Case Explained: Karnataka High Court Draws a Line Between Loan Default and Crime, Stays Probe Against Borrower to Prevent Abuse of Criminal Law – The Legal Affair – Legal Perspective

Introduction:

The Karnataka High Court, in Mummammad Rafan v. The State of Karnataka and Another (CRL.P No. 149/2026), passed a significant interim order staying investigation against a borrower who had been arrayed as an accused in a cheating and criminal breach of trust case registered at the instance of the State Bank of India after his loan account was classified as a Non-Performing Asset. The matter was heard by Justice M. Nagaprasanna, who was called upon to examine whether the criminal justice system could be invoked merely because a borrower failed to service a loan and the account slipped into NPA status. The petitioner, accused No. 15 in the FIR, challenged the registration of the case under Sections 316(2), 316(5), 318(2), 318(3), and 3(5) of the Bharatiya Nyaya Sanhita, contending that the allegations against him did not disclose any criminal intent but only reflected financial difficulty in repayment. The FIR arose from a complaint lodged by the bank alleging cheating and breach of trust by multiple accused, including a bank employee who was accused of irregularly sanctioning loans. At the interim stage, the petitioner sought a stay on investigation, arguing that criminal law was being misused to coerce recovery instead of the bank availing statutory civil remedies such as proceedings under the SARFAESI Act. The Court’s observations during the hearing reflected serious concern over the growing trend of converting commercial and contractual disputes into criminal prosecutions, thereby burdening the criminal justice system and undermining its core purpose.

Arguments on Behalf of the Petitioner:

Counsel appearing for the petitioner submitted that the petitioner was a bona fide borrower who had availed a loan of ₹90 lakhs on 12 January 2024 and that the only allegation against him was non-payment of instalments after 11 November 2024, leading to the classification of the account as a Non-Performing Asset. It was argued that mere failure to repay a loan, without any allegation of fraudulent inducement at the inception of the transaction or dishonest misappropriation of funds, could not attract offences of cheating or criminal breach of trust. The petitioner contended that the FIR was a classic example of abuse of process, where criminal law was set into motion to pressurize borrowers rather than to punish genuine criminal conduct. It was further submitted that the petitioner’s unit was operational and that financial stress had temporarily affected repayment capacity, which is a commercial risk well-recognized in banking law. The petitioner pointed out that the bank possessed multiple statutory remedies under the SARFAESI Act, the Recovery of Debts and Bankruptcy Act, and other civil mechanisms to recover dues, yet it chose to bypass these remedies and directly invoke criminal law. Emphasis was placed on the fact that once the account was declared NPA, the petitioner was allegedly not even permitted to regularize payments, while criminal proceedings were initiated simultaneously. The petitioner relied upon Supreme Court precedents cautioning against the criminalization of civil disputes, particularly the observation that the criminal justice machinery is increasingly misused for oblique motives. On these grounds, it was urged that continuation of investigation would cause irreparable harm to the petitioner’s liberty and reputation, warranting immediate interim protection.

Arguments on Behalf of the State and the Bank:

The State, represented by the High Court Government Pleader, opposed the grant of interim relief and submitted that the FIR disclosed serious allegations involving public money and collusion between borrowers and a bank employee. It was contended that accused No. 1, a bank official, had been suspended for granting spot loans without proper verification of documents, indicating a larger conspiracy that justified criminal investigation. The State argued that since public funds were involved, the matter transcended a mere private dispute between a borrower and a bank and attracted the attention of criminal law. It was submitted that investigation at this stage should not be stalled, as it would impede the discovery of the truth and the unearthing of systemic irregularities in loan sanctioning. The bank’s side maintained that the borrower’s failure to repay, when viewed in conjunction with alleged procedural lapses by the bank employee, raised sufficient suspicion to warrant registration of an FIR. It was further argued that the power of investigation must be allowed to run its course, particularly when allegations of cheating and breach of trust were levelled, and that the High Court should exercise restraint at the interim stage. The respondents thus sought dismissal of the plea for stay of investigation, emphasizing the importance of safeguarding public money.

Court’s Judgment:

After hearing the parties, the Karnataka High Court passed a reasoned interim order staying investigation against the petitioner, while allowing the probe to continue against other accused, particularly the bank employee. Justice M. Nagaprasanna expressed strong prima facie disapproval of the practice of invoking criminal law merely because a loan account had slipped into NPA status. The Court orally observed that if such prosecutions were permitted, the criminal justice system would be immediately clogged and genuine criminal cases would be crowded out, as every bank would resort to criminal complaints against every defaulting borrower. The Court questioned how the mere classification of an account as an NPA could justify setting the criminal law in motion, especially when banks are equipped with comprehensive statutory mechanisms for recovery. While acknowledging that recovery of public money is important, the Court emphasized that preventing misuse of the criminal justice system is equally crucial. In its dictated order, the Court noted that the allegation against the petitioner was confined to availing a loan and defaulting in repayment after a certain date, which led to NPA classification. The Court held that if this alone were treated as a criminal offence, it would represent a textbook case of abuse of process. Reliance was placed on Supreme Court decisions, including Vishal Noble Singh v. State of Uttar Pradesh, where the apex court warned against the misuse of criminal law for vested interests and oblique motives. The Court observed that the bank, without exhausting remedies under SARFAESI or other laws, had chosen to initiate criminal proceedings, thereby raising serious questions about its intent. Taking into account the admitted facts and the absence of any prima facie criminal element attributable to the petitioner, the Court stayed investigation against accused No. 15 until the next date of hearing, while clarifying that the order would not impede investigation against other accused, particularly the errant bank employee. The order thus reinforced the principle that criminal law cannot be used as a shortcut for debt recovery.