Recently, the Supreme Court ruled that criminal proceedings against a loan defaulter should not continue once the borrower and the bank have lawfully settled their dispute. Setting aside a criminal case against a businessman, the Court observed that allowing such prosecutions after a settlement could discourage parties from resolving commercial disputes and undermine confidence in negotiated settlements.
The case arose from a banking dispute in which a businessman settled his loan account before the Debt Recovery Tribunal by paying ₹4.25 crore against outstanding dues of ₹6.49 crore. Despite the settlement receiving the approval of the Tribunal, the bank later initiated criminal proceedings alleging cheating and fraud. Following a CBI investigation and chargesheet, it was alleged that forged audit reports had been used to secure an enhancement of the cash credit limit. The borrower approached the Apex Court seeking quashing of the criminal case, arguing that the underlying dispute had already been resolved through a compromise between the parties.
The Division Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan noted that the dispute stemmed from banking transactions that were overwhelmingly commercial and civil in nature and had already concluded through a mutually accepted settlement. The Court found that the likelihood of securing a conviction was extremely weak and that continuing the prosecution would cause serious prejudice to the borrower.
The Bench observed, while referring to the bank's decision to initiate criminal proceedings after settling the account, that such conduct lacked good faith. Stressing the importance of preserving the credibility of settlements approved by judicial forums, the Court said, “If such a conduct is overlooked and prosecution is allowed to continue, many persons including commercial entities would be hesitant to come forward and seek resolution of their disputes arising out of banking transactions.”
Holding that continuation of the case would amount to abuse of the legal process, the Court quashed the criminal proceedings.
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