Criminal Case After Loan Settled Before DRT: When It's Abuse

If a borrower and a bank have already settled their loan dispute before the Debts Recovery Tribunal (DRT), can the bank still drag the borrower through a criminal trial for cheating and forgery? On 29 May 2026 the Supreme Court answered that question directly in Vijay Kumar Kela v. Central Bureau of Investigation (2026 INSC 588), quashing a CBI chargesheet filed by a bank more than two years after it had accepted a DRT-approved compromise, taken the settlement money and issued a no-dues certificate. The Court held that the belated prosecution betrayed a lack of good faith and amounted to an abuse of the process of the court. The judgment is on Indian Kanoon.

This is one of the most practically important propositions in Indian law for anyone who has borrowed against a business. A loan default is, at its heart, a civil dispute. Criminal courts are not a recovery agency. When a lender uses an FIR for cheating or forgery as a pressure tactic, particularly after the underlying debt has been settled, the High Court can and does step in. Knowing exactly where the line falls between a genuine criminal offence and a dressed-up recovery claim can save an honest borrower several years of anxiety, and can save a lender from an adverse order and costs.

The core principle: a loan default is civil, not criminal

Indian courts have drawn this distinction for well over a century, and the statute itself draws it. Failing to repay a loan is a breach of contract. The lender's remedies are a recovery application before the DRT under the Recovery of Debts and Bankruptcy Act, 1993, enforcement of security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, or an ordinary civil suit where the debt falls below the notified DRT threshold.

Cheating requires something more, and the Bharatiya Nyaya Sanhita, 2023 says so on its face. Illustration (g) to Section 318 reads:

"A intentionally deceives Z into a belief that A means to deliver to Z a certain quantity of indigo plant which he does not intend to deliver, and thereby dishonestly induces Z to advance money upon the faith of such delivery. A cheats; but if A, at the time of obtaining the money, intends to deliver the indigo plant, and afterwards breaks his contract and does not deliver it, he does not cheat, but is liable only to a civil action for breach of contract."

That illustration is the whole doctrine in one sentence. The dishonest intention must exist at the time the money is obtained. A borrower who genuinely intended to repay but could not, because a contract fell through, a receivable went bad, an illness intervened or a market turned, is a defaulter. He is not a fraudster. The test is the state of mind at inception, not the outcome at maturity.

A settlement reached before the DRT is powerful evidence on precisely that question. It shows the parties themselves treating the matter as a recoverable commercial debt, negotiated and quantified, rather than as money extracted by deception on day one. It is not conclusive, but it is the sort of contemporaneous conduct that is very difficult for a lender to argue around later.

Why an unpaid loan is a civil problem before it is anything else.

The statutory framework, section by section

Three codes and two banking statutes are in play. The criminal codes changed on 1 July 2024, so both sets of numbers are given.

The offences a lender must actually make out, under the Bharatiya Nyaya Sanhita, 2023:

• Section 316 (criminal breach of trust, replacing Sections 405 and 406 of the Indian Penal Code). Requires entrustment of property or dominion over property, followed by dishonest misappropriation or conversion. Section 316(5) is the aggravated form for a person entrusted in the capacity of a banker, merchant, factor, broker, attorney or agent, which is the successor to Section 409 IPC.
• Section 318 (cheating, replacing Sections 415 and 420 IPC). Section 318(1) defines cheating, Section 318(2) punishes simple cheating with up to three years, Section 318(3) covers cheating where the accused was bound by law or contract to protect the victim's interest, and Section 318(4), punishable with up to seven years and fine, is the successor to Section 420 IPC and is the charge normally used in loan cases.
• Section 335 (making a false document, replacing Section 464 IPC) and Section 336 (forgery, replacing Sections 463 and 465 IPC). Section 336(3), forgery intending the document to be used for cheating, carries up to seven years and replaces Section 468 IPC.
• Section 337 (forgery of a court record, public register or identity document, replacing Section 466 IPC) and Section 338 (forgery of a valuable security, will or receipt, replacing Section 467 IPC). Section 338 is the heavyweight, punishable with imprisonment for life or up to ten years, and it is the provision under which forged title deeds and fabricated guarantees are charged.
• Section 340(2) (fraudulently using as genuine a document known to be forged, replacing Section 471 IPC), punished in the same manner as if the accused had forged the document himself.
• Section 61 (criminal conspiracy, replacing Section 120B IPC), routinely added where directors, guarantors and bank officials are named together.

The procedural provisions, under the Bharatiya Nagarik Suraksha Sanhita, 2023:

• Section 173 (information in cognizable cases, replacing Section 154 of the Code of Criminal Procedure, 1973), the FIR provision.
• Section 175 (a police officer's power to investigate a cognizable case, replacing Section 156), including the Magistrate's power to direct investigation.
• Section 223 (examination of the complainant on a private complaint, replacing Section 200). The first proviso is new and important: no cognizance shall be taken by the Magistrate without giving the accused an opportunity of being heard. That is a real change from the old Section 200 regime and gives a borrower a hearing before process issues.
• Section 250 (discharge in a sessions trial, replacing Section 227) and Section 262 (discharge in a warrant case on a police report, replacing Section 239). Both now fix a sixty-day window from commitment or from the supply of copies within which the accused may prefer a discharge application.
• Sections 438 and 442 (revision, replacing Sections 397 and 401).
• Section 528 (saving of the inherent powers of the High Court, replacing Section 482), the provision under which a quashing petition is filed. It preserves the power to make such orders as may be necessary to give effect to any order under the Sanhita, to prevent abuse of the process of any Court, or otherwise to secure the ends of justice.

The recovery statutes. The Recovery of Debts and Bankruptcy Act, 1993 constitutes the Debts Recovery Tribunals and the Debts Recovery Appellate Tribunals. A bank institutes an Original Application before the DRT for debts above the threshold notified under the Act; below that, the ordinary civil court has jurisdiction. Under the SARFAESI Act, 2002 the lender issues a demand notice under Section 13(2) giving sixty days, may take measures including possession under Section 13(4), and the borrower's remedy is an application to the DRT under Section 17. None of these routes is criminal, and that is the point: Parliament has built the lender an entire dedicated recovery architecture.

What the Supreme Court decided in Vijay Kumar Kela

The facts matter, because quashing turns on facts. A proprietary trading firm dealing in fertilisers and agricultural inputs had been given cash credit and letter of credit facilities by a public sector bank from 2006, enhanced over time to eight crore rupees against primary and collateral security. The account went bad. The bank filed its Original Application before the DRT. During those proceedings the parties negotiated a compromise, the bank's competent authority approved it, a joint application was filed before the DRT to place the settlement on record, the borrower paid the entire settlement amount, and the bank issued a no-dues certificate. The DRT then dismissed the Original Application as withdrawn, recording that the dues stood settled.

More than two years after that withdrawal, the bank lodged a written complaint with the CBI alleging fraud and forgery. A chargesheet followed in 2018 and charges were framed in 2023. The Chhattisgarh High Court declined to quash. The Supreme Court, Nagarathna and Bhuyan JJ, allowed the appeal.

Three strands of reasoning are worth extracting, because they are the strands a borrower's petition should track:

1. Delay that is not explained is delay that is fatal. The bank's own complaint said fraud had been suspected in 2013, yet nothing was done then. The justification offered was that the bank wanted to maximise recovery. The Court held that such conduct betrays a lack of good faith. If you suspect a crime, you report the crime; you do not bank it as leverage.
2. The lender's own settlement document can destroy its case. The compromise recorded that there were no lapses in documentation and no irregularity in the credit proposal on a legal audit, and the bank certified that the compromise amount conformed to Reserve Bank of India policy guidelines and was not below the distress sale value of the securities. Having said all that in writing, the bank could not credibly allege tampering afterwards.
3. The sanctity of a tribunal-endorsed settlement is a public interest in itself. The Court reasoned that allowing prosecution after a DRT-recorded settlement would make commercial entities hesitant to settle at all, which would have a debilitating effect on the economy when the policy focus is on resolving commercial disputes. It called this the larger picture.

The Court applied the principles it restated from the Gian Singh v. State of Punjab, (2012) 10 SCC 303 line of authority: the power to quash under the inherent jurisdiction is distinct from the power to compound and is available even for a non-compoundable offence; heinous offences such as murder, rape and dacoity are not private in nature and are not quashed on settlement; but criminal cases arising from commercial, financial, mercantile or partnership transactions with an essentially civil flavour may in appropriate cases be quashed where the parties have settled, because the possibility of conviction becomes remote and continuation would cause oppression and prejudice.

The chargesheet dated 27 November 2018 and the charge-framing order of 20 February 2023 were quashed, with no order as to costs.

What "abuse of process of court" means

Abuse of process is a legal way of saying the court system is being put to an improper purpose: to harass, to extract a better settlement, to keep pressure on a person after the real dispute is over, or to punish a commercial counterparty for a commercial outcome. It is not a comment on the merits of the allegation. A case can be theoretically arguable and still be an abuse if the reason it is being run is not the reason the criminal law exists.

The classical formulation in Indian law is the one applied in Paramjeet Batra v. State of Uttarakhand, decided by the Supreme Court on 14 December 2012, where the Court asked whether a dispute essentially civil in nature had been given the cloak of a criminal offence. If it had, the inherent power should be exercised to stop it. That question, put in those words, is still the question a High Court asks.

Reader note: India replaced the Indian Penal Code, the Code of Criminal Procedure and the Indian Evidence Act with the Bharatiya Nyaya Sanhita, 2023, the Bharatiya Nagarik Suraksha Sanhita, 2023 and the Bharatiya Sakshya Adhiniyam, 2023 with effect from 1 July 2024. FIRs registered before that date continue to be investigated and tried under the old codes, so a great many live loan-related prosecutions are still IPC and CrPC matters. Always confirm with your advocate which code governs your specific FIR and the exact current section number before relying on either set.

Cheating and forgery: the old and new sections mapped

The key point is that the bank must show genuine criminal ingredients, not merely that a loan was not repaid. Where the FIR restates a recovery grievance in criminal vocabulary, and the debt has since been settled, courts treat it as a civil dispute wearing a criminal costume.

Why a DRT settlement matters so much

The Debts Recovery Tribunal exists precisely to recover debts owed to banks and financial institutions. When a lender and borrower arrive at a One Time Settlement or consent terms before the DRT, several consequences follow at once:

• The lender has accepted a negotiated resolution of its money claim, usually after internal credit-committee approval and often on the footing that the amount is not below the distress sale value of the security.
• The parties have, by their own conduct, characterised the matter as a recoverable debt rather than a theft by deception.
• The settlement becomes part of a judicial proceeding and carries the endorsement of a judicial forum, which is why the Supreme Court in Vijay Kumar Kela treated its sanctity as a matter of public interest rather than only of private contract.
• A parallel criminal trial on the same facts, after money has changed hands and a no-dues certificate has issued, is very hard to justify as anything other than pressure.

Courts therefore look closely at sequencing. When was the fraud first suspected? When was it reported? Did the report come before the settlement, or only after the settlement money was banked? Did the compromise document itself say the paperwork was clean? A borrower's petition should answer those four questions on the first page.

When a criminal case can still survive

A settlement is not an automatic shield. Criminal proceedings can legitimately continue in several situations:

• Independent, provable forgery. Fabricated title deeds, forged guarantees, doctored balance sheets or duplicate stock statements are offences in their own right under Sections 336, 337, 338 and 340 of the BNS. Paying off the loan does not un-forge a document.
• Dishonesty at inception. Where the sanction itself was obtained by fake collateral, a non-existent purchase order, or an identity that was never the borrower's, the Illustration (g) defence is unavailable because the deception preceded the money.
• Serious economic offences. The Supreme Court has expressly carved out cases where the offender is involved in activity akin to financial or economic fraud with implications beyond a private dispute. The consequences of the act on the financial or economic system are weighed in the balance.
• Where a special statute is invoked. In Anil Bhavarlal Jain v. State of Maharashtra, discussed in Vijay Kumar Kela, the accused faced charges under Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988 alongside IPC offences, and the Court held that quashing offences under that special statute would not be justified merely because the loan had been settled before the DRT on consent terms. Corruption offences involve the State, not just the lender, and the lender cannot compromise them away.
• Where public money and public servants are involved together. Once bank officials are alleged to have colluded in the sanction, the case stops being bilateral, and the borrower's settlement does not answer the charge against the officials or the conspiracy count.

The question is always the same: does the case have a real criminal core, or is it a recovery claim wearing a criminal mask?

Civil dispute given a criminal colour: the red flags

How a quashing petition actually runs

1. Assemble the settlement file before you draft anything. Sanction letters, the OTS approval by the competent authority, the joint application filed before the DRT, the DRT order recording the settlement, the order dismissing the Original Application as withdrawn, every payment receipt, the bank statement showing the settlement debit, and the no-dues or account-closure letter. This bundle is the petition.
2. Get certified copies of the criminal record. The FIR, the chargesheet with the list of documents, the sanction for prosecution if any, and the order framing charge. A petition drafted from the accused's memory of the FIR does not survive the first hearing.
3. Build the chronology on one page. Date of sanction, date of default, date the lender says fraud was suspected, date of the DRT application, date of settlement, date of payment, date of no-dues, date of the complaint to the police or the CBI. The gap between the fourth and the last entries is usually the case.
4. Choose the forum and the provision. A petition under Section 528 of the BNSS (Section 482 CrPC for pre-July 2024 FIRs) before the High Court having territorial jurisdiction over the trial court. Where the grievance is against a specific interlocutory order rather than the prosecution as a whole, revision under Sections 438 and 442 BNSS may be the better fit.
5. Plead the ingredients, not the equities. Take each offence charged and show which statutory ingredient is missing on the prosecution's own documents. For Section 318 that means the absence of dishonest intention at inception. For Section 336 or 338 that means the absence of any document alleged to be false, or the absence of any expert or forensic opinion supporting the allegation.
6. Ask for interim protection at admission. A stay of further proceedings before the trial court, or at minimum a dispensation from personal appearance, keeps the client working while the petition is heard.
7. Anticipate the special-statute objection. If the chargesheet includes Prevention of Corruption Act offences, address that head-on and separate the borrower's position from the officials'. Pretending it is not there is worse than answering it.
8. Consider the discharge route in parallel. Where the High Court is slow or the facts are contested, a discharge application under Section 250 or Section 262 BNSS, within the sixty-day window those sections now prescribe, can be quicker and produces a reasoned trial-court order that is itself useful on appeal.

Costs and timelines: what to budget

The figures below are indicative planning ranges for a Karnataka matter and vary substantially with the High Court, the seniority of counsel, the number of accused and whether the CBI or a State police station is prosecuting.

The last row is the real argument for taking quashing seriously. The cost of a petition is knowable. The cost of a decade of criminal listings, passport complications, bank account freezes and disclosure obligations to employers and regulators is not.

Four routes out of a prosecution, and what each one is for.

The mistakes people actually make

1. Signing an OTS that says nothing about the criminal side. Where a complaint has already been lodged, the settlement should record what happens to it. Where none has been lodged, the settlement should record that the bank has no subsisting allegation of fraud or irregularity as at that date. Lenders resist this; it is still worth asking, and the refusal itself is informative.
2. Losing the no-dues certificate. It is the single most valuable document in a later quashing petition, and it is issued once. Scan it the day it arrives.
3. Ignoring the FIR because the loan is settled. A pending criminal case affects passport renewal, visa applications, directorships, professional licences and employment verification long before it affects liberty. Non-appearance converts an arguable case into a non-bailable warrant.
4. Filing the quashing petition without the chargesheet. Courts want to see what the investigating agency actually alleges. A petition against an FIR alone is heard differently from one that dismantles a completed chargesheet.
5. Arguing hardship instead of ingredients. Business failure, family illness and market conditions are real, but they are the wrong register. The winning submission is that the offence charged is not made out on the prosecution's own material.
6. Overlooking the sixty-day discharge window. Sections 250 and 262 BNSS now prescribe a period within which a discharge application may be preferred. Missing it narrows your options.
7. For lenders, treating an FIR as a recovery tool. A complaint lodged after a settlement has been executed and money received invites exactly the finding recorded in Vijay Kumar Kela, that the conduct betrays a lack of good faith. That observation follows the institution, not just the file.
8. For lenders, certifying clean documentation and then alleging forgery. Internal legal audits and compromise recitals are disclosed in the criminal proceeding. A recital that there were no lapses in documentation is very difficult to argue away two years later.

A note from practice

Two things decide these petitions more often than any citation. The first is chronology. A quashing petition that opens with a clean, dated, document-referenced timeline showing the settlement, the payment, the no-dues letter and only then the complaint, is doing most of the persuasive work before the first legal proposition appears. The second is candour about the parts of the case that are genuinely criminal. Where there is a real forgery allegation buried inside an otherwise civil dispute, the petition that concedes it, isolates it and argues that the remaining counts are unsustainable tends to fare better than the petition that denies everything with equal vehemence and therefore persuades on nothing. It is also worth saying that borrowers routinely arrive after the point where the cheapest intervention was available, which was the drafting stage of the settlement itself. If you are negotiating an OTS while a fraud allegation is even faintly in the air, that is the moment to take advice, not eighteen months later when the police call.

What this means for you, practically

If you are a borrower facing a criminal FIR after settling with your bank:

1. Preserve the settlement record: the OTS letter, the DRT consent terms and order, every payment proof, and the bank's no-dues or account-closure communication.
2. Do not ignore the FIR. Appear, cooperate on documents, and take advice on anticipatory bail before the investigating officer's first notice, not after.
3. Reconstruct the chronology of when the lender first alleged fraud, and obtain the internal legal audit or inspection report through the criminal disclosure process if you can.
4. Consult an advocate about a petition to quash under Section 528 BNSS (Section 482 CrPC for older FIRs) before the appropriate High Court, and about a parallel discharge application.
5. Be ready to demonstrate the absence of dishonest intention at the start of the loan: the original project report, the utilisation of funds, the repayments actually made, and the reason the business turned.

If you are a lender or a business extending credit:

1. Use the correct forum for money claims: the DRT under the Recovery of Debts and Bankruptcy Act, 1993, enforcement under the SARFAESI Act, 2002, or a civil recovery suit.
2. Report suspected fraud when you suspect it. Holding the complaint back to improve your recovery position is precisely the conduct the Supreme Court criticised.
3. Reserve criminal complaints for genuine fraud or forgery, supported by documents and, where relevant, forensic opinion.
4. Make sure your compromise recitals are consistent with any allegation you may later wish to make, because they will be produced against you.
5. Remember that a baseless FIR can attract costs and adverse judicial observations that outlast the recovery it was meant to assist.

For tailored guidance on quashing petitions and on defending or pursuing economic-offence matters, see our criminal defence and prosecution practice.

Frequently asked questions

Generally no. A loan default is a civil breach of contract, and Illustration (g) to Section 318 of the Bharatiya Nyaya Sanhita, 2023 says in terms that a person who intended to perform and later broke the contract does not cheat but is liable only to a civil action. It becomes criminal only where there was dishonest intention at inception, or genuine forgery.

It can lodge a complaint, but in Vijay Kumar Kela v. Central Bureau of Investigation (2026 INSC 588) the Supreme Court quashed exactly such a prosecution, brought more than two years after the bank accepted a DRT-approved compromise, took the money and issued a no-dues certificate. The Court held the conduct betrayed a lack of good faith and amounted to an abuse of the process of the court.

Using the criminal justice system for an improper purpose, to harass or pressure a borrower, rather than to address a real offence. The High Court's inherent power exists specifically to prevent it.

Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023, which saves the inherent power of the High Court to prevent abuse of the process of any court or otherwise to secure the ends of justice. For FIRs registered before 1 July 2024 the corresponding provision is Section 482 of the Code of Criminal Procedure, 1973.

No. Where there is independent, serious forgery, where the offence is a large-scale economic fraud with implications for the financial system, or where a special statute such as the Prevention of Corruption Act, 1988 has been invoked, the prosecution can continue notwithstanding the settlement.

The OTS or consent terms, the DRT order recording the settlement and the order dismissing the application as withdrawn, every payment receipt and bank statement entry, and the no-dues or account-closure letter. Keep the sanction letters and the original project report as well, because they go to intention at inception.

Immediately. Early advice lets you sequence anticipatory bail, quashing and discharge sensibly, obtain the chargesheet before drafting, and preserve the sixty-day discharge window under Sections 250 or 262 of the BNSS.

It is harder, because the strongest version of this argument rests on a completed, tribunal-endorsed settlement and a no-dues certificate. A partial repayment under a subsisting dispute still leaves the lender able to say the matter is live. The ingredients argument, that dishonest intention at inception is absent, remains available independently.

Compounding is a statutory settlement of specified offences with the consent of the victim. Quashing is the exercise of the High Court's inherent power, and as the Supreme Court has held, it is available even where the offence is non-compoundable, provided the case is one with a predominantly civil flavour and continuation would be oppressive.

Often yes, where the allegation against them is derivative of the borrower's alleged cheating and the settlement covers the whole debt. It does not help where they face independent allegations, such as personally executing a forged guarantee, or where they are charged with conspiracy along with bank officials.

Related guides and where to get help

If this is a live problem rather than background reading, our criminal defence practice handles these matters from Bengaluru, including for clients who cannot attend court in person. These guides go deeper on the neighbouring questions:

• Ante-Dated FIR: How a Wrong FIR Date Can Sink a Case
• Tarun Tejpal Convicted: When Can a High Court Reverse an Acquittal?
• Zero FIR: How to Register an FIR in India and Compel the Police to Act