Substitution of Law Does Not Extinguish Offence Committed Under Previous Statute: Kerala High Court Upholds Criminal Prosecution in ₹9.6 Crore Loan Fraud

“Whether any offence has been committed or not has to be examined in the light of the provisions of the statute as it existed prior to the amendment carried out on 26-7-2018” — Supreme Court’s dictum in State of Telangana v. Sarveshwar Reddy guides Kerala High Court's rejection of discharge petitions

 “Repeal Without Intention to Erase Liability Keeps Past Crimes Alive” - Kerala High Court at Ernakulam delivered a judgment of significant import in Crl.R.P. Nos. 1026 & 1035 of 2024, declining to discharge two accused in a high-value loan fraud case. The accused, A.A. Haneefa (2nd accused) and M. Balakrishnan (5th accused), had sought to escape prosecution on the ground that the 2018 Amendment to the Prevention of Corruption Act had substituted the core penal provision under which they were being tried. The Court, however, dismissed this contention, clarifying that “substitution of a penal provision does not retrospectively erase offences already committed under the earlier law.”

The petitions challenged the dismissal of discharge applications by the Special CBI Court, Ernakulam in a prosecution arising out of a CBI FIR alleging fraudulent disbursal and misuse of loans to the tune of ₹9.6 crore between 2009 and 2010 from the State Bank of Travancore, Palarivattom branch.

Accused Plead Civil Dispute, Court Finds Prima Facie Criminal Conspiracy

The criminal case was based on allegations that A1 (Chief Manager of SBT) and other bank officials, in conspiracy with the accused partners of M/s. Surya Traders and M/s. Pan Biz Corporation, manipulated banking procedures to obtain illegal credit facilities. The 2nd accused was the managing partner of the firms, and the 5th accused was allegedly the recipient of large sums through backdoor channels.

Challenging their prosecution, the 2nd accused argued that, “the entire dispute is civil in nature and the amended Section 13 of the Prevention of Corruption Act no longer criminalises the acts attributed to him.” Similarly, the 5th accused contended that, “mere receipt of funds through business transactions cannot attract charges of criminal conspiracy without concrete evidence.”

However, Justice A. Badharudeen observed that the materials produced by the prosecution “prima facie show that huge amounts were withdrawn in excess of sanctioned limits, routed through multiple shell accounts, and misused through cheque discounting in a deliberate kite-flying operation.”

The Court held that “the 2nd accused, being the signatory and managing partner, cannot feign ignorance of fraudulent banking practices” and that “the 5th accused was a key conduit through which the misappropriated money was moved.”

“Amendment of Law Does Not Automatically Erase Past Guilt” — Court Applies Section 6 of General Clauses Act

The crux of the legal defence revolved around the 2018 Amendment to the Prevention of Corruption Act, which substituted Section 13(1)(d) and narrowed the definition of “criminal misconduct.” The accused argued that since this provision no longer exists, they could not be prosecuted for past acts.

Rejecting this line of reasoning, the Court emphatically ruled that: “The effect of repeal or substitution is governed by Section 6 of the General Clauses Act, 1897, which ensures that pending proceedings and liabilities remain unaffected unless a contrary intention is expressed.”

Quoting the Supreme Court's decision in State of Telangana v. Managipet Sarveshwar Reddy [(2019) 19 SCC 87], the Court reiterated:

“Whether any offence has been committed or not has to be examined in the light of the provisions of the statute as it existed prior to the amendment carried out on 26-7-2018.”

The Court explained that the Prevention of Corruption (Amendment) Act, 2018, though substituting the provision, did not repeal it with retrospective effect nor indicated any intention to wipe out past liability.

“Substitution of a provision results in repeal and replacement — but not erasure of liability for past misconduct unless the legislature clearly says so,” the Court explained while relying on the doctrine of continuity of legal consequences.

“Mens Rea Not Essential Under Old Section 13(1)(d)(iii)” — Legislative Intent Behind Amendment Does Not Affect Past Crimes

The Court also examined legislative materials and case law to hold that the 2018 amendment was intended to clarify and narrow the scope of “criminal misconduct” by public servants — but not to retroactively decriminalise past misconduct.

Justice Badharudeen noted: “The Select Committee of the Rajya Sabha had expressed concern that decisions without mens rea were being criminalised under Section 13(1)(d)(iii), leading to fear among honest officials — the 2018 amendment addressed that concern going forward, not retrospectively.”

Referring to the Supreme Court’s decision in Zile Singh v. State of Haryana [(2004) 8 SCC 1], the Court reiterated that substitution must be read as affecting future cases unless a saving clause excludes prior consequences.

Thus, the court dismissed the attempt of the accused to benefit from the new definition, and found that the offence as defined prior to July 26, 2018 continues to govern acts committed in 2009-10.

"Business Deal or Fraud?" — Court Finds Strong Prima Facie Case in Transactions Between Accused

On the factual front, the Court highlighted the flow of ₹19.63 crore and ₹24.82 crore from Surya Traders and Pan Biz Corporation respectively to Abhidarsana Traders, the proprietorship of the 5th accused. The transactions were circular in nature and included repeated cheque bounce and re-issuance, without any legitimate commercial logic.

The Special CBI Court had earlier ruled: “The accused are allegedly committed criminal conspiracy. Collecting direct evidence for the same is difficult. The court has to consider the circumstantial evidences.”

Agreeing with the lower court, Justice Badharudeen held: “There are sufficient materials which prima facie show that the 2nd and 5th accused have committed the offence punishable under Section 120B r/w 420 IPC and Section 13(1)(d) r/w 13(2) of the P.C. Act.”

“Right to Trial Cannot Be Frustrated at Discharge Stage When Prima Facie Case Exists”

The Court cautioned against prematurely terminating criminal trials where complex financial fraud involving public funds is alleged, and where documentary and circumstantial evidence points to “deep-rooted conspiracy.”

It concluded: “Substitution of a penal provision by itself cannot be treated as an amnesty for past crime — to hold otherwise would be to erase accountability through legislative silence.”

Accordingly, the revision petitions were dismissed, and the trial was permitted to proceed.

Date of Decision: 16 September 2025