Banks can't initiate criminal proceedings when declaration as 'wilfil defaulter' stayed by Court: Karnataka High Court

Banks can't initiate criminal proceedings when declaration as 'wilfil defaulter' stayed by Court: Karnataka High Court

The Karnataka High Court in its recent judgement quashed an FIR registered against Steel Hypermart India and its founder by CBI's Banking Securities Fraud Branch for alleged bank fraud of over Rs. 200 crore.

The company had availed credit facilities from a consortium of banks led by the Indian Bank. It was declared as a 'wilful defaulter' in 2020 after the loans became Non-Performing Asset.

A single judge bench comprising of Justice M Nagaprasanna observed that the company's declaration as a 'wilful defaulter' was stayed by the High Court in proceedings initiated by the company and the petition was finally disposed of on an assurance by the Indian Bank to remit the matter to its Review Committee for consideration in terms of Supreme Court's decision in SBI v. Jah Developers. The Court remarked, "if the very root is to be reconsidered according to the Bank, it can hardly be justified as to how a crime could be registered in the teeth of subsistence of interim order..."

It was held by the Apex Court that the Bank has to discover whether a 'unit' has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilized for specific purpose for which the finance was made available and to further analyze whether the default is intentional, deliberate and calculated.

However, soon thereafter, the consortium filed a complaint with the CBI which registered a FIR under Sections 420, 468, 471 r/w Section 120B of the IPC and Sections 7, 13(2) r/w 13(1)(d) of the Prevention of Corruption Act, 1988.

In this background, the High Court held,

"The entire issue of declaration of the petitioner as willful defaulter and subsequent action of registration of a crime was on the basis of the declaration of the petitioner to be a willful defaulter or a fraudulent borrower. That having been stayed by this Court and the stay being in operation up to 15-04-2021, the 2nd respondent concealing the said fact of pendency of the case, could not have registered the crime. As the basis for registration of crime was the account being slipped into NPA on whatever score it would be, and the declaration of the petitioner as willful defaulter having been stayed, it could not have appeared before the Court without divulging the fact that a complaint had already been registered before the CBI, get the matter disposed of, to re-consider the very root that led to registration of the crime. It is not the merit of the matter that needs consideration at the hands of this Court, but it is the act of the 2nd respondent/Bank in trying to overreach the interim order of this Court by registering the crime."

The court referred to the broad framework of Master Circulars issued by RBI for declaration as willful defaulters and borrowers who had indulged in fraud. It then said,

"if the facts narrated, in the case at hand are considered, the unmistakable inference would be that the entire proceedings having been initiated against the petitioners in terms of the afore-quoted circulars, the submission that the circulars are not applicable to the facts of the case at hand is rendered unsustainable, as it is fundamentally flawed."

While allowing the petition and quashing the CBI case, the Court observed that permitting continuation of impugned criminal proceedings would become an abuse of the process of law and result in permitting an action which is initiated in an attempt to overreach the orders of the Court.

The Court however granted liberty to the Bank to initiate appropriate proceedings against the Company subject to the outcome of the decision of the Review Committee.