Supreme Court Quashes Criminal Charges Post-DRT Loan Settlement

An appleal heard by the Supreme Court wherein the criminal proceeding under section 420, 471 IPC was intiated/continued after a loan account is full settled via an approved compromise recorded by the DRT. The Supreme Court ruled that the belated prosecution after the apporved compromise is an abuse of process of law.

The origin of the matter is when the cash credit facilities extended by UCO Bank to a proprietary firm, M/s Mohan Traders, between 2006 and 2009. Following the death of the firm’s founder, the loan account became irregular and was eventually declared a Non-Performing Asset (NPA). The bank initiated recovery proceedings before the Debts Recovery Tribunal (DRT) at Jabalpur and invoked the SARFAESI Act and during the pendency of these proceedings, the firm and the bank entered into a negotiated compromise for ₹4.25 crores, which was approved by the bank's highest authorities and the compromise was recorded by DRT. The appellants paid the full amount, the bank then issued a "No Dues Certificate" in 2015, following which the DRT also dismissed the recovery application as withdrawn.

However, over two years after the said settlement and NOC, the bank filed a complaint with the CBI, alleging that the appellants had defrauded the bank using forged audit reports and by substituting valuable security with encroached property. On the basis of bank's complaint, CBI filed a chargesheet and the trial court framed charges under Sections 420 and 471 of the IPC. The Chhattisgarh High Court refused to quash the case, which led the appeal to the Supreme Court.

The Bench, comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan, delivered significant observations on the finality of banking settlements and the limits of criminal prosecution in commercial matters:

On the "Sanctity of Judicial Settlements" the Apex Court observed that the compromise was not merely a private agreement but had the "imprimatur" and endorsement of the DRT. Allowing a bank to initiate criminal proceedings after such a judicial closure would destroy the sanctity of settlements reached in legal forums.

The Apex Court noted that the bank's conduct "betrays lack of good faith" as it suspected fraud as early as 2013 but chose to wait until the settlement money was paid and the DRT case was withdrawn before filing a criminal complaint in 2018.

Relying on the Nikhil Merchant vs CBI, 2008 and in case of K. Bharti Devi v. State of Telangana precedents, the Court held that while the case had criminal allegations, it was "predominantly civil" in nature. In such financial and mercantile transactions, a full settlement makes the possibility of a conviction remote and bleak, rendering further prosecution oppressive.

Additionally, the Court pointed out a major contradiction: the bank’s own compromise proposal in 2015 explicitly stated there were no lapses in documentation or irregularities, yet the subsequent criminal complaint alleged forgery of those very documents.

The Supreme Court warned that if settlements are not respected, commercial entities will be hesitant to resolve disputes through banking channels, which would have a "debilitating effect on the overall economy".

Thus, the Supreme Court set aside the High Court’s order and quashed the criminal proceedings, ruling that the settlement had conclusively resolved what was essentially a commercial dispute.

CORAM: JUSTICE B.V. NAGARATHNA AND JUSTICE UJJAL BHUYAN.