Kiran Raj

The Madras High Court, Single Bench of Justice G.K. Ilanthiraiyan has issued a judgement upholding the order directing an investigation into allegations of fraudulent transactions linked to a financial dispute involving a banking institution and a borrower. The court examined the merits of the allegations and upheld the directive for police investigation issued by the Metropolitan Magistrate for Exclusive Trial of CCB Cases (Relating to Cheating Cases in Chennai) and CBCID Metro Cases, Egmore, Chennai.

The dispute originated when the first respondent, a businessman affiliated with multiple companies, including M/s. Vinitha Associates Ltd., M/s. Shopper's Spot (Chennai) Ltd., M/s. Mahalaxmi Inn Pvt. Ltd., M/s. Mahalaxmi & Sons, and M/s. Vinitha Resorts Ltd., approached City Union Bank Limited for financial assistance. These companies availed of credit facilities beginning in 2017, securing significant loan amounts.

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Due to business downturns, particularly exacerbated by the COVID-19 pandemic, the respondent's companies struggled to meet their repayment obligations. Consequently, City Union Bank classified the accounts as non-performing assets (NPAs) and initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The respondent proposed a one-time settlement (OTS), which the bank accepted under specific conditions requiring staggered payments, with an agreement that properties used as collateral would be released upon full compliance with the settlement terms.

The respondent alleged that despite adhering to the OTS terms and clearing substantial dues, the bank failed to remove the encumbrances on the pledged properties. While the bank returned the title deeds and parent documents of M/s. Vinitha Associates Limited and Shopper's Spot (Chennai) Limited, other properties remained under a continuing mortgage. The first respondent claimed that the bank provided misleading assurances and delayed the release of properties, causing financial strain and legal complications.

The allegations further included that the bank had made false entries in mortgage-related documents and had uploaded misleading information to government portals such as the Ministry of Corporate Affairs and the Registrar of Companies, thereby impeding the respondent’s business operations. These acts, according to the respondent, resulted in financial damages and loss of investor confidence, as potential buyers and business partners were deterred due to outstanding encumbrances over company assets.

The first respondent initially lodged a complaint with the Commissioner of Police, Greater Chennai, detailing the alleged fraudulent transactions and misrepresentations by the bank. The complaint was subsequently referred to the Inspector of Police, R-1 Mambalam Police Station, for inquiry. However, the police inquiry was closed, citing the pendency of related civil proceedings before various courts. Dissatisfied with the closure, the respondent approached the Metropolitan Magistrate with a private complaint under Section 156(3) of the Code of Criminal Procedure (Cr.P.C.), requesting a full investigation.

The Magistrate, upon examining the materials, directed the police to conduct a detailed investigation and file a report. The bank and its senior officials challenged this order before the High Court, contending that the complaint was baseless, that the matter was purely civil in nature, and that criminal proceedings were being initiated to exert undue pressure on the financial institution.

The High Court examined whether the Magistrate had correctly exercised jurisdiction in directing the police to investigate under Section 156(3) of Cr.P.C. Justice Ilanthiraiyan reviewed the statutory framework governing the discretionary power of Magistrates in ordering criminal investigations.

The court recorded, "The power of the Magistrate under Section 156(3) of Cr.P.C. to direct further investigation is clearly an independent power and does not stand in conflict with the power of the State Government. It can be exercised by the Magistrate even after submission of a report by the investigating officer."

Regarding the procedural aspect, the court further noted, "The Magistrate, before taking cognizance of the offense, can order an investigation under Section 156(3) of the Code. If he does so, he is not to examine the complainant on oath." The judgment stated that the provision allows for a thorough inquiry to be conducted where prima facie allegations suggest possible criminal conduct.

Addressing the bank's contention that the dispute was of a civil nature, the High Court analysed the allegations of fraudulent documentation and electronic record manipulation. The court observed that "the mortgage documents and extension of mortgage documents were in the custody of the petitioners. Thereafter, the first respondent came to understand that false entries were created in the Memorandum of Deposit of Title document."

The court also referred to the serious nature of the allegations, which extended beyond contractual breaches into potential criminal misconduct. The judgment noted that "False and fabricated records were uploaded on official government portals, affecting the complainant's financial credibility and hindering business transactions." It held that the presence of such allegations warranted police investigation rather than summary dismissal.

Further, the court addressed precedents governing the Magistrate’s powers in such situations. The judgement cited prior Supreme Court judgments affirming that "Even in matters arising from financial transactions, criminal liability is not excluded where allegations of fraud, forgery, or misrepresentation exist."

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The court concluded that the Magistrate had acted within his jurisdiction in directing a police inquiry and that the order did not suffer from legal infirmities. The bank’s argument that the case should be limited to civil proceedings was found unconvincing given the nature of the allegations.

The court dismissed the petition challenging the Magistrate’s order, concluding that "there is no infirmity or illegality in the order dated 01.04.2024 passed by the learned Metropolitan Magistrate for Exclusive Trial of CCB Cases (Relating to Cheating Cases in Chennai) and CBCID Metro Cases, Egmore, Chennai." The directive for police inquiry and subsequent action within prescribed timelines was upheld.

Advocates Representing the Parties

For Petitioners: Mr. Abudukumar Rajaratnam, Senior Counsel, Mr. Sharath Chandran

For Respondents: Mr. B. Kumar, Senior Counsel (For R1), M/s. Aruna Ganesh (For R1), Mr. K.M.D. Muhilan, Government Advocate (Crl. Side) (For R2)

Case Title: City Union Bank Limited & Ors. vs. Sumerchand Bafna & Anr.

Case Number: Crl.O.P.No.15172 of 2024

Bench: Justice G.K. Ilanthiraiyan

[Read/Download order]