In Vijay Kumar Kela & Anr. v. Central Bureau of Investigation & Anr., 2026 INSC 588, the Supreme Court set aside criminal proceedings initiated by the Central Bureau of Investigation (CBI) against borrowers after a loan dispute had already been resolved through a compromise settlement approved by the Debt Recovery Tribunal (DRT). The Court held that continuation of criminal prosecution in the peculiar facts of the case would amount to an abuse of the process of law and would undermine the sanctity of settlements arrived at in commercial disputes.

The case arose out of credit facilities granted by the bank to the appellants. Following default in repayment, the bank instituted recovery proceedings before the DRT. During the pendency of those proceedings, the parties entered into a negotiated compromise settlement which was approved by the competent authority of the bank. A joint application was thereafter filed before the DRT recording the settlement. Pursuant thereto, the appellants paid the entire settlement amount, the bank issued a “No Dues Certificate”, and the DRT disposed of the recovery proceedings after recording full satisfaction of the bank’s claim.

However, more than two years after the settlement had been fully implemented and the DRT proceedings stood concluded, the bank lodged a complaint with the CBI alleging fraud, forgery, and other offences in relation to the very loan transaction under Sections 420 and 471 of Indian Penal Code (IPC). Based on the complaint, a criminal case was registered, a chargesheet was filed, and charges were framed against the appellants. The appellants filed a petition under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) before the High Court for quashing of the chargesheet as well as the order passed by the Special Judicial Magistrate framing charges.

Aggrieved by the order of the High Court and continuation of the criminal proceedings, the appellants approached the Supreme Court contending that the dispute arose out of a commercial banking transaction which had already been amicably resolved and judicially recognised by the DRT. It was argued that permitting criminal prosecution to continue after the bank had accepted the settlement amount, issued a no-dues certificate, and withdrawn its recovery proceedings would be wholly unjust and oppressive.

The Supreme Court undertook a detailed examination of its earlier decisions dealing with the interplay between settlement of commercial disputes and criminal prosecutions. The Court referred to precedents including Nikhil Merchant v. CBI ((2008) 9 SCC 677), Gian Singh v. State of Punjab ((2012) 10 SCC 303), Narinder Singh v. State of Punjab ((2014) 6 SCC 466), and K. Bharthi Devi v. State of Telangana ((2024) 10 SCC 384), wherein it was recognised that criminal proceedings having an overwhelmingly civil or commercial flavour may be quashed where the underlying dispute has been fully resolved and the continuation of prosecution would serve no meaningful purpose.

Applying those principles, the Court noted that the compromise settlement in the present case was not a private arrangement but one that had been formally placed before and recognised by the DRT. The appellants had complied with all settlement obligations, the bank had accepted the settlement amount, issued a no dues certificate, and the recovery proceedings were withdrawn on that basis.

A significant factor that weighed with the Court was the conduct of the bank itself. The Court noted that the bank had stated in its complaint that fraud was suspected as early as 2013. Despite such alleged suspicion, no criminal proceedings were initiated at that stage. Instead, the bank chose to pursue recovery proceedings, entered into a compromise settlement, accepted the settlement amount in full and final satisfaction of its claim, and only thereafter sought to initiate criminal prosecution. The Court found such conduct difficult to reconcile with the allegations subsequently made against the appellants.

The Court further observed that the compromise settlement itself contained clauses indicating that the bank had not found any irregularity in the loan documentation and had certified that the settlement was in conformity with applicable RBI guidelines. In these circumstances, the subsequent allegation that the loan transaction was tainted by fraud appeared inconsistent with the bank’s own earlier position.

While examining the effect of the settlement, the Supreme Court made a significant observation regarding the bona fides of the bank’s actions. The Court held:

“We are afraid, such conduct of the respondent- Bank betrays lack of good faith. If the Bank had suspected fraud in 2013 itself, it should have lodged complaint at that stage itself. However, such stand of the Bank that fraud was committed by appellant No. 1 is not supported by the contents of the compromise settlement itself. We have already noted that in clause 9.1.9 of the compromise settlement, it was clearly mentioned by the Bank that there were no lapses in documentation or any irregularity was observed in the cash credit proposal of the appellants as per legal audit dated 12.02.2009. Additionally, the Bank certified in clause 25 that the compromise amount was in terms of the RBI policy guidelines and that it was not lower than the distress sale value of the securities available. After entering into a compromise settlement with the appellants wherein it was clearly stated that there was no tampering of any of the documents and after filing joint application before the DRT to record the compromise settlement, it was not proper on the part of the respondent-Bank to belatedly initiate criminal proceedings against the appellants, that too, after withdrawing the proceedings from the DRT on execution of the compromise settlement leading to closure of the loan account. 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.”

The Court also emphasised that the dispute emanated from a banking transaction which was essentially commercial in nature and possessed an overwhelmingly civil flavour. Once the dispute had been resolved through a duly approved settlement and the loan account had been closed, the possibility of securing a conviction became remote and bleak. In such circumstances, continuation of criminal proceedings would result in grave prejudice and injustice to the accused.

Importantly, the Court cautioned against permitting criminal prosecutions to be initiated after parties have resolved their disputes through settlements recognised by judicial forums. The Court observed that allowing such prosecutions to continue would undermine confidence in settlement mechanisms and discourage parties from resolving commercial disputes through negotiated settlements. The Court noted that if settlements approved by forums such as the DRT do not bring finality to disputes, commercial entities may become reluctant to enter into such arrangements, which would ultimately have an adverse impact on the broader economic and commercial environment.

Taking note of the peculiar facts of the case, the Supreme Court concluded that the continuation of criminal proceedings was unsustainable. Accordingly, it set aside the order of the High Court, quashed the chargesheet filed by the CBI, and also quashed the order framing charges against the appellants.

The judgment reaffirms that where a banking dispute is predominantly civil and commercial in nature, has been fully resolved through a compromise settlement approved by the DRT, and the lender itself has accepted the settlement and issued a no dues certificate, subsequent criminal prosecution based on the same transaction may, in appropriate cases, constitute an abuse of process. The decision also underscores the importance of preserving the sanctity and finality of settlements in commercial disputes, particularly where such settlements have received judicial recognition.

Authored By
Rajat Jain, Advocate
Email: [email protected]
Mobile No. 9953887311