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 prosecution initiated two years after a DRT-approved settlement is oppressive and an abuse of process.

The Supreme Court has quashed a CBI chargesheet and a charge-framing order against a Raipur-based trading firm and its proprietor, holding that a bank cannot initiate criminal prosecution after voluntarily entering into a compromise settlement that was recorded and endorsed by the Debts Recovery Tribunal. The Court found that UCO Bank suspected fraud as early as 2013, yet chose to accept a negotiated settlement in 2015, obtain a full payment of Rs. 4.25 crores, issue a no-dues certificate, and then — more than two years later — lodge a complaint with the CBI. That sequence, the Court held, betrayed a lack of good faith and amounted to an abuse of the process of court. The judgment, authored by Justice Ujjal Bhuyan, sets aside the Chhattisgarh High Court's order of 5 July 2024 which had declined to quash the proceedings.

How the Dispute Reached the Supreme Court

M/s Mohan Traders, a proprietary concern dealing in agricultural inputs, was established in 1998 by Parmanand Kela. Following Parmanand Kela's death on 28 November 2009, his brother Vijay Kumar Kela (appellant No. 1) took over as sole proprietor.

The firm had been availing cash credit facilities from UCO Bank since 2006. The original sanction of Rs. 50 lakhs in fund-based credit and Rs. 1 crore in non-fund-based credit was progressively enhanced, reaching Rs. 8 crores by January 2009. The enhanced facilities were secured by mortgaged properties, including a substitution of earlier mortgaged plots with a larger plot at Boriyakhurd, Raipur, valued at Rs. 625 lakhs by the bank's own approved valuer.

After Parmanand Kela's death, repayments became irregular and the loan account was declared a Non-Performing Asset. UCO Bank issued a notice under Section 13(2) of the SARFAESI Act on 5 February 2011 and filed Original Application No. 355/2011 before the Debts Recovery Tribunal, Jabalpur for recovery of dues.

In the course of those proceedings, a compromise was negotiated. The settlement amount was fixed at Rs. 4.25 crores against outstanding dues of Rs. 6.49 crores as on 14 March 2015. 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. On 10 July 2015, the DRT recorded the compromise. The appellants paid the full settlement 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, noting 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 valuable mortgaged properties with an encroached property 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.

CBI filed a chargesheet on 27 November 2018 before the Special Judicial Magistrate, CBI Cases, Raipur. The chargesheet alleged that forged audit reports had been submitted to secure enhancement of the cash credit limit, causing a wrongful loss of Rs. 223.74 lakhs to the bank. Significantly, no bank official was chargesheeted; the PC Act charges were dropped. On 20 February 2023, the Special Judicial Magistrate framed charges against appellant No. 1 under Sections 420 and 471 IPC.

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 filed a special leave petition before the Supreme Court, in which leave was granted.

The Central Question

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

The Court noted that it was not necessary to examine in detail whether the ingredients of Sections 420 and 471 IPC were individually made out, because the larger question of the permissibility of continuing such a prosecution after a DRT-endorsed settlement was determinative.

The Court's Reasoning

The Court examined the compromise settlement in detail. Clause 9.1.9 of the settlement document itself recorded that there were “no lapses in documentation or irregularity observed” in the cash credit proposal as per a legal audit dated 12 February 2009. Clause 25 certified that the compromise amount was in accordance with RBI policy guidelines and was not lower than the distress sale value of the available securities. The Court found these admissions by the bank to be significant: having certified the absence of documentation lapses in the settlement itself, the bank could not subsequently allege fraud in the same transactions.

The Court also noted that the bank's own written complaint to the CBI acknowledged that fraud was first suspected on 20 December 2013 — nearly two years before the compromise was finalised. Despite this, the bank proceeded to negotiate and execute the settlement, accepted full payment, issued a no-dues certificate, and withdrew its proceedings from the DRT. It was only after all of this that the complaint was lodged, in February 2018. The Court held that such conduct “betrays lack of good faith.”

The Court drew on the principle in Nikhil Merchant v. Central Bureau of Investigation (2008) 9 SCC 677, where this Court had quashed criminal proceedings after a bank and a borrower settled their dispute through a compromise, observing that continuation of such proceedings would be a futile exercise. The Court also applied the framework laid down by the three-Judge Bench in Gian Singh v. State of Punjab (2012) 10 SCC 303, which held that criminal cases having an overwhelmingly civil flavour — particularly those arising from commercial, financial, or mercantile transactions — stand on a different footing for the purposes of quashing under Section 482 CrPC. In such cases, where the possibility of conviction is remote and bleak and continuation would cause great oppression and prejudice, the High Court may quash the proceedings.

The Court found the present case to be squarely covered by its earlier decision in K. Bharthi Devi, where criminal proceedings arising from a banking transaction were quashed after a compromise settlement before the DRT, on the ground that the possibility of conviction was remote and continuation would cause grave prejudice.

The Court identified a further, broader reason for quashing. Allowing the bank to prosecute the appellants after a DRT-endorsed settlement would, in its view, adversely affect the sanctity of such settlements. If borrowers and commercial entities faced the risk of criminal prosecution even after fully honouring a court-endorsed compromise, many would be hesitant to seek resolution of banking disputes. The Court described this as having a “debilitating effect on the overall economy,” particularly given the focus on settlement of commercial disputes.

CBI's Position

The Additional Solicitor General, appearing for the CBI, submitted that a prima facie triable offence was made out and that the High Court had rightly rejected the quashing petition. He pointed to the allegation that the substituted property at Boriyakhurd was an encroached property, that the audit reports submitted for enhancement of the credit limit were forged, and that the bank had suffered a wrongful loss of Rs. 223.74 lakhs. He submitted that the investigation was carried out in accordance with law and that there was no reason to interfere with the criminal prosecution at this stage.

The appellants' senior counsel, Dr. Vineet Kothari, also raised a jurisdictional argument: that the State of Chhattisgarh, by a notification dated 19 July 2012, had clarified that it had not given general consent to the CBI to exercise jurisdiction within the state, making case-specific consent mandatory under Section 6 of the Delhi Special Police Establishment Act, 1946. He submitted that the CBI had proceeded without such consent, rendering the entire proceedings void. However, when the Bench queried whether the appellants had submissions on the merits, Dr. Kothari did not elaborate further on the consent point and proceeded to argue on other grounds.

Outcome

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 and the charge-framing order of the Special Judicial Magistrate dated 20 February 2023 were quashed. No costs were awarded.