Supreme Court Declines Quashing Criminal Proceedings in Economic Offence Involving Diversion of Loan Funds, Observes “Economic Offences Affect Financial Health of the Country”

Court’s Decision

The Supreme Court dismissed the appeals filed by the directors of a private company and employees of a bank against the High Court’s refusal to quash criminal proceedings under Sections 409, 420, and 120B of the Indian Penal Code (IPC) and Sections 13(2) read with 13(1)(d) of the Prevention of Corruption Act (PC Act), 1988. The Court emphasized that economic offences, by their very nature, affect the financial health of the country and cannot be quashed solely on the basis of settlements between the parties involved.

Facts

1. Loan Sanction and Dispute:
   • In 2013, the appellant company obtained a building permit for a commercial project and secured a loan of ₹50 crore from a bank by mortgaging commercial land as collateral.
   • Timely payments were made initially, but in 2017, the bank declared the loan account a Non-Performing Asset (NPA) with an outstanding amount of ₹23.86 crore.
2. Settlement Process:
   • The bank initiated recovery proceedings before the Debt Recovery Tribunal (DRT).
   • A settlement was reached in 2019 for ₹15 crore, which was paid by the company, leading to the closure of the loan account.
3. Criminal Allegations:
   • Despite the settlement, the bank lodged a complaint with the Central Bureau of Investigation (CBI) alleging diversion of funds, fraudulent undervaluation of collateral, and unauthorized changes to the building plans, causing a loss of ₹6.13 crore to the public exchequer.
   • An FIR was registered in 2020, followed by a chargesheet against the appellants.

Issues

1. Quashing of Proceedings:
   • Can criminal proceedings be quashed in cases of economic offences when a settlement has been reached between the parties?
2. Applicability of the Prevention of Corruption Act:
   • Does the absence of bribery allegations negate the applicability of the PC Act provisions?

Petitioner’s Arguments

1. Resolution of Dispute:
   • The appellants argued that the loan dispute was settled through consent terms approved by the DRT, and there was no outstanding liability to the bank.
2. Delay in FIR:
   • The FIR was lodged almost three years after the alleged acts of fraud, prejudicing the appellants.
3. Departmental Inquiry Outcome:
   • The charges against the appellant employees were dropped in a departmental inquiry, with remaining allegations deemed technical.
4. Inapplicability of the PC Act:
   • The appellants claimed that since there were no allegations of bribery, the PC Act should not apply to their case.

Respondent’s Arguments

1. Serious Allegations:
   • The respondents highlighted the fraudulent diversion of funds and undervaluation of collateral, which led to substantial losses to the public exchequer.
2. Public Interest:
   • Settlements in such cases cannot absolve the accused of criminal liability, particularly when public money is involved.
3. Validity of Proceedings:
   • They contended that the allegations warranted prosecution and the FIR disclosed a prima facie case against the appellants.

Analysis of the Law

1. Settlements in Criminal Cases:
   • The Court referred to Gian Singh v. State of Punjab (2012), which allows quashing of criminal cases with a predominantly civil flavor where parties have resolved their disputes. However, the judgment excludes serious economic offences or those involving moral turpitude.
2. Economic Offences as a Separate Class:
   • Parbatbhai Aahir v. State of Gujarat (2017) established that economic offences have broader societal implications and cannot be treated as private disputes.
3. Applicability of the PC Act:
   • The Court clarified that offences under the PC Act, including misuse of public office, are distinct and demand stricter scrutiny. Allegations of corruption cannot be diluted by settlements.

Precedent Analysis

1. Gian Singh v. State of Punjab (2012):
   • Criminal cases arising from personal disputes may be quashed if the possibility of conviction is remote. However, offences involving public interest or societal harm cannot be quashed on the grounds of settlement.
2. Parbatbhai Aahir (2017):
   • Economic offences affect the state’s financial health and should be addressed with utmost seriousness.
3. State v. R Vasanthi Stanley (2015):
   • Serious economic offences cannot be quashed merely because of settlements, as it would weaken the justice system and public trust.

Court’s Reasoning

The Court held that:

1. Nature of Offences:
   • The allegations of fraud and undervaluation of collateral security involve public funds and are therefore of a grave nature.
2. Public Interest:
   • Economic offences impact the confidence of the public in financial institutions and the financial health of the country, making them distinct from ordinary civil disputes.
3. Role of Settlements:
   • While settlements may resolve financial claims, they do not absolve criminal liability, particularly for offences involving corruption or public funds.
4. High Court’s Discretion:
   • The High Court rightly refused to quash the proceedings, considering the larger implications of the allegations.

Conclusion

The Supreme Court affirmed the High Court’s decision, concluding that:

• The criminal proceedings should continue to address the allegations of fraud and ensure accountability.
• Economic offences, especially those involving public funds, demand a strict approach to uphold public trust.

Implications

• This judgment reinforces the judiciary’s stance that economic offences are not mere private disputes but affect the financial ecosystem and public interest.
• It underscores the principle that settlements do not negate the criminality of actions impacting public funds.
• The decision serves as a deterrent to financial misconduct, emphasizing the importance of accountability in cases involving public money.

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