Bank Cannot Prosecute a Flat Buyer for a Builder's Default: Karnataka High Court Order
On September 25, 2026, the Karnataka High Court quashed FIR No. 55/2024 against a home loan borrower whose builder left the Grandeur Park project incomplete and sold the flat to a third party, holding the tripartite agreement put repayment on the builder and deprecating the bank's criminal complaint.
In February 2020, a buyer signed a tripartite agreement with a developer and the State Bank of India to buy Flat B-306, a 1,050 square foot unit on the third floor of a building called Grandeur Park. The bank agreed to lend Rs 39,92,000. The project was never completed. In March 2023, the developer sold the flat to a third party. The buyer never got a sale deed, never got the flat, and stopped paying the loan. Then the bank filed a criminal complaint against the buyer.
On September 25, 2026, the High Court of Karnataka quashed that case. In its order in Pritesh Bari v. State of Karnataka, Criminal Petition No. 3230 of 2025, Justice Suraj Govindaraj held that a borrower 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. The Court also deprecated the bank's decision to set the criminal law in motion.
The short answer. The Karnataka High Court quashed FIR No. 55/2024 at Shankarapura police station against a home loan borrower whose builder failed to complete the project and sold the flat to a third party. It found the tripartite agreement put the obligation to repay the bank on the builder if the project was shelved or not completed, and that the borrower got no title and no benefit from the sale. The trade-off: this protects borrowers from criminal cases over a builder's default, but the order makes clear it is about criminal liability only; the loan account and the bank's civil remedies are a separate matter.
What happened with the Grandeur Park flat?
According to the order, the tripartite agreement dated February 8, 2020 was between the buyer, the developer and the bank, which agreed to lend Rs 39,92,000 for Flat B-306 in Grandeur Park, to be built and handed over by the developer. The bank's complaint said the developer sold the flat to M/s. Benaka Enterprises under a registered sale deed dated March 27, 2023, without the bank's consent, while the loan of Rs 39,92,000 had not been repaid by either the buyer or the developer.
The bank's Assistant General Manager filed a private complaint before the IV Additional Chief Metropolitan Magistrate, Bengaluru, in PCR No. 8789/2024, against the buyer as accused No. 1 and the developer and its partners as accused Nos. 2 to 5. On August 22, 2024, the Magistrate referred it for investigation, and FIR No. 55/2024 was registered at Shankarapura police station on September 25, 2024. The offences listed ran from criminal breach of trust and cheating to forgery and criminal intimidation.
What did the tripartite agreement say?
That the builder, not the buyer, would return the money if the project failed. The order records the buyer's description of the key clauses. Clause 1 gave the bank a paramount lien over amounts paid by the borrower to the builder. Clause 2 recorded the builder's no objection to the borrower mortgaging the apartment and proportionate land share to the bank. Clause 4 said that if the builder cancelled the booking for the borrower's default, or shelved the project for any reason, the builder would pay the entire amount received from the borrower to the bank. Clause 5 said the same if the builder failed to complete the project. Clause 6 required the builder to record the bank's charge and not to transfer the apartment without the bank's prior written consent.
The Court said that in each of these eventualities, the obligation contemplated under the agreement was upon the builder to pay the bank the entire amount it received from the borrower. It found nothing in the material before it showing a corresponding obligation on the buyer to make good what the agreement required the builder to repay.
| Clause, as recorded in the order | What it said | Who it bound |
|---|---|---|
| Clause 1 | Bank's paramount lien over amounts paid to the builder | Builder and borrower |
| Clause 2 | No objection to mortgaging the flat to the bank | Builder |
| Clause 4 | On cancellation for borrower default or shelving, builder repays bank | Builder |
| Clause 5 | On failure to complete, builder repays bank the amount received | Builder |
| Clause 6 | Record bank's charge; no transfer without bank's written consent | Builder |
Why did the High Court quash the case against the buyer?
Because there was no criminal element on the buyer's side. The Court noted the material fact that no sale deed was ever executed in the buyer's favour, so the buyer did not acquire title and did not derive any benefit from the sale to Benaka Enterprises. It found no material showing the buyer participated in that sale, benefited from it, or acted in concert with the developer to deceive or cause loss to the bank.
The bank had argued otherwise. Its counsel submitted that the loan had been serviced neither by the buyer nor by the developer, that the sale to Benaka Enterprises coupled with non servicing of the loan gave rise to a serious allegation of intent to deceive, and that the police should be allowed to investigate the circumstances of the sale, the use and repayment of the loan, and each accused person's role. It urged the Court not to interdict the investigation on the strength of the buyer's defence.
The Court held that the allegations, even taken at face value, did not disclose the necessary criminal element against the buyer, and that continuing the proceedings would amount to an abuse of the process of law. It drew a clear line: the distinction between a subsisting contractual or financial liability and criminal liability cannot be lost sight of, and the former cannot assume the character of a criminal prosecution without the ingredients of the latter.
What did the Court say about the bank?
That its conduct was wholly unwarranted. The Court called it disconcerting that the bank, a party to the tripartite agreement and fully aware of the builder's obligations under it, chose to set the criminal law in motion against the buyer. It said 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.
It added that an outstanding loan, or the failure of the underlying transaction, cannot by itself be treated as a criminal offence, and that criminal prosecution cannot be used as a means of securing recovery of a financial liability unless the foundational ingredients of the offence are prima facie made out. If the bank was aggrieved by the builder's acts, the Court said, it could have pursued the persons responsible in accordance with law.
Does this mean the buyer's loan is wiped out?
No, and the order does not say so. The Court quashed the criminal proceedings insofar as the buyer is concerned. It expressly said its observations are confined to the buyer's case and are not an opinion on the allegations against the developer and its partners. It also described the bank's grievance as a civil dispute of recovery of money, and referred to remedies available to the bank for enforcing its contractual or financial rights.
So a buyer in this position still has to deal with the loan account through civil and contractual channels. The order's value lies in the reasoning that a tripartite agreement can place the repayment obligation on the builder in specified events, and that being the named borrower does not make you criminally liable for what the builder did. It is also worth noting what the order did not decide. It did not examine whether the developer or its partners committed any offence, and it did not rule on how the bank should recover its money. Those questions remain open. Our explainer on a builder paying EMIs until possession covers related risks, and our guide to sanction letters and disbursement explains how loan money moves.
What should a Bengaluru buyer with a tripartite loan do?
Read the tripartite agreement before signing, and act early if the project stalls. The case shows that the clauses about shelving, failure to complete and transfer without consent can decide where liability falls.
- Get a full copy of the tripartite agreement and read the clauses on cancellation, shelving and non completion.
- Check whether the builder must repay the bank directly if the project fails.
- Confirm the clause barring transfer of your flat without the bank's written consent.
- Keep records of every payment you make to the builder and the bank.
- If construction stops, write to both the bank and the builder and keep copies.
- Check the Encumbrance Certificate periodically for any sale of your unit to someone else.
- If you receive a criminal summons over a builder's default, take legal advice promptly.
Frequently asked questions
Can a bank file a criminal case against a borrower when the builder fails?
In Pritesh Bari v. State of Karnataka, decided on September 25, 2026, the Karnataka High Court quashed such a case. It held that a borrower cannot, merely because he is shown as the borrower in the loan account, be made to answer criminally for the builder's acts, absent material showing his participation or benefit.
Who repays the bank if a builder shelves a project under a tripartite agreement?
It depends on the agreement. In this case, the order records clauses saying that if the builder shelved the project or failed to complete it, the builder would pay the bank the entire amount received from the borrower. The Court relied on these clauses in quashing the case against the buyer.
Does the order cancel the borrower's home loan?
No. The Court quashed only the criminal proceedings against the buyer. It described the bank's grievance as a civil dispute of recovery of money, referred to the bank's remedies for enforcing contractual or financial rights, and expressed no opinion on the allegations against the developer and its partners.
What did the developer do with the flat in this case?
According to the bank's complaint as recorded in the order, the developer did not complete the project and sold Flat B-306 in Grandeur Park to M/s. Benaka Enterprises under a registered sale deed dated March 27, 2023, without the bank's consent and without executing a sale deed for the buyer.
Last updated 2026-10-29. PropNewz Team.
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