Criminal Prosecution Under Sections 420 & 471 IPC Cannot Continue After Bank Loan Settlement Approved By DRT: Supreme Court

"If the respondent-Bank is permitted to go ahead with the criminal prosecution initiated after settlement of the loan account before the DRT, it would adversely impact the sanctity of such settlement which has become part of the judicial proceeding and which had the approval of a judicial forum," Supreme Court, in a significant ruling dated May 29, 2026, held that criminal prosecution for offences of cheating and forgery cannot be allowed to continue once a borrower has settled the loan account through a compromise approved by the Debts Recovery Tribunal (DRT).

A bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan observed that continuing such proceedings after a full and final settlement, especially when initiated as an afterthought by the bank, amounts to an abuse of the process of the court.

The case involved a proprietary firm, M/s Mohan Traders, which had availed credit facilities from UCO Bank. After the account was declared a Non-Performing Asset (NPA), the bank initiated recovery proceedings before the DRT Jabalpur. During the pendency of the case, a compromise settlement was reached in 2015 for Rs. 4.25 crores, which was duly paid by the appellants. Consequently, the bank issued a 'No Dues Certificate' and the DRT dismissed the recovery suit as withdrawn. However, nearly three years later, the bank filed a complaint with the CBI alleging that the appellants had used forged audit reports and substituted mortgaged properties with encroached land.

The primary question before the court was whether criminal prosecution under Sections 420 and 471 of the IPC could be initiated or allowed to continue after a loan account was settled via an approved compromise that had the imprimatur of the DRT. The court was also called upon to determine if the subsequent criminal complaint by the bank constituted an abuse of legal process.

Court Distinguishes Between Heinous Crimes And Commercial Disputes

The Supreme Court referred to the landmark judgment in Gian Singh Vs. State of Punjab, noting that while heinous and serious offences like murder or rape cannot be quashed despite a settlement, cases with an overwhelmingly civil flavour stand on a different footing. The bench observed that criminal cases arising from commercial, financial, or mercantile transactions should be quashed if the parties have resolved their entire dispute and the possibility of conviction is remote.

Sanctity Of Banking Settlements Must Be Preserved

The bench emphasized that permitting the bank to pursue criminal charges after a judicial settlement would undermine the finality of banking transactions. The Court observed that if such conduct is overlooked, commercial entities would be hesitant to come forward and seek resolution of their disputes. It noted that the focus on the settlement of commercial disputes is essential for the overall economy.

"The possibility of conviction of appellant No. 1 is remote and bleak. Therefore, continuation of the criminal case would cause grave prejudice and injustice to the appellants."

Court Criticizes Bank's Delayed Complaint As An Afterthought

The Court expressed concern over the bank’s conduct, noting that it had suspected fraud as early as 2013 but chose to enter a compromise in 2015 to maximize recovery. The bench found it improper that the bank waited until 2018 to lodge a complaint with the CBI, long after the loan account was closed and the DRT proceedings were withdrawn. It held that such a belated move betrayed a lack of good faith on the part of the respondent-bank.

Terms Of Compromise Contradicted Fraud Allegations

The bench scrutinized the compromise proposal itself, which contained a clause stating that no lapses in documentation or irregularities were observed during the legal audit. The Court noted that the bank had certified the settlement amount was in line with RBI guidelines and was not lower than the distress sale value of the securities. This formal acknowledgment by the bank at the time of settlement weakened the subsequent allegations of forgery and fraud.

"After entering into a compromise settlement with the appellants wherein it was clearly stated that there was no tampering of any of the documents... it was not proper on the part of the respondent-Bank to belatedly initiate criminal proceedings."

Applicability Of Precedents On Quashing Of Non-Compoundable Offences

While acknowledging that Section 471 IPC is non-compoundable, the Court reiterated that the High Court’s inherent power under Section 482 CrPC is distinct from the power to compound under Section 320 CrPC. Relying on K. Bharthi Devi Vs. State of Telangana, the bench held that when a dispute is predominantly civil and has been settled to the satisfaction of the bank, the High Court ought to exercise its jurisdiction to prevent oppression.

The Supreme Court concluded that the High Court of Chhattisgarh erred in refusing to quash the proceedings. It held that the continuation of the trial would be a futile exercise and would result in extreme injustice to the appellants. Consequently, the court allowed the appeal, set aside the High Court's order, and quashed the chargesheet and the order framing charges against the appellants.

Date of Decision: May 29, 2026