Supreme Court quashes criminal proceedings in loan settlement case: K. Bharathi Devi vs. State of Telangana (2024)

Date of the Judgment: October 3, 2024

Citation: 2024 INSC 750

Judges: B.R. Gavai, J. and K.V. Viswanathan, J.

Can criminal proceedings continue against individuals when a bank loan, which led to those charges, has been fully settled? The Supreme Court of India recently addressed this question, focusing on whether a private settlement between a bank and borrowers should halt criminal prosecution, particularly when charges include forgery of documents. This case involves two women who were accused of criminal conspiracy in a loan fraud case, where the primary accused was their respective husbands. The Supreme Court bench, comprising Justices B.R. Gavai and K.V. Viswanathan, delivered the judgment.

Case Background

The case revolves around M/s Sirish Traders, a firm owned by K. Suresh Kumar (Accused No. 1), which received credit facilities from Indian Bank. These loans were secured by collateral, with the present appellants (Accused No. 3 & 4), wives of Accused Nos. 2 and 1 respectively, acting as mortgagors. When the borrowers failed to repay the dues, the account was declared a Non-Performing Asset (NPA) on March 31, 2010. The bank initiated recovery proceedings before the Debts Recovery Tribunal (DRT), Hyderabad.

During the DRT proceedings, the bank discovered that some of the title documents submitted by the accused were fake, leading to the lodging of a complaint on September 3, 2012. The Central Bureau of Investigation (CBI) registered an FIR on September 15, 2012, and filed a charge sheet on December 27, 2013, accusing the individuals of offences under Sections 120-B, 420, 409, 467, 468, and 471 of the Indian Penal Code, 1860 and Sections 13(1)(d) and 13(2) of the Prevention of Corruption Act, 1988.

Subsequently, the borrowers proposed a One Time Settlement (OTS) of Rs. 3.8 crores, which the bank accepted. A No Dues Certificate was issued on November 21, 2015. Despite this settlement, the criminal proceedings continued, prompting the accused to file a petition in the High Court seeking to quash the charges. The High Court dismissed this petition, stating that the settlement was private and did not negate the criminal charges, especially those involving forgery.

Timeline

Course of Proceedings

The Indian Bank initially filed an Original Application (OA No. 253 of 2010) before the Debts Recovery Tribunal (DRT) in Hyderabad to recover the outstanding loan amount. During these proceedings, the bank discovered the use of fake documents. Subsequently, the CBI filed a charge-sheet in the trial Court, leading to criminal proceedings. The borrowers then approached the High Court under Section 482 of the Code of Criminal Procedure, 1973, seeking to quash the charges, arguing that the matter had been settled through the OTS. The DRT also recorded the settlement and disposed of the OA. However, the High Court dismissed the petition, stating that the settlement was a private agreement and did not nullify criminal charges, especially those involving forgery. This dismissal led to the present appeal before the Supreme Court.

Legal Framework

The judgment refers to several key legal provisions:

• Section 482 of the Code of Criminal Procedure, 1973 (CrPC): This section grants inherent powers to the High Court to make orders necessary to prevent abuse of the process of any court or to secure the ends of justice.
• Sections 120-B, 420, 409, 467, 468, and 471 of the Indian Penal Code, 1860 (IPC): These sections deal with criminal conspiracy, cheating, criminal breach of trust, forgery of valuable security, forgery for the purpose of cheating, and using a forged document as genuine, respectively.
• Sections 13(1)(d) and 13(2) of the Prevention of Corruption Act, 1988 (PC Act): These sections relate to criminal misconduct by a public servant and the punishment for such misconduct.

The court also discusses the concept of compounding of offenses under Section 320 of the CrPC, which allows certain offenses to be settled with the permission of the court. However, offenses like forgery are not compoundable under this section.

Arguments

Appellants’ Arguments:

• The appellants, wives of the main accused, had no active role in the alleged fraud. They were merely mortgagors, and the chargesheet does not attribute any specific actions to them.
• The matter has been amicably settled between the bank and the borrowers through an OTS, and all dues have been cleared. The bank has received a total of Rs. 7,78,25,143 and also realized Rs. 1,07,54,000 by auctioning the mortgaged properties.
• Continuing the criminal proceedings would be futile and an abuse of the legal process.
• The appellants relied on several judgments of the Supreme Court, including Central Bureau of Investigation v. Duncans Agro Industries Ltd. [(1996) 5 SCC 591], Nikhil Merchant v. Central Bureau of Investigation [(2008) 9 SCC 677], Gian Singh v. State of Punjab [(2012) 10 SCC 303], Central Bureau of Investigation v. Narendra Lal Jain [(2014) 5 SCC 364], Narinder Singh v. State of Punjab [(2014) 6 SCC 466], Gold Quest International Private Limited v. State of Tamil Nadu [(2014) 15 SCC 235], and Central Bureau of Investigation v. Sadhu Ram Singla [(2017) 5 SCC 350], to support their claim that criminal proceedings should be quashed in cases where a settlement has been reached.

CBI’s Arguments:

• A settlement between the bank and the borrowers does not absolve the accused of their criminal liability, especially in cases involving serious offenses like forgery.
• The High Court was correct in dismissing the petition under Section 482 of the CrPC.

Bank’s Arguments:

• The bank confirmed the settlement with the borrowers.

Submissions Table

Innovativeness of the argument

The innovativeness of the argument by the appellants lies in their reliance on previous Supreme Court judgments to argue that criminal proceedings should be quashed when a settlement has been reached, even for non-compoundable offenses. This argument challenges the conventional view that criminal liability persists regardless of civil settlements, particularly in cases involving financial institutions.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the continuation of criminal proceedings against the appellants, given the settlement between the borrowers and the bank, is justified.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• Central Bureau of Investigation v. Duncans Agro Industries Ltd. [(1996) 5 SCC 591] – Supreme Court of India. The Court observed that even if an offense of cheating is prima facie constituted, such offense is a compoundable offense and compromise decrees passed in the suits instituted by the Banks, for all intents and purposes, amounted to compounding of the offense of cheating.
• Nikhil Merchant v. Central Bureau of Investigation [(2008) 9 SCC 677] – Supreme Court of India. The Court held that in cases where the dispute has overtones of a civil dispute with certain criminal facets, the power to quash criminal proceedings pursuant to a compromise can be exercised.
• Gian Singh v. State of Punjab [(2012) 10 SCC 303] – Supreme Court of India. The Court clarified that the High Court can quash criminal proceedings in cases with a predominantly civil flavor, even if the offenses are not compoundable, to secure the ends of justice.
• Central Bureau of Investigation v. Narendra Lal Jain [(2014) 5 SCC 364] – Supreme Court of India. The Court reiterated that when civil liability has been settled, the High Court can invoke its power under Section 482 CrPC to quash criminal proceedings.
• Narinder Singh v. State of Punjab [(2014) 6 SCC 466] – Supreme Court of India. The Court laid down principles for the High Court to follow when considering settlements and quashing criminal proceedings, emphasizing that cases with a civil character should be quashed when parties have resolved their disputes.
• Gold Quest International Private Limited v. State of Tamil Nadu [(2014) 15 SCC 235] – Supreme Court of India. The Court followed the principles laid down in previous cases to quash criminal proceedings based on settlements.
• Central Bureau of Investigation v. Sadhu Ram Singla [(2017) 5 SCC 350] – Supreme Court of India. The Court upheld the quashing of criminal proceedings in a case where the dispute between a borrower and a bank was settled.

The court also considered the provisions of:

• Section 482 of the Code of Criminal Procedure, 1973 (CrPC)
• Section 320 of the Code of Criminal Procedure, 1973 (CrPC)

Authority Analysis Table

Judgment

The Supreme Court allowed the appeal and quashed the criminal proceedings against the appellants. The court emphasized that the case had a predominantly civil character, arising from a loan transaction that had been settled between the bank and the borrowers. The court also noted that the appellants were wives of the main accused and did not have a direct role in the alleged fraud.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the dispute was essentially civil in nature, arising from a loan transaction that had been settled. The court emphasized that the continuation of criminal proceedings would be an exercise in futility and would cause undue hardship to the appellants, who were not directly involved in the alleged fraud. The court also considered the fact that the bank had received full payment under the OTS and had closed the loan account. The court was also influenced by the fact that the appellants were women and not the primary accused.

The court’s reasoning was based on the principle that criminal proceedings should not be used to harass individuals when the underlying dispute is primarily civil and has been resolved. The court emphasized the need to secure the ends of justice and prevent the abuse of the legal process.

The court quoted the following from the judgment:

• “In the facts of the case, it appears to us that there is enough justification for the High Court to hold that the case was basically a matter of civil dispute.”
• “The dispute involved herein has over tones of a civil dispute with certain criminal facets.”
• “It has been held that there are certain offences which overwhelmingly and predominantly bear civil flavour having arisen out of civil, mercantile, commercial, financial, partnership or such like transactions.”

Key Takeaways

• Criminal proceedings can be quashed when the underlying dispute is primarily civil and has been settled between the parties.
• The High Court has the power to quash criminal proceedings under Section 482 of the CrPC, even in cases involving non-compoundable offenses, if the dispute has a civil flavor and the continuation of proceedings would be an abuse of the legal process.
• Cases arising from commercial transactions, financial disputes, and family matters are more likely to be quashed if a settlement has been reached.
• The court will consider the nature of the offense, the role of the accused, and the overall circumstances of the case when deciding whether to quash criminal proceedings.

This judgment reinforces the principle that criminal law should not be used to settle private disputes, and it provides a framework for the High Courts to exercise their inherent powers to quash proceedings in appropriate cases.

Directions

The Supreme Court quashed the judgment of the High Court and the criminal proceedings against the appellants in C.C. No. 16 of 2014 on the file of Principal Special Judge for CBI Cases, Nampally, Hyderabad.

Development of Law

The ratio decidendi of this case is that criminal proceedings arising from disputes with a predominantly civil character can be quashed if the parties have settled their differences, even if the offenses are non-compoundable. This judgment reinforces the principles laid down in previous cases and clarifies the circumstances under which High Courts can exercise their inherent powers under Section 482 of the CrPC. It emphasizes that the continuation of criminal proceedings should not be allowed when the core issue is a private dispute that has been resolved, as it would be an abuse of the legal process.

Conclusion

The Supreme Court’s decision in K. Bharathi Devi vs. State of Telangana (2024) provides significant relief to individuals facing criminal charges arising from loan disputes that have been settled with the bank. The court emphasized that in cases where the dispute has a predominantly civil character, the High Court can exercise its inherent powers to quash criminal proceedings, ensuring that the legal process is not used to harass individuals when the underlying dispute has been resolved. This judgment underscores the importance of securing the ends of justice and preventing the abuse of the legal process.

Category

Parent Category: Criminal Law

Child Categories:

• Section 482, Code of Criminal Procedure, 1973
• Quashing of Criminal Proceedings
• Settlement of Disputes
• Banking Law
• Loan Recovery

Parent Category: Code of Criminal Procedure, 1973

Child Categories:

• Section 482, Code of Criminal Procedure, 1973

Parent Category: Indian Penal Code, 1860

Child Categories:

• Section 120-B, Indian Penal Code, 1860
• Section 420, Indian Penal Code, 1860
• Section 409, Indian Penal Code, 1860
• Section 467, Indian Penal Code, 1860
• Section 468, Indian Penal Code, 1860
• Section 471, Indian Penal Code, 1860

FAQ

Q: Can criminal charges be dropped if I settle a loan with the bank?

A: Yes, the Supreme Court has indicated that if the dispute is primarily civil in nature and you have settled the loan with the bank, the criminal charges can be dropped. This is especially true if you are not the main accused and your role was limited.

Q: What does ‘civil flavor’ mean in a criminal case?

A: ‘Civil flavor’ means that the dispute primarily arises from a civil transaction, such as a loan agreement, rather than a serious criminal act. If the core issue is a private dispute that has been resolved, the court may consider quashing the criminal charges.

Q: What is Section 482 of the CrPC?

A: Section 482 of the Code of Criminal Procedure, 1973, gives the High Court inherent powers to make orders necessary to prevent abuse of the court process or to secure the ends of justice. This can include quashing criminal proceedings.

Q: What kind of cases can be quashed if settled?

A: Cases arising from commercial transactions, financial disputes, and family matters are more likely to be quashed if a settlement has been reached. However, serious offenses like murder, rape, and dacoity are not typically quashed even if there is a settlement.

Q: What should I do if I have settled a case but criminal proceedings are still ongoing?

A: You should approach the High Court under Section 482 of the CrPC, citing this judgment and other relevant precedents, to request that the criminal proceedings be quashed. It is advisable to consult with a lawyer to prepare your case.