Supreme Court’s judgment in Vijay Kumar Kela: Is it time to make commercial dispute-adjacent offences compoundable?

WHEN A COMMERCIAL DISPUTE has been fully resolved, is there any justification for keeping criminal proceedings alive? Earlier this year, the Supreme Court of India in Vijay Kumar Kela v. CBI held that criminal proceedings under Sections 420 (cheating) and 471 (forgery) of the Indian Penal Code (‘IPC’) in relation to loans cannot be sustained after the loan account is compromised before the Debts Recovery Tribunal (‘DRT’) between the bank and the debtor. 

The judgment is welcome inasmuch as it affirms a line of case law that holds that criminal cases having an “overwhelmingly and predominantly civil flavour” stand on a different footing and ought to be quashed by a High Court using its inherent powers under the Code of Criminal Procedure (‘CrPC’) when a compromise is reached notwithstanding the fact that some charges may not be compoundable under Section 320 of the CrPC. 

How did the case come about?

Appellant No. 2, a proprietorship dealing in agricultural inputs, had a credit facility from UCO Bank that was progressively enhanced from ₹1.5 crore in 2006 to ₹8 crore by 2009, secured by its mortgaged properties. After the proprietorship’s founder died in November 2009, his brother (Appellant No. 1) took over but its account fell into financial difficulty and was declared as a non-performing asset. 

The Bank invoked SARFAESI proceedings. In March 2015, the Bank itself proposed and sanctioned a One-Time Settlement of Rs 4.25 crore against outstanding dues of Rs 6.49 crore, which was recorded before the DRT and the recovery proceedings were closed. More than two years after this settlement, the Bank lodged a complaint with the CBI alleging fraud by the Appellants in the scheme of the enhancement of the credit facilities. The Bank alleged that the Appellants swapped the mortgaged properties with encroached properties, and submitted forged audit reports. This led to a chargesheet under Sections 420 and 471 of the IPC and an order framing charges. Thereafter, the Chhattisgarh High Court declined to quash the proceedings under Section 482 of the CrPC, leading to the appeal before the Supreme Court.

What the Supreme Court ruled

The Supreme Court noted that while offences under Section 420 of the IPC are compoundable, those under Section 471 are not. It framed the question as whether Sections 420 and 471 could be said to have been made out against the Appellants when the transaction(s) were related to banking and ultimately led to settlement with the competent authority of the Bank which was compromised before the DRT.

The Supreme Court, relying on K. Bharthi Devi v. State of Telangana (2024), held that the Bank's own settlement documents had certified there were no lapses or irregularities in the loan documentation and that the settlement amount complied with RBI policy guidelines on settlements of August 4, 2010. The belated fraud complaint, filed only after the Bank had already benefited from the OTS, was held to be a demonstration of bad faith. 

The Court reasoned that permitting a criminal prosecution to proceed after a bank has voluntarily negotiated and obtained DRT-sanctioned satisfaction of its dues would be oppressive and an abuse of process, particularly since the dispute was a commercial/banking transaction of predominantly civil flavour where the possibility of conviction was remote and bleak. It added a policy justification that allowing such post-settlement prosecutions would undermine the sanctity of judicially approved settlements and discourage parties from resolving commercial disputes. On this basis, the appeal was allowed and the chargesheet and order framing charges were quashed.