By Nihit Nagpal
Introduction
In a notable judgment dated May 29, 2026, a Division Bench of the Supreme Court of India comprising Hon’ble Justices BV Nagarathna and Ujjal Bhuyan in Vijay Kumar Kela & Anr. v. CBI & Anr.[1] quashed criminal proceedings initiated by the Central Bureau of Investigation (“CBI”) against a borrower whose loan account dues had already been settled through a compromise approved by the Debt Recovery Tribunal (“DRT”). The ruling provides important clarity on the interplay between civil debt recovery mechanisms and criminal prosecution in the context of banking disputes.
Background
The dispute arose from credit facilities extended by UCO Bank to Mohan Traders, a proprietorship concern. Following the death of its founder in 2009, the firm encountered financial difficulties and loan repayments became irregular. The loan was eventually classified as a Non-Performing Asset (“NPA”), and UCO Bank initiated recovery proceedings before the DRT.
During the pendency of DRT proceedings, the parties negotiated a compromise settlement under which UCO Bank agreed to accept ₹4.25 crore in full and final settlement of dues aggregating approximately ₹6.49 crore. Critically, the settlement documentation recorded that a legal audit conducted in 2009 had found no lapses or irregularities in the loan account. Following receipt of the settlement amount, UCO Bank issued a no-dues certificate and withdrew its proceedings before the DRT.
More than two years after the closure of DRT proceedings, UCO Bank lodged a complaint with the CBI alleging that Vijay Kumar Kela had obtained enhancements to the credit facility by submitting forged audit reports and had substituted valuable mortgaged properties with an encroached property. The CBI registered an FIR and filed a chargesheet under Sections 420 and 471 of the Indian Penal Code, 1860. The trial court framed charges in 2023. Kela’s application for quashing was rejected by the Chhattisgarh High Court, leading to the present appeal.
The Court’s Analysis
Predominantly Civil Character of the Dispute
The Court reiterated that where a dispute arising from commercial or banking transactions is overwhelmingly civil in nature and has been conclusively resolved through a duly approved settlement, continuation of criminal proceedings would be an abuse of the process of the court and an abuse of the court’s process. The Court placed reliance on K. Bharthi Devi v. State of Telangana[2] (2024), holding that Vijay Kumar Kela was “squarely covered” by that precedent.
Remote Possibility of Conviction
Given the comprehensive settlement, including the no-dues certificate and the settlement document’s express recording of no irregularities, the possibility of a conviction was found to be “remote and bleak.” This assessment was central to the Court’s conclusion that prolonging the prosecution would cause grave prejudice without any commensurate legitimate purpose.
Bank’s Conduct and Lack of Good Faith
UCO Bank’s own complaint disclosed that it had suspected fraud as early as 2013, yet chose not to pursue criminal proceedings at that time, expressly on the grounds that it wished to “maximise recovery.” Criminal proceedings were initiated only after the compromise settlement had been fully implemented and DRT proceedings withdrawn. This sequencing was characterised by the Court as lacking good faith and amounting to an abuse of process.
Policy Rationale: Sanctity of DRT Settlements
The Court cautioned that permitting criminal prosecution after a DRT-approved compromise settlement would fundamentally undermine the credibility of such settlements. The Court noted that this would discourage borrowers and commercial entities from pursuing negotiated resolutions to banking disputes, with a potentially “debilitating effect on the overall economy”, particularly at a time when the policy focus is on facilitating the settlement of commercial disputes.
Key Takeaways for Practitioners
- DRT-approved settlements carry significant legal protection. Where a banking dispute of predominantly civil character has been resolved through a DRT-approved compromise, the scope for subsequent criminal prosecution is substantially curtailed.
- Timing and sequencing of criminal proceedings are under scrutiny. Banks must be cautious about withholding evidence of suspected fraud during settlement negotiations only to pursue criminal action thereafter.
- The Bharthi Devi framework is being applied broadly. This judgment confirms the 2024 precedent is being consistently applied to banking disputes where the civil component is dominant.
- Settlement documentation matters. The express recording of “no irregularities” in the settlement document was a material factor. Parties should ensure settlement terms accurately reflect the bank’s position on the conduct of the account.
[1] Vijay Kumar Kela & Anr. v. Central Bureau of Investigation & Anr. 2026 INSC 588.
[2] (2024) 10 SCC 384