Freeing Recovery from Enforcement Paralysis: A Practical Path for Fraud and Settlement Cases

India’s banking sector grapples with a legacy of high-value defaults, where defaulters, often involving willful siphoning via shell entities or overseas flights, exploit the chasm between civil restitution tools and criminal enforcement. Domestic proceedings under the Recovery of Debts and Bankruptcy Act (RDBA), 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, frequently falter against sophisticated evasion tactics. For instance, banks’ charged securities (e.g., mortgages or pledges) become ensnared in Prevention of Money Laundering Act (PMLA), 2002, attachments, rendering them unproductive for years. The ED Annual Report[1] 2024-25 (ED Report/Report) articulates this frustration: “Although these assets earned through criminal activities have been secured, a substantial portion remains unproductive until their final confiscation by courts.” In such scenarios, banks derive no interim yields, despite legal charges and costs.

As per the ED Report, assets worth approximately ₹30,036 crore have been provisionally attached by ED, a 141% increase over the previous year. As of 31st March 2025, the total value of assets under provisional attachment stood at ₹1,54,594 crore.” Further, as per the Report “with the approval of the courts, restitution of ₹15,261 crore was done in 30 cases during F.Y. 2024-25.” Specific cases like Cox & Kings, “ED restored ₹520.8 crore assets in Cox & Kings fraud case.” Reports also highlight recovery of ₹19,187 crore from FEOs (Fugitive Economic Offenders), with Mallya-linked at over ₹14,000 crore.” In Nirav Modi Fraud case involving ₹13,850 crore, assets worth more than ₹3,000 crore are reported to have been attached.

Enforcement agencies like ED and the Central Bureau of Investigation (CBI) sometime provide important support to Banks in high profile cases, transcending civil limitations. The Vijay Mallya saga exemplifies this. ED’s global attachments of shares and properties facilitated recoveries surpassing ₹14,000 crore as of October 31, 2025, against dues of ₹22,065 crore plus ₹31,437 crore in interest, via mutual legal assistance treaties (MLATs) and Non-Conviction Based Confiscation (NCBC). Similarly, in the Prakash Vanijya fraud^[i] (₹234.57 crore diversion from Central Bank of India), ED’s November 28, 2025, restitution of ₹169.47 crore in attached properties directly bolstered bank coffers, illustrating enforcement’s restitutive edge.

The real difficulty does not end with the mere classification of an account as NPA. Matters often escalate because banks, under pressure, mechanically label accounts as fraud or wilful default without appreciating that not every default is fraudulent, nor every business failure is criminal. Directions and expectations from CVC, RBI inspection teams who often do not have operational and ground level experience in banking operations,

statutory auditors and internal vigilance units frequently push bank officials into adopting a defensive posture. To protect themselves from such onslaught, bankers sometimes over-extend these drastic labels even in long-standing, satisfactorily performing accounts where the default is a result of genuine business stress.

Once an account is tagged as fraud or wilful default, it effectively shuts the door on any pragmatic settlement or restructuring. Criminal proceedings are triggered, investigating agencies take custody of documents and title deeds, and statutory bars come into play, even in situations where the secured assets were never part of the alleged fraudulent conduct.

This trend has partly arisen because banks, particularly in high-value corporate exposures, have found the civil recovery framework slow and often ineffective, prompting them to rely on more coercive tools, fraud tagging, wilful default declarations, look-out circulars, and criminal complaints, to exert pressure. While such measures are fully justified in genuine cases of deceit, diversion and malfeasance, these are extraordinary powers and must be used with caution, proportionality, and seriousness. Mechanical or fear-driven invocation dilutes their credibility, clogs investigative machinery, derails recovery efforts, and ultimately undermines public confidence in both the banking system and the regulatory framework

Economic offences, broadly defined as violations impacting financial systems, public revenue, or market integrity, such as cheating, embezzlement, or money laundering, straddle civil restitution and criminal accountability. The classification of such offence as compoundable and non-compoundable offences under Section 320 of the Code of Criminal Procedure (CrPC), 1973 (now, Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023), serves as the fulcrum. Compoundable offences enable party-driven compromises to alleviate judicial burdens, while non-compoundable ones enforce state-led prosecutions to deter systemic threats. Philosophically, this bifurcation embodies a tension between restorative justice and retributive deterrence, with recent judgments navigating exceptions via inherent powers under CrPC Section 482.

The philosophy traces to English common law’s distinction between felonies (non-compoundable, public wrongs) and misdemeanours (compoundable, private injuries), adapted in India to foster harmony while shielding collective interests. Compoundable offences embody restorative justice, reducing court dockets and enabling economic pragmatism. Non-compoundable ones invoke retributivism and utilitarianism, punishment deters white-collar crime, preventing moral hazard where affluent offenders “buy” impunity, as critiqued in ED’s FY 2024-25 report emphasizing “crime should not pay.”

The Supreme Court has iteratively refined quashing non-compoundable proceedings, invoking Article 21 (speedy justice) and Section 482 (inherent powers) to prevent abuse, but with caveats for economic crimes’ public stake.

Foundational Guidelines (Gian Singh v. State of Punjab, 2012[2]): In this landmark judgment, the Hon‘ble Court clarified quashing is permissible for non-compoundable offences if they possess a “predominant civil colour” (e.g., commercial breaches), settlement resolves disputes, and prosecution would be “futile, oppressive, or vexatious.” Heinous crimes (e.g., murder) are ineligible; economic cases qualify if conviction is “remote” and no public loss ensues. The Court observed that “In what cases power to quash the criminal proceeding or complaint or F.I.R may be exercised where the offender and victim have settled their dispute would depend on the facts and circumstances of each case and no category can be prescribed. However, before exercise of such power, the High Court must have due regard to the nature and gravity of the crime. Heinous and serious offences of mental depravity or offences like murder, rape, dacoity, etc. cannot be fittingly quashed even though the victim or victim’s family and the offender have settled the dispute. Such offences are not private in nature and have serious impact on society.”

Narinder Singh v. State of Punjab, 2014[3], extended this to violent non-compoundable, but stressed societal impact, economic frauds with exchequer harm (e.g., bank scams) warrant restraint, as “public wrongs cannot be bartered.”

The Court also laid down broad boundaries for such settlements by observing that

“Those cases where the settlement is arrived at immediately after the alleged commission of offence and the matter is still under investigation, the High Court may be liberal in accepting the settlement to quash the criminal proceedings/investigation. It is because of the reason that at this stage the investigation is still on and even the charge sheet has not been filed. Likewise, those cases where the charge is framed but the evidence is yet to start or the evidence is still at infancy stage, the High Court can show benevolence in exercising its powers favourably, but after prima facie assessment of the circumstances/material mentioned above. On the other hand, where the prosecution evidence is almost complete or after the conclusion of the evidence the matter is at the stage of argument, normally the High Court should refrain from exercising its power under Section 482 of the Code, as in such cases the trial court would be in a position to decide the case finally on merits and to come a conclusion as to whether the offence under Section 307 IPC is committed or not. Similarly, in those cases where the conviction is already recorded by the trial court and the matter is at the appellate stage before the High Court, mere compromise between the parties would not be a ground to accept the same resulting in acquittal of the offender who has already been convicted by the trial court. Here charge is proved under Section 307 IPC and conviction is already recorded of a heinous crime and, therefore, there is no question of sparing a convict found guilty of such a crime.”

Further, the case of State of Madhya Pradesh v. Laxmi Narayan (2019)[4], reiterated quashing viability in financial disputes sans moral turpitude, but not for “economic offences affecting state economy.” The Court laid down following proposition of the law:

• that the power conferred under Section 482 of the Code to quash the criminal proceedings for the non-compoundable offences under Section 320 of the Code can be exercised having overwhelmingly and predominantly the civil character, particularly those arising out of commercial transactions or arising out of matrimonial relationship or family disputes and when the parties have resolved the entire dispute amongst themselves;
• such power is not to be exercised in those prosecutions which involved heinous and serious offences of mental depravity or offences like murder, rape, dacoity, etc. Such offences are not private in nature and have a serious impact on society;
• similarly, such power is not to be exercised for the offences under the special statutes like Prevention of Corruption Act or the offences committed by public servants while working in that capacity are not to be quashed merely on the basis of compromise between the victim and the offender;”

K. Bharthi Devi v. State of Telangana (October 3, 2024)[5]: In this case, a loan fraud (IPC- 120B, 420), quashed proceedings post-OTS, holding settlement distinguishes compounding from quashing; civil overtone and low

conviction likelihood justified closure, philosophically favouring restitution over retribution in “predominantly commercial” cases.

On the contrary there have been rulings where it was ruled that economic offences with corruption and public loss (e.g., PMLA-linked frauds) cannot be quashed on settlement, as they transcend private compromise, deterrence trumps individual accord to protect financial integrity.

However, the latest ruling the Supreme Court in Hemant S. Hathi v. CBI[6] (November 19, 2025), where the ₹5,100 crore settlement involving Sandesara brothers was approved quashing multi-agency probes (CBI, ED, SFIO) by exercising extra ordinary powers under Article 142 of the Constitution, deeming it a “civil/commercial” dispute, and caveated as non-precedential for “peculiar facts,” yet signals pragmatic leniency amid delays (8+ years), balancing recovery with accountability.

These judgments reflect an evolution from strict non-interference in public-interest crimes to conditional quashing where restitution serves justice.

[2]Prakash Vanijya fraud (₹234.57 crore diversion from Central Bank of India), ED’s November 28, 2025.

[3] Narinder Singh & Ors vs State Of Punjab & Anr- Supreme Court- Decided on 27 March, 2014

[4] The State Of Madhya Pradesh vs Laxmi Narayan – Supreme Court – Decided on 5 March, 2019

[5] Bharti Devi and Anr Vs State of Telangan & Anr., 2024 (SC) 775

[6]WRIT PETITION (CRIMINAL) NO. 37 OF 2020

In the light of emerging jurisprudence, to mitigate challenges of recovery a hybrid models offers a viable option to effect recoveries for banks. RBI’s updated fraud guidelines (2025) emphasize early reporting to law enforcement while enabling OTS, however, the Supreme Court ruling in Hemant S. Hathi v. CBI, hints at judicial pragmatism, though caveated as non-precedential. In essence, while ED’s motto, “Crime should not pay”, drives a 93.6% conviction efficacy, but the system’s empathy for banks’ plight demands streamlined timelines and transparent OTS-criminal interfaces.

This case originates from a 2017 banking consortium fraud involving Gujarat-based Sterling Biotech Ltd. and its promoters, the Sandesara brothers (Nitin and Chetan), who allegedly diverted ₹5,383 crore in loans from 17 public sector banks (e.g., SBI, PNB) through shell entities, fictitious transactions, and overseas routing, escalating to over ₹15,000 crore with interest and penalties. The brothers fled to Nigeria and Albania in 2017 using forged passports, triggering investigation by various law enforcement agencies. CBI FIRs (August/October 2017) under IPC Sections 120B (conspiracy), 420 (cheating), and Prevention of Corruption Act. ED’s PMLA Enforcement Case Information Reports (ECIRs) for money laundering. SFIO investigations under Companies Act Section 447 (fraud). IT Department probes under Black Money Act. FEOA proceedings declaring the brothers fugitives (assets worth ₹900+ crore attached, per ED FY 2024-25 data).

Petitioners Hemant S. Hathi and Chetan Jayantilal, chartered accountants filed writs in 2020 seeking quashing, arguing the matter was a commercial dispute amenable to settlement. Prior to the 2025 order of the Supreme Court, interim reliefs included asset releases for One-Time Settlements (OTS) and Insolvency and Bankruptcy Code (IBC) resolutions yielding ₹1,192 crore to banks via NCLT against Sterling entities. The consolidated outstanding, post-adjustments (e.g., ₹3,507.63 crore prior deposits), stood at ₹5,100 crore for Indian guarantors and foreign entities.In this background, on November 19, 2025, Justices J.K. Maheshwari and Vijay Bishnoi disposed of the petitions, directing quashing of all proceedings (FIRs, charge sheets, ECIRs, attachments, FEOA actions) upon deposit of ₹5,100 crore by December 17, 2025, in tranches into court-supervised fixed deposits for proportional bank

disbursement. Failure revives cases. The bench characterized the disputes as “predominantly civil/commercial,” resolved via “full and final settlement,” invoking Article 142’s “complete justice” powers.

The judgment’s reasoning pivots on the two pillars:

• Peculiar Facts: Overlapping multi-agency probes (CBI, ED, SFIO, IT) created procedural redundancy, with trials pending since 2017, exacerbating delays attributable to “inherent complexity” and predicate offence linkages.
• Public Interest in Restitution: Post-settlement, “no purpose is served” by prosecutions, as ₹5,100 crore directly benefits public exchequer. The court exercised inherent powers to “do complete justice,” treating the fraud as resolvable commercially, not mandating retribution where recovery heals economic harm.

It is to be noted that in Sandesara brother case, eight years of probes yielded attachments but no convictions. Morally and legally, the ruling navigates a tightrope. Legally, it subordinates stringent, non-compoundable statutes to equitable closure, raising Article 14 equality concerns, affluent offenders negotiate global OTS, while others endure full trials. Morally, restitution restores benefit the financial system but critics argue that it dilutes deterrence, and ED’s moto “Crime should not pay”.

However, as seen above, the judgement builds on precedents like Gian Singh v. State of Punjab (2012) for compoundable quashing and Tarina Sen v. Union of India (2024) for OTS in civil-tinged frauds, potentially de-stigmatizing entrepreneurship amid RBI’s fraud classification reforms.

The Hathi judgment, though expressly labelled as non-precedential, reflects a broader judicial recognition of realities surrounding commercial defaults. It underscores that while fraud and wilful wrongdoing must be dealt with firmly, not every contractual breach or business failure warrants the full weight of the criminal justice system. The increasing trend of mechanically branding accounts as fraud or wilful default, often influenced by CVC observations, RBI inspection remarks, statutory auditors, and internal vigilance pressures, has led to an environment where bankers act defensively rather than prudently. Such labels, once affixed, freeze settlement prospects, trigger criminal processes, delay recovery, and drag the system into protracted investigations, even where secured assets have no nexus with the alleged fraud.

Against this backdrop, Hathi illustrates that in exceptional and well-monitored situations, prioritising restitution and recovery over retribution may in fact better serve the banking system and public interest. The recovery of ₹5,100 crore, despite years of litigation, shows that restorative outcomes can be aligned with policy goals without letting wrongdoing escape scrutiny. The key is calibrated discretion, not blanket criminalisation of civil defaults, nor unprincipled compromise of genuine fraud.

Going forward, RBI and investigative agencies must evolve a pragmatic framework that allows banks, in appropriate and well-scrutinised cases, to pursue settlements and withdrawal of criminal cases, even where criminal proceedings are under investigation, have been initiated but or not concluded in any conviction, provided such settlements demonstrably maximise recovery, protect the integrity of the financial system, and are subject to a transparent criteria. Such a framework should also ensure that stricter measures, fraud tagging, wilful default declarations, look-out circulars, are reserved for cases of real malfeasance and are not mechanically invoked due to institutional fear or audit pressure. Ultimately, India’s debt-recovery ecosystem must be guided by fairness, accountability and efficiency. Enforcement should ensure that “crime does not pay,” but equally, recovery must not be held hostage to procedural paralysis or over-criminalisation. A balanced, principled and recovery-centric regulatory approach is essential to safeguard public funds while preserving confidence in the banking and business environment.

We trust you will find this an interesting read. For any queries or comments please write to us at insights@elp-in.com or write to our authors:

Mukesh Chand, Senior Counsel – Email- mukeshchand@elp-in.com

Disclaimer: The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice.