Criminal Prosecution Cannot Continue After DRT-Endorsed Loan Compromise, Supreme Court Rules

A Division Bench quashes CBI charges under Sections 420 and 471 IPC, holding that UCO Bank’s belated complaint after a settled compromise was oppressive and an abuse of process.

The Supreme Court has quashed a CBI chargesheet and a charge-framing order against a Chhattisgarh-based trading firm and its proprietor, holding that a criminal prosecution initiated more than two years after a fully executed, DRT-endorsed loan compromise cannot be allowed to continue. The Division Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan, deciding a criminal appeal arising out of SLP (Criminal) No. 18035 of 2024, set aside the Chhattisgarh High Court’s order dated 5 July 2024 which had refused to quash the proceedings. The Court found that UCO Bank’s conduct in lodging a complaint with the CBI after accepting a settlement, issuing a no-dues certificate, and withdrawing its own recovery application from the Debts Recovery Tribunal betrayed a lack of good faith and amounted to an abuse of the process of court.

How the Dispute Reached the Supreme Court

M/s Mohan Traders, appellant No. 2, was a proprietary trading concern established in 1998 dealing in agricultural inputs. It was set up and managed by Parmanand Kela, the elder brother of appellant No. 1 Vijay Kumar Kela. In 2006, the firm approached UCO Bank for cash credit facilities. On 2 September 2006, the Bank sanctioned a fund-based cash credit limit of Rs. 50 lakhs and a non-fund-based letter of credit limit of Rs. 1 crore. Over the following years, the credit facility was enhanced in stages, reaching Rs. 8 crores by 30 January 2009, with mortgaged properties substituted at each stage.

Parmanand Kela died on 28 November 2009. Vijay Kumar Kela stepped in to manage the firm. Repayments became irregular, and the loan account was declared a Non-Performing Asset. UCO Bank issued a notice dated 5 February 2011 under Section 13(2) of the SARFAESI Act and filed Original Application No. 355/2011 before the Debts Recovery Tribunal, Jabalpur for recovery of dues.

A compromise was worked out on 14 March 2015. The settlement amount was fixed at Rs. 4.25 crores against outstanding dues of Rs. 6.49 crores. The Management Committee of the Board of UCO Bank approved the compromise on 30 March 2015. A joint application was filed before the DRT by both the Bank and the appellants to record the settlement. On 10 July 2015, the DRT noted the compromise and directed the appellants to deposit the amount within the stipulated period. The appellants paid the full amount, and UCO Bank issued a no-dues certificate dated 30 September 2015. On 27 October 2015, the DRT dismissed OA No. 355/2011 as withdrawn, recording that the entire compromise amount had been deposited.

More than two years later, on 27 February 2018, the Zonal Head of UCO Bank, Raipur, submitted a written complaint to the CBI alleging that the appellants had defrauded the Bank by substituting mortgaged properties with an encroached plot and by submitting forged audit reports to obtain enhancement of the credit limit. The CBI registered FIR No. RC2202018E0002 on 8 March 2018 under Section 120B read with Section 420 IPC and provisions of the Prevention of Corruption Act, 1988. After investigation, the CBI filed a chargesheet on 27 November 2018 before the Special Judicial Magistrate, CBI Cases, Raipur, under Sections 420 and 471 IPC against appellant No. 1. No Bank official was chargesheeted. The Special Judicial Magistrate framed charges on 20 February 2023.

The appellants filed a petition under Section 482 of the Code of Criminal Procedure, 1973 before the High Court of Chhattisgarh seeking quashing of the chargesheet and the charge-framing order. The High Court dismissed the petition on 5 July 2024, observing prima facie that the appellants had fraudulently substituted mortgaged properties with an encroached property and had enhanced the credit limit using forged audit reports. The appellants then approached the Supreme Court.

The Core Question Before the Court

Justice Ujjal Bhuyan, writing the judgment, framed the question precisely: whether a criminal prosecution under Sections 420 and 471 IPC can be initiated and allowed to continue after settlement of the loan account by way of an approved compromise that had the imprimatur of the Debts Recovery Tribunal.

Dr. Vineet Kothari, senior counsel for the appellants, argued that the dispute was purely civil in character, conclusively settled before the DRT, and that the criminal complaint filed nearly three years after the settlement was an afterthought. He pointed to the compromise settlement itself, which in clause 9.1.9 recorded that the Bank found no lapses in documentation or irregularity in the cash credit proposal as per a legal audit dated 12 February 2009. He submitted that the property substitution had been done through proper banking channels, with Bank officials personally visiting and valuing the substituted property, and that the substitution was approved by the competent authority when the loan account was still operational.

Mr. Rajkumar Bhaskar Thakare, Additional Solicitor General for the CBI, countered that a prima facie triable case was made out. He submitted that investigation had revealed the audit report submitted by the appellants was fake, that the substituted property was encroached, and that the Bank had suffered a wrongful loss of Rs. 223.74 lakhs with notional interest of Rs. 308.80 lakhs. He argued the High Court had rightly declined to quash the proceedings.

The Court’s Reasoning on Compromise and Criminal Prosecution

The Court surveyed the relevant precedents at length. It referred to Nikhil Merchant v. Central Bureau of Investigation, (2008) 9 SCC 677, where the accused company had availed credit from Andhra Bank, defaulted, and the Bank had filed a suit for recovery as well as a CBI complaint. After the suit was disposed of on compromise and the dues were cleared, this Court had quashed the criminal proceedings, holding that continuation after the compromise would be a futile exercise.

The Court then examined Gian Singh v. State of Punjab, (2012) 10 SCC 303, where a three-Judge Bench had affirmed the approach in Nikhil Merchant while laying down the governing framework. The larger Bench held that the High Court’s inherent power under Section 482 CrPC to quash criminal proceedings is distinct from the compounding power under Section 320 CrPC. Heinous offences and offences under special statutes like the PC Act cannot be quashed merely on compromise. However, criminal cases with an overwhelmingly civil flavour — arising from commercial, financial, or mercantile transactions — stand on a different footing. In such cases, if the possibility of conviction is remote and bleak because of the compromise, continuation of the criminal case would cause great oppression and prejudice to the accused.

The Court also relied on its earlier decision in K. Bharthi Devi, which it found to be directly on point, holding that the present case was “squarely covered” by that ruling. In that case, the Court had held that where a banking dispute arising from commercial transactions had ended in a compromise between the parties in a proceeding before the DRT, the possibility of conviction was remote and bleak, and continuation of criminal proceedings would be oppressive.

Applying these principles, the Court found several features of the present case decisive. First, the compromise was not a private arrangement between the parties. It was approved by the highest competent authority of UCO Bank, recorded before the DRT, and the DRT had dismissed the recovery proceedings only after the full settlement amount was paid and acknowledged. The settlement thus carried the endorsement of a judicial forum.

Second, the Bank’s own compromise document, in clause 9.1.9, certified that there were no lapses in documentation or irregularity in the cash credit proposal as per the legal audit of 12 February 2009. Clause 25 of the same document certified that the compromise amount was in terms of RBI policy guidelines and was not lower than the distress sale value of the available securities. The Court found it was not proper for the Bank to belatedly initiate criminal proceedings after having made these certifications and after withdrawing its own proceedings from the DRT.

Third, the Bank had itself stated in the complaint to the CBI that fraud was first suspected on 20 December 2013, but no steps were taken at that stage because the Bank wanted to maximise recovery. The Court held that such conduct betrayed lack of good faith. If fraud was suspected in 2013, the complaint should have been lodged then. Instead, the Bank accepted the compromise, took the settlement money, issued a no-dues certificate, withdrew from the DRT, and only then — more than two years later — approached the CBI.

The Wider Concern: Sanctity of Settled Disputes

The Court went beyond the immediate facts to articulate a broader concern. It held that permitting the Bank to pursue criminal prosecution after the DRT-endorsed settlement would adversely impact the sanctity of such settlements, which had become part of judicial proceedings. The Court said that if such conduct were overlooked, commercial entities would be hesitant to seek resolution of banking disputes through compromise. This, the Court observed, would have a debilitating effect on the overall economy, particularly given the current focus on settlement of commercial disputes.

The Court also noted that none of the Bank officials had been chargesheeted, even though the complaint had specifically named two officials for accepting the property substitution without proper valuation. The CBI had given all Bank officials a clean chit, finding no proactive role in the sanction or enhancement of the credit limit. The Court found this asymmetry relevant to the overall picture.

Order

The Supreme Court allowed the criminal appeal. The impugned order of the High Court of Chhattisgarh dated 5 July 2024 was set aside. The chargesheet dated 27 November 2018 filed by the CBI and the charge-framing order of the Special Judicial Magistrate dated 20 February 2023 were quashed. No costs were awarded.