Introduction:

In a significant ruling delineating the boundary between civil disputes and criminal liability in banking transactions, the Delhi High Court quashed criminal proceedings initiated against the Central Bank of India and its senior officials, holding that a bank is legally entitled to adjust amounts deposited under a One Time Settlement (OTS) scheme when the borrower fails to comply with the agreed terms.

Justice Neena Bansal Krishna set aside the summoning order and criminal complaint filed under Sections 420 (cheating), 406 and 409 (criminal breach of trust), and 120B (criminal conspiracy) of the IPC. The Court categorically held that the dispute was purely civil in nature and did not disclose any element of fraudulent or dishonest intention necessary to attract criminal liability.

The case arose out of an unsuccessful OTS agreement under which the borrower had deposited ₹58 lakh in a ‘no-lien’ account but subsequently defaulted on the remaining payment obligations. When the bank adjusted the deposited amount toward the outstanding dues and later assigned the debt to an asset reconstruction company, the borrower initiated criminal proceedings alleging misappropriation and conspiracy.

The High Court’s judgment reiterates that criminal law cannot be invoked to settle contractual disputes arising from failed financial settlements.

Background of the Case:

The complainant, Mohan Tanksale, had availed loan facilities from the Central Bank of India. Due to persistent defaults, his loan accounts were declared Non-Performing Assets (NPA). Recovery certificates amounting to approximately ₹13 crore were issued by the Debt Recovery Tribunal (DRT).

Subsequently, the parties entered into a One Time Settlement (OTS) agreement. Under the terms of the OTS:

• The borrower was required to pay a reduced, agreed settlement amount.
• As part payment, ₹58 lakh was deposited in a ‘no-lien’ account.
• The balance settlement amount was required to be paid within a stipulated time.
• In case of default, the OTS would stand automatically cancelled.

The borrower failed to pay the remaining settlement amount within the agreed timeline. As per the contractual terms, the OTS stood cancelled automatically.

Following this, the bank adjusted the ₹58 lakh deposit toward the outstanding loan dues and later assigned the debt to an asset reconstruction company in the ordinary course of business.

Aggrieved by the non-refund of the ₹58 lakh deposit, the borrower filed a criminal complaint alleging cheating, criminal breach of trust, and conspiracy against the bank and its officials.

The trial court summoned the bank officials, leading to the filing of a petition before the High Court seeking quashing of the criminal proceedings.

Arguments on Behalf of the Petitioners (Bank and Officials):

Senior Advocate Mr. Rakesh Tiku, appearing for the petitioners, advanced several key arguments:

1. OTS Failed Due to Borrower’s Default

It was undisputed that the OTS failed because the complainant failed to adhere to its terms. The agreement clearly stipulated that non-payment within the stipulated time would result in automatic cancellation.

Therefore, the borrower could not claim refund while being in breach of contractual obligations.

2. Right to Adjust ‘No-Lien’ Account Amount

Though the ₹58 lakh was deposited in a ‘no-lien’ account, counsel argued that such designation did not create an irrevocable right in favour of the borrower in the event of default.

Upon cancellation of the OTS due to non-compliance, the bank was fully entitled to adjust the deposited amount toward the outstanding liability.

3. Purely Civil Dispute

The petitioners submitted that the dispute, at best, concerned adjustment or refund of money arising from contractual terms.

The complainant had already invoked civil remedies by filing a civil suit, which was pending adjudication.

Invoking criminal provisions such as Sections 420, 406, and 409 IPC was an abuse of process.

4. No Dishonest Intention at Inception

To constitute an offence under Section 420 IPC (cheating), fraudulent or dishonest intention must exist at the inception of the transaction.

Here, the OTS was entered into in good faith. The failure occurred due to the complainant’s own default. There was no material suggesting that the bank or its officials had any fraudulent intent.

5. Assignment of Debt is Lawful

The bank’s decision to assign its debt to an asset reconstruction company was a commercial decision taken in business wisdom. There was nothing illegal or conspiratorial about such assignment.

Arguments on Behalf of the Complainant and State:

The complainant alleged that:

• The bank dishonestly misappropriated the ₹58 lakh deposit.
• The amount was placed in a ‘no-lien’ account, implying it should not have been adjusted.
• The adjustment and assignment of debt amounted to criminal breach of trust and cheating.
• The bank officials had entered into a conspiracy to deprive him of his money.
• The State opposed the quashing petition, arguing that the allegations disclosed cognizable offences warranting trial.

Court’s Analysis:

Justice Neena Bansal Krishna examined the matter in detail.

1. Nature of OTS Agreements

The Court observed that OTS schemes are contractual arrangements entered into voluntarily by parties. Such agreements typically provide:

• Concessions in repayment.
• Strict timelines.
• Automatic cancellation clauses upon default.

In the present case, the OTS expressly provided that failure to comply would result in cancellation.

2. Adjustment of ₹58 Lakh Was Lawful

The Court held:

“First and foremost, admittedly, OTS failed on account of nonadherence of the terms by the Complainant. Secondly, though this amount of Rs.58 lakhs was lying in ‘No lien’ account, the Bank, in case of default, was well within its right to adjust the said amount towards outstanding amount. It cannot be held to be a case of criminal breach of trust or of cheating.”

Thus, the adjustment of the deposit was contractually justified.

3. Absence of Criminal Intent

The Court emphasized that cheating requires dishonest intention at the inception.

There was no material indicating that the bank entered into the OTS with fraudulent intent. The transaction was commercial and bona fide.

The failure resulted from the complainant’s inability to comply.

4. Civil Nature of Dispute

The Court observed:

“It is merely a case of recovery of Rs.58 lakhs, to which the Complainant is making a claim, which is purely a civil dispute, for which he has already invoked civil remedy by filing a Civil Suit…”

The existence of a civil suit further indicated that the matter was contractual.

5. Assignment of Debt Not Illegal

The Court noted that assignment of debts to asset reconstruction companies is common banking practice.

“There is nothing to show that it was intended to cheat the Complainant of his Rs.58 lakhs.”

Judgment:

The High Court quashed:

• The summoning order.
• The criminal complaint.
• All consequential proceedings against the bank and its officials.

The Court held that the dispute was civil in nature and did not disclose any criminal offence.