If Defaulters Are Allowed to Give Criminal Colour to Bank’s Statutory Right to Recover Loan, It Would be Fatal to Banking System: Allahabad HC

ByMehak Dhiman

December 23, 2022 10:10 PM

The Allahabad HC on Wednesday observed that, if defaulters are allowed to give criminal colour to bank’s statutory right to recover the loan, it would be fatal to the banking system.

The bench of Justices Suneet Kumar and Syed Waiz Mian was dealing with the petition filed to quash the impugned FIR registered under Sections 420 and 406 I.P.C.

In this case, The petitioner was posted as Branch Manager of Union Bank of India. The first informant/respondent no. 4 is one of the Directors of M/s Shyamvi Steels Private Limited. 

The Bank sanctioned a loan to the Company. A Hypothecation Agreement of goods and debts for Rs. 1.75 crores was executed by the Company through its directors. The Company defaulted, consequently, the debt was classified Non-Performing Asset.

The Bank issued notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 20024 whereby, the Company was called upon to discharge its liability in full with future interest and incidental expenses costs, within a period of 60 days from the date of notice, failing which Bank would proceed under Sub-Section (4) of Section 13 of the SARFAESI Act.

The fourth respondent challenged the aforesaid notice before the Debts Recovery Tribunal which was allowed by the DRT, on the technical grounds directing the Bank to hand over the possession of the seized assets.

The Bank filed an application before the DRT, against the directors of the Company for recovery of the amount due under Section 19 of the Debt Recovery Tribunal Act, 1993.

The Bank handed over the possession of the Factory to the Company. Thereafter, Bank again issued a corrected notice under Section 13(4) of the SARFAESI Act and took possession of the Factory.

The fourth respondent moved an application under Section 156(3) Cr.P.C., before the Chief Judicial Magistrate, Saharanpur, praying for registering criminal case against the officers of the Bank.

The fourth respondent further attempted to create obstacles, accordingly, entered into a registered rent agreement letting out the premises of the Company in favour of one Ashok Gupta, son of, Late Ram Nath Gupta, Proprietor of M/s Ram Prem Stocky Yard, the possession of which was taken by the Bank on 05.06.2018.

The Chief Judicial Magistrate wherein Police Station was directed to register F.I.R. and investigate the matter. 

The issues for consideration before the bench were:

1. Whether it is a case of malicious prosecution against the Bank?

2. Whether ingredients of the offence under Section 420, 406 I.P.C. made out from the impugned F.I.R.?

The bench noted that to constitute an offence of criminal breach of trust, it is essential that the prosecution must prove first of all that the accused was entrusted with some property or with any dominion or power. It has to be established further that in respect of the property so entrusted, there was dishonest, misappropriation or dishonest conversion or dishonest use or disposal in violation of a property or law of legal contract by the accused himself or some one else which he willingly suffered to do. 

High Court opined that Magistrate should take note of the allegations in entirety, the date of incident and whether any cognizable case is remotely made out. When a borrower of the financial institution covered under the SARFAESI Act, invokes the jurisdiction under Section 156(3) Cr.P.C. and also there is separate procedure under the DRT Act/SARFAESI Act, an attitude of more care, caution and circumspection had to be adhered to by the Magistrate.

The bench stated that the complaint filed by the complainant was an intimidatory tactic and afterthought which is an abuse of process of law. Further, the officials of the financial institution/bank are provided with immunity from prosecution under Section 32 of SARFAESI Act. The act or action of the Bank officials having not taken in good faith, that aspect of the matter is also an aspect which can be examined in the proceedings under the SARFAESI Act before the prescribed forum. In such circumstances, criminal proceedings would not be sustainable in a matter of the present nature, exposing the petitioners to proceeding before the investigating officer or the criminal court, would not be justified.

High Court relied upon the case of State of Haryana & Ors. Vs. Bhajan Lal & Ors. where the Supreme Court considered in detail the scope of the High Court powers under Section 482 Cr.P.C. and/or Article 226 of the Constitution of India to quash the FIR and referred to several judicial precedents and held that the High Court should not embark upon an inquiry into the merits and demerits of the allegations and quash the proceedings without allowing the investigating agency to complete its task.

The bench stated that the Magistrate has to remain vigilant with regard to the allegations made and the nature of allegations in an application filed under Section 156(3) Cr.P.C. and not to issue directions without proper application of mind. The petitioners are officers of the Bank and the complainant is the Director of the defaulted Company. The bank has statutory right of effecting recovery of the security interest, which if allowed to be given criminal colour by the defaulting Company would be fatal to the Banking System.

In view of the above, the High Court allowed the petition.

Case Title: Rajpal Singh v. State Of U.P. And 3 Others

Bench: Justices Suneet Kumar and Syed Waiz Mian

Case No.: CRIMINAL MISC. WRIT PETITION No. – 10571 of 2021

Counsel for the petitioner: Anil Kumar Bajpai

Counsel for the respondent: Gaurav Pundir