DRT-approved loan settlement bars initiation of criminal case against borrower: SC

In a significant ruling aimed at preserving the sanctity of negotiated settlements in commercial disputes, the Supreme Court has held that criminal proceedings against a borrower cannot be initiated or continued once the borrower and the lending bank have entered into a compromise settlement that has been approved by the Debt Recovery Tribunal (DRT).

Quashing the criminal proceedings initiated by the Central Bureau of Investigation (CBI) against businessman Vijay Kumar Kela at the instance of UCO Bank under Sections 420 and 471 of the Indian Penal Code, a Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan, in a judgment pronounced on May 29, 2026, said, “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 like the DRT.”

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Speaking for the Bench, Justice Bhuyan 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 which are after all commercial transactions, having predominantly elements of civil dispute(s). This in turn would have a debilitating effect on the overall economy, more so, when the focus is on settlement of commercial disputes. This is the larger picture we need to keep in mind.”

Referring to the initiation of criminal proceedings by the lending bank against the borrower after entering into a settlement endorsed by the DRT, the Court said, “Such a criminal proceeding in our view would not only be oppressive qua the appellants but would also amount to an abuse of the process of the court.”

Referring to the nature of the dispute raised by the bank after settlement of the loan account, which was “overwhelmingly or predominantly” civil in flavour, the Court said that the possibility of conviction of Kela was remote and bleak; therefore, continuation of the criminal case would cause grave prejudice and injustice to him.

Having said this, the Court further pointed out: “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 like the DRT.”

The case arose out of credit facilities extended by UCO Bank to Mohan Traders, a proprietorship concern established by Kela’s elder brother, Parmanand Kela. Following financial difficulties after the latter’s death in 2009, the account slipped into default and recovery proceedings were initiated before the DRT.

During the pendency of those proceedings, the parties arrived at a compromise under which the bank agreed to accept ₹4.25 crore in full and final settlement of outstanding dues of about ₹6.49 crore. The settlement proposal recorded that a legal audit found no lapses in documentation or irregularities in the loan account.
Upon receiving the settlement amount, UCO Bank issued a no-dues certificate and withdrew its proceedings before the DRT.

More than two years later, however, the bank lodged a complaint with the CBI alleging that Kela had obtained enhancement of credit facilities using forged audit reports and by substituting mortgaged properties. Acting on the complaint, the CBI registered an FIR and later filed a chargesheet.

The Supreme Court noted that although the bank claimed it suspected fraud as early as 2013, it chose not to initiate criminal proceedings at that stage and instead pursued recovery. The Court found it significant that the prosecution was launched only more than two years after the settlement had been fully implemented and the DRT proceedings had been withdrawn.

Setting aside the Chhattisgarh High Court’s refusal to quash the proceedings, the Supreme Court allowed Kela’s appeal and terminated the criminal case against him.