed, leading to the appeal before the Supreme Court.
The Supreme Court examined a series of earlier decisions dealing with criminal proceedings arising out of commercial and financial disputes that were later settled.
The Bench noted that the dispute stemmed from a banking transaction that had an overwhelmingly civil and commercial character. The Court emphasized that the settlement had not only been approved by the bank but had also received the endorsement of the DRT.
Questioning the bank's conduct, the Court observed that it had claimed to suspect fraud as early as 2013 but chose not to initiate criminal action at that stage. Instead, it entered into a negotiated settlement, accepted payment, issued a no-dues certificate, and secured withdrawal of the DRT proceedings.
“The present case is squarely covered” by earlier precedents permitting quashing of criminal proceedings in settled commercial disputes, the Bench observed.
The Court further remarked:
“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 Bench expressed concern that allowing criminal prosecutions to continue after judicially recognized settlements could discourage parties from resolving banking and commercial disputes through compromise.
The Court observed that if such prosecutions were permitted despite a completed settlement, businesses and borrowers might become reluctant to enter into negotiated resolutions, which could ultimately affect commercial dispute resolution mechanisms and economic activity.
Allowing the appeal, the Supreme Court set aside the Chhattisgarh High Court's judgment dated 5 July 2024.
The Court also quashed the CBI chargesheet dated 27 November 2018 and the order of the Special Judicial Magistrate dated 20 February 2023 framing charges under Sections 420 and 471 IPC against the appellant.
The appeal was accordingly allowed without any order as to costs.
Case Title: Vijay Kumar Kela & Anr. v. Central Bureau of Investigation & Anr.
