Criminal case against loan defaulter can't continue after DRT-approved settlement: Supreme Court

The Supreme Court has held that criminal proceedings cannot be allowed to continue against a loan defaulter after his loan account dues have been settled through a compromise approved by the Debt Recovery Tribunal (DRT) [Vijay Kumar Kela & Anr. v. CBI & Anr.].

In a judgment delivered on May 29, a Bench of Justices BV Nagarathna and Ujjal Bhuyan quashed criminal proceedings initiated by the Central Bureau of Investigation (CBI) at the instance of UCO Bank against businessman Vijay Kumar Kela under Sections 420 (cheating) and 471 (using forged documents as genuine) of the Indian Penal Code (IPC).

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

The Court noted that the dispute stemmed from a banking transaction and that the loan account arrears had already been settled through a compromise approved by the DRT.

“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 (Vijay Kumar Kela) is remote and bleak. Therefore, continuation of the criminal case would cause grave prejudice and injustice to the appellants,” the Court added.

It further cautioned that permitting criminal prosecution after a DRT-approved settlement would undermine the sanctity of such settlements and discourage borrowers and commercial entities from resolving banking disputes through negotiated settlements.

"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," the Court observed.

The Bench thus allowed the appeal filed by Vijay Kumar Kela and set aside the Chhattisgarh High Court order refusing to quash criminal proceedings.

The case arose from credit facilities availed by Mohan Traders, a proprietorship trading concern established by Vijay Kumar Kela's elder brother, Parmanand Kela, from UCO Bank. The credit facilities, which were enhanced from time to time, were secured by mortgaged properties offered as collateral.

Following Parmanand Kela's death in 2009, the firm faced financial difficulties and repayment of the loan became irregular. The loan account was eventually classified as a non-performing asset (NPA), following which UCO Bank initiated recovery proceedings and approached the DRT for recovery of its dues.

During the pendency of the DRT proceedings, the parties negotiated a compromise settlement under which the bank agreed to accept ₹4.25 crore in full and final settlement of outstanding dues of about ₹6.49 crore.

The compromise proposal recorded that no lapses in documentation or irregularities had been found in the loan account as per a legal audit dated February 12, 2009. After the settlement amount was paid, UCO Bank issued a no-dues certificate and withdrew its recovery proceedings before the DRT.

More than two years later, UCO Bank lodged a complaint with the CBI, alleging that Kela had secured the enhancement of credit facilities by submitting forged audit reports and had substituted valuable mortgaged properties with an encroached property.

Based on the complaint, the CBI registered an FIR and subsequently filed a chargesheet against Kela under Sections 420 and 471 of the IPC.

In 2023, the trial court framed charges against Kela under the said provisions. His plea seeking quashing of the chargesheet and the order framing charges was rejected by the Chhattisgarh High Court, leading him to approach the Supreme Court.

The Supreme Court relied on its decision in K Bharthi Devi v. State of Telangana (2024), wherein it had held that criminal proceedings arising from a banking dispute could be quashed after a full settlement if the dispute was predominantly civil in nature and the possibility of conviction was remote.

"In the facts and circumstances, we are of the view that the present case is squarely covered by the decision of this Court in K. Bharthi Devi," the Court added.

The Bench also noted that UCO Bank, in its complaint, claimed to have suspected fraud as early as 2013. However, it did not initiate criminal proceedings at that stage, stating that it wanted to maximise recovery.

The Court noted that it was only after the compromise settlement had been given effect to by the appellant-accused through payment of the settlement amount, and after the original application before the DRT had been withdrawn on account of the settlement, that the bank sought to initiate criminal prosecution.

This too was done more than two years after the withdrawal of the DRT proceedings pursuant to the approved compromise settlement, the Court added.

The Bench further pointed out that the compromise settlement itself recorded that no lapses in documentation or irregularities had been found in the loan proposal.

In these circumstances, the Bench opined that belated prosecution lacked good faith, was oppressive to the appellants and amounted to an abuse of the process of the Court.

Accordingly, the Supreme Court allowed the appeal and quashed the criminal proceedings against Kela.

Senior Advocate Vineet Kothari, along with Senior Advocate Prashant Mishra and advocates Sumeir Ahuja, Mehul Kothari, Rohit Jain, Aniket Sancheti, Nilanjan Sen and Dhawesh Pahuja, appeared for Kela.

Additional Solicitor General  (ASG) Rajkumar Bhaskar Thakare with Advocates Mukesh Kumar Maroria, Rohit Khare, Sarthak Karol, Khushal Kolwar, Udit Dedhiya and SN Terdal appeared for the respondents.

[Read Judgment]