In a landmark judgment, the Supreme Court quashed a criminal prosecution initiated by the Central Bureau of Investigation (CBI) against a borrower after a loan dispute had already been settled through a tribunal-approved compromise.
The ruling came in Vijay Kumar Kela & Anr. v. Central Bureau of Investigation & Anr. (Criminal Appeal of 2026 arising out of SLP (Crl.) No. 18035 of 2024).
A Division Bench comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan examined whether criminal proceedings under Sections 420 and 471 of the Indian Penal Code could continue after borrowers and the bank resolved the dispute through a settlement approved by the Debts Recovery Tribunal (DRT).
The Court ultimately answered the question in the negative and quashed the proceedings.
Loan Facilities and Financial Difficulties
The dispute arose from financial facilities obtained by M/s Mohan Traders, a proprietary concern engaged in agricultural inputs.
Late Parmanand Kela established the business in 1998. In September 2006, UCO Bank sanctioned a cash credit facility of ₹50 lakh and a letter of credit facility of ₹1 crore.
Over the next three years, the bank enhanced the credit limits through approved banking procedures. By January 2009, the total sanctioned limits had reached ₹8 crore.
To secure these facilities, the borrowers substituted the original collateral with a larger plot of land at Boriyakhurd, Raipur. Bank-approved valuers assessed the property at more than ₹625 lakh. Bank officials also conducted physical inspections before approving the security.
However, the business suffered a setback after Parmanand Kela passed away in November 2009.
Subsequently, Vijay Kumar Kela stepped in to manage the business and support the family. Nevertheless, the firm faced financial difficulties and struggled to secure major supply orders.
As a result, loan repayments became irregular.
In December 2010, UCO Bank classified the account as a Non-Performing Asset (NPA). The bank then initiated proceedings under the SARFAESI Act and filed Original Application No. 355/2011 before the DRT, Jabalpur.
Parties Reach a Compromise Before the DRT
While the recovery proceedings remained pending, the parties negotiated a compromise settlement in March 2015.
The competent authority of UCO Bank approved a settlement amount of ₹4.25 crore against total dues of ₹6.49 crore.
Importantly, the bank’s internal compromise proposal contained significant findings.
Under Clause 9.1.9, the bank recorded that its legal audit had found no irregularities in the borrower’s documentation.
Additionally, Clause 25 confirmed that the settlement complied with RBI guidelines. The bank also stated that the settlement value exceeded the distress value of the available securities.
Following the agreement, both parties jointly approached the DRT.
The borrowers paid the entire settlement amount of ₹4.25 crore. Thereafter, UCO Bank issued a No Dues Certificate on September 30, 2015.
Recognising complete repayment, the DRT dismissed the recovery proceedings as withdrawn on October 27, 2015.
Bank Files Criminal Complaint Years Later
Despite the settlement, UCO Bank’s Zonal Head at Raipur filed a complaint with the CBI in February 2018.
The complaint came more than two years after the DRT had closed the matter.
The bank alleged that the borrowers secured enhanced credit limits by submitting forged audit reports. It also claimed that they concealed liabilities owed to ICICI Bank and substituted valuable collateral with an overvalued encumbered property.
Based on these allegations, the CBI registered an FIR in March 2018.
Later, the agency filed a chargesheet under Sections 420 and 471 IPC.
Notably, the investigation found no evidence of criminal misconduct by bank officials. Consequently, the CBI dropped all allegations under the Prevention of Corruption Act.
In February 2023, a Special Judicial Magistrate framed charges against Vijay Kumar Kela.
The borrowers challenged the prosecution before the Chhattisgarh High Court under Section 482 CrPC.
However, the High Court dismissed their petition in July 2024. It held that the allegations disclosed a prima facie case of fraud.
Supreme Court Examines Earlier Judgments
The Supreme Court carefully examined the ingredients of offences under Sections 420 and 471 IPC.
The Bench relied on precedents such as Mohammed Ibrahim v. State of Bihar and Deepak Gaba v. State of Uttar Pradesh.
The Court reiterated that cheating and use of forged documents require dishonest or fraudulent intent.
The Bench also reviewed several landmark decisions governing the exercise of inherent powers under Section 482 CrPC.
These included Nikhil Merchant v. CBI, Gian Singh v. State of Punjab, Narinder Singh v. State of Punjab, and Parbatbhai Aahir v. State of Gujarat.
According to these judgments, courts may quash criminal proceedings arising from predominantly civil or commercial disputes after a genuine settlement.
However, this principle does not generally apply to heinous crimes or offences under special statutes such as the Prevention of Corruption Act.
In the present case, the Court noted that investigators had already dropped the Prevention of Corruption Act allegations.
Therefore, the dispute retained an overwhelmingly commercial character.
Supreme Court Criticises UCO Bank’s Conduct
The Supreme Court strongly criticised the bank’s conduct.
The Bench observed that UCO Bank had certified the borrower’s documents as regular while approving the compromise settlement.
The bank also joined the borrowers in seeking a DRT order recording the settlement.
Despite this, it initiated criminal proceedings several years later.
The Court rejected the bank’s explanation that it delayed criminal action to maximise recovery.
According to the Bench, if the bank genuinely believed that fraud had occurred, it should have reported the matter before entering into the compromise.
Instead, it accepted the settlement, issued a No Dues Certificate, and allowed the DRT proceedings to conclude.
The Court held that the subsequent criminal prosecution lacked fairness and good faith.
Continued Prosecution Amounted to Abuse of Process
The Supreme Court held that continuing the prosecution would amount to an abuse of the judicial process.
The Bench observed that the chances of securing a criminal conviction had become extremely remote after the complete settlement of the dispute.
Furthermore, the Court warned against the broader commercial consequences of permitting such prosecutions.
According to the judgment, allowing banks to revive criminal allegations years after a tribunal-approved settlement would undermine confidence in compromise mechanisms.
As a result, borrowers and lenders might hesitate to resolve disputes through settlements.
Such uncertainty could adversely affect the banking sector and commercial dispute resolution framework.
Supreme Court Quashes FIR and Chargesheet
For these reasons, the Supreme Court allowed the appeal.
The Court set aside the Chhattisgarh High Court’s judgment dated July 5, 2024.
It also quashed the CBI chargesheet dated November 27, 2018, and the Special Judicial Magistrate’s order dated February 20, 2023.
The Bench concluded that continuing the prosecution would serve no legitimate purpose and would only result in injustice to the appellants.
Accordingly, the Court exercised its powers to prevent abuse of process and secure the ends of justice.
