Can a Handclasp Erase a Fraud? Supreme Court Rejects Discharge on the Basis of Bank Settlement

Introduction

Can a corporate handshake, in the form of a one-time settlement with a bank, wipe away serious criminal charges of fraud and corruption? This pivotal question was at the heart of the Supreme Court’s decision in the case of Central Bureau of Investigation v. M/s. Sarvodaya Highways Ltd. and Ors¹., a landmark judgment delivered. The ruling underscores the critical distinction between resolving a financial liability and answering for an economic crime that impacts the public exchequer and the larger society.

The dispute originated from a credit facility sanctioned by the erstwhile State Bank of Bikaner and Jaipur to M/s. Sarvodaya Highways Ltd.. The loan account turned into a Non-Performing Asset (NPA) in 2013, due to non-repayment. An internal inquiry exposed a colossal fraud of Rs. 52.50 crores. The investigation by the Central Bureau of Investigation subsequently revealed a deep-seated conspiracy where officers of the company connived with the then Branch Manager of the Bank, to defraud the Bank. This was achieved through the submission of false stock and receivable statements, and critically, the use of fabricated work orders and forged collateral documents.

Based on these findings, the CBI filed a chargesheet against the company, its directors, and the Bank Manager for offences under Sections 120B, 406, 420, 467, 468, and 471 of the Indian Penal Code (IPC) and Sections 13(2) read with 13(1)(d) of the Prevention of Corruption (PC) Act, 1988. The entire criminal proceeding was subsequently quashed by the High Court of Punjab and Haryana on the sole premise that the company and the Bank had entered into a one-time settlement (OTS) in 2018, where the cash credit liability was settled for Rs. 41 crores. The High Court reasoned that the dispute was overwhelmingly civil in nature, the entire settled amount had been paid, and no criminal intent was found other than the loan not being paid on time. This decision was challenged by the CBI before the Supreme Court.

The Judicial Test: When Settlement Fails to Quash Criminality

The core argument put forth by the CBI was that the High Court erred by quashing the proceedings based merely on the OTS. The settlement, effected after the account was declared an NPA, was done under compulsion, with the Bank accepting a substantially lesser amount (Rs. 41 crores against an approximate liability of Rs. 52 crores), resulting in a loss to the public exchequer. The Supreme Court, while exercising its Appellate Jurisdiction, set aside the High Court’s order, relying on established principles concerning the High Court’s inherent power under Section 482 of the CrPC. The Court categorically affirmed that economic offences are not private in nature; they affect society at large and fall outside the category of disputes that can be quashed merely on the basis of a compromise.

Economic Offences are Social Wrongs, Not Private Torts

The Court reiterated the established principle that economic offences involving fiscal impurity and financial fraud are social wrongs with immense societal impact. They create a “dent in the economic spine of the nation.” Citing the judgment in State of Maharashtra through CBI v. Vikram Anantrai Doshi & Ors²., the Court underlined that the victim is the collective, and repayment or settlement cannot justify quashing criminal proceedings where the public interest is harmed. In the instant case, the clear deficit of over Rs. 5 crores plus interest, even after the OTS, demonstrated a clear loss to the public exchequer.

This principle was also affirmed in the case of Parbatbhai Aahir @ Parbhatbhai Bhimsinhbhai Karmur v. State of Gujarat³, where the Supreme Court delineated the boundaries of the High Court’s power under Section 482 CrPC. The Court held that in cases involving serious offences of mental depravity or economic offences involving the financial and economic well-being of the State, the High Court would be justified in declining to quash the proceeding, even if a settlement is reached. The economic offences have implications that lie beyond the domain of a mere dispute between the private disputants.

Settlement Cannot Neutralise PC Act Offences

Crucially, the Court invoked the binding ruling in Gian Singh v. State of Punjab⁴, which mandates that the power to quash proceedings must be exercised sparingly and not extended to serious crimes. The Gian Singh judgment explicitly carved out an exception for grave offenses, stating that any compromise between the victim and the offender in relation to the offences under special statutes like the Prevention of Corruption Act or the offences committed by public servants while working in that capacity, cannot provide for any basis for quashing criminal proceedings involving such offences.

Furthermore, in the case of Anil Bhavarlal Jain & Ors. v. State of Maharashtra & Ors⁵., the Supreme Court upheld the Bombay High Court’s decision to refuse to quash an FIR under the PC Act and other provisions despite a subsequent OTS with the bank. The Court in this case observed that the bank had suffered losses, causing substantial injury to the public exchequer, and since a special statute like the PC Act was invoked, quashing the proceedings would have a “grave and substantial impact” on society at large. This aligns perfectly with the present facts where the CBI’s investigation proved collusion and forgery, invoking the PC Act against the Bank Manager.

The Court distinguished the precedents relied upon by the Respondents, such as CBI New Delhi v. B.B. Aggarwal & Others⁶ and CBI, ACB, Mumbai v. Narendra Lal Jain & Others⁷, noting that in the present matter, the clear distinguishing factors were the proven use of forged documents and the fact that PC Act Offences were invoked. The blanket quashing of the chargesheet would also have resulted in the indirect exoneration of the Bank Manager, whose prosecution was sanctioned for corruption.

Conclusion

The Supreme Court found that the High Court’s decision to quash the FIR and chargesheet was an error apparent in the eyes of law. The verdict is a clear and resounding reaffirmation of the principle that a one-time financial settlement cannot annul the prosecution for grave economic offences, particularly those involving the PC Act, the use of forged documents, and a clear loss to the public exchequer. The appeal was allowed, the impugned judgment was set aside, and the proceedings were restored before the trial Court, ensuring that criminal accountability prevails over civil settlement in matters of national economic interest.

Citations

1. Central Bureau of Investigation vs M/s. Sarvodaya Highways Ltd. & Ors., (2025) INSC 135
2. State of Maharashtra through. CBI vs. Vikram Anantrai Doshi & Others (2014 (15) SCC 29)
3. Parbatbhai Aahir @ Parbatbhai Bhimsinhbhai Karmur & Ors. v. State of Gujarat & Anr.(2017) 9 SCC 641
4. Gian Singh v. State of Punjab is (2012) 10 SCC 303
5. Anil Bhavarlal Jain v. State of Maharashtra 2024 INSC 1039
6. C.B.I. New Delhi v. B.B. Agarwal AIR 2019 SC 1045
7. CBI, ACB, Mumbai v. Narendra Lal Jain & Others (2014) 5 SCC 364

Expositor(s):  Adv. Archana Shukla