Can Banks File FIR Against Borrower When Builder Fails To Complete Project? Karnataka High Court Gives Big Relief

The Karnataka High Court quashed a criminal case filed by the State Bank of India (SBI) against a home loan borrower for not paying the instalments after the builder failed to deliver the project. Justice Suraj Govindaraj allowed the petition and quashed the FIR filed against the petitioner (borrower).

While the Bank alleged charges of cheating and criminal breach of trust, the court deprecated the bank’s conduct for filing a criminal case against the borrower. It clarified that financial liability cannot be considered of a criminal nature without prima facie evidence of lying or dishonest intent.  

Case Background

The petitioner (borrower) booked a house in 2020 and entered into a tripartite agreement executed on February 8, 2020, between the developer partnership firm, the bank (SBI), and himself. Under the agreement, SBI sanctioned him a loan of Rs 39.92 lakh for purchasing a flat in the "Grandeur Park" project in Bengaluru.

The agreement had this condition that if the builder failed to complete the project or cancel the booking, the builder would be bound to refund the entire amount directly to the bank.

Notably, the builder had neither completed the project nor executed a sale deed in the borrower’s favour. Instead, the builder sold the apartment to a third party in March 2023, without taking consent from the borrower. When the borrower defaulted on loan repayment, SBI filed a complaint against both the borrower and the developer.

Arguments

The petitioner’s counsel argued that the petitioner was innocent and is now left without money, title deed, or the flat. He contended that any breach of the tripartite agreement is linked to the developer. He argued that the petitioner has received no financial benefits from the unauthorised third-party sale of his flat by the builder.

The counsel representing the SBI contended that a loan of Rs 39.92 lakh remained completely unpaid. They argued that the unauthorised sale of the mortgaged property amounts to fraudulent intent and requires police investigation so that the criminal role of the parties (borrower and the builder) in the transaction can be determined.

Court Observation

The Court observed that the bank’s complaint didn’t disclose any criminal intent on the part of the borrower. It noted that the borrower had never received the title to the flat or any proceeds from the flat’s sale to the third party.

It also noted and highlighted that the tripartite agreement explicitly placed the obligation on the builder, not the buyer, to repay the bank if the project is not completed.

The bench condemned the bank’s action, stating, “The action of the Bank in setting the criminal machinery in motion against the petitioner, in the facts and circumstances of the present case, is wholly unwarranted and deserves to be deprecated. A financial institution, particularly a public sector bank, is expected to act with due care and circumspection before invoking the criminal process against a customer. The existence of an outstanding loan or the failure of the underlying transaction, by itself, cannot be treated as constituting a criminal offence.”

Court Judgment

The court held, “The petitioner cannot, merely because he continues to be shown as the borrower in the loan account, be made to answer criminally for the acts of the builder in dealing with the property contrary to the terms of the tripartite agreement.”

It further stated, “The initiation and continuation of criminal proceedings against the petitioner in such circumstances is therefore wholly unjustified. The criminal process cannot be permitted to become a substitute for remedies available to the Bank for enforcement of its contractual or financial rights, particularly when the material on record does not disclose the requisite dishonest intention, deception, misappropriation or other criminal conduct on the part of the petitioner.”

Finding the criminal proceedings against the borrower an absolute abuse of the judicial process, the High Court allowed the petition and quashed the FIR case.