State Bank of India vs Rajesh Agrawal
Civil Appeal no 7300 of 2022
Facts:
1.Various appeals was filed challenging the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. These directions were challenged before different High Courts primarily on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent.
2.BS Limited availed loans amounting to Rs. 1406 crores from various banks. The company failed to meet its payment obligations to lender banks, thereby defaulting in repayment of credit facilities. In accordance with the Master Directions on Frauds, all the lender banks formed a Joint Lenders Forum4 with State Bank of India as the lead bank.
3.On 15 February 2019, the JLF declared the account of the company as fraud by invoking Clause 2.2.1(g) of the Master Directions on Frauds. Subsequently, the Fraud Identification Committee8 passed a resolution on 31 July 2019 identifying the company’s account as fraud. The company filed a writ petition challenging both the decision of the JLF dated 15 February 2019 and the resolution of the FIC dated 31 July 2019 before the High Court of Telangana
4.By a judgment dated 10 December 2020, a Division Bench of the High Court allowed the writ petition by holding that the principle of audi alteram partem ought to be read into Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds.
Issue: Whether opportunity of being heard should be provided to borrowers?
Arguments:
For Appellants:
1.Counsel for the appellants submitted that Under Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds, no notice is given to the borrowing company or its promoters, and directors including whole-time directors. They are not given an opportunity to present a defense and even a copy of the final decision is not provided to them
2.The Master Directions on Frauds are violative of Articles 14, 19, and 21 of the Constitution of India as they debar a company and its promoters and directors from accessing financial and credit markets for a period of five years without even providing a show cause notice or opportunity of being heard.
3.The Master Directions on Frauds does not stand good on other facets of audi alteram partem such as notice of allegations levelled and evidence collected, notice of the penalty proposed, among others. According to the procedure laid down under the Master Directions on Frauds, a company or its promoters and directors are not even informed that they have been classified as fraud and that a penalty has been imposed upon them.
4.Although the purpose and object of the Master Directions on Frauds is speedy detection and reporting of fraud to law enforcement agencies, such exigencies cannot be a valid ground to exclude the applicability of the principles of natural justice.
For Respondents:
1.It was argued that The Master Directions on Frauds were necessitated to protect the interests of depositors and banks from the growing instances of frauds. The clauses of the Master Directions on Frauds, therefore, must be interpreted in light of their purpose and objective, that is, timely detection and dissemination of information and reporting about the fraud.
2.The procedure for classifying an account as fraud under the Master Directions on Frauds is not arbitrary. The classification is done only for reporting the matter to law enforcement agencies. The banks already have in place structured organizational setup to identify and investigate fraudulent activities in bank accounts.
3.Principles of natural justice are not applicable at the stage of setting the process of criminal law in motion. Since the lender bank is an injured party in case of fraudulent accounts, it has the right to report the crime to the law enforcement agencies without giving an opportunity of being heard to the fraudulent borrower. The requirement of notice or prior hearing could be excluded if it impedes the taking of prompt action. Further, it is not an inviolable rule that personal hearing ought to be given in all cases.
Decision: Opportunity of being heard should be provided to the borrowers while classifying their account as fraudulent.
Rationale:
1.Hon’ble Supreme Court noted that “The process of forming an informed opinion under the Master Directions on Frauds is administrative in nature. This has also been acceded to by RBI and lender banks in their written submissions. It is now a settled principle of law that the rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions.
2.Relying on the clauses of master direction it held that The classification of an account as fraud not only results in reporting the fact to investigating agencies, but has other penal and civil consequences as specified in Clauses 8.12.1 and 8.12.3. Classification of the borrower’s account as fraud under the Master Directions on Frauds virtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets. The bar from raising finances could be fatal for the borrower leading to its ‘civil death’ in addition to the infraction of their rights under Article 19(1)(g) of the Constitution.
3.Debarring a borrower under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrower for being untrustworthy and unworthy of credit by the banks. This Court has consistently held that an opportunity of a hearing ought to be provided before a person is put on a blacklist
4.Classification of a borrower’s account as fraud has the effect of preventing the borrower from accessing institutional finance for the purpose of business. It also entails significant civil consequences as it jeopardizes the future of the business of the borrower. Therefore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds. The action of classifying an account as fraud not only affects the business and goodwill of the borrower, but also the right to reputation.
5.It finally held that the rule of audi alteram partem ought to be read in Clauses 8.9.4 and 8.9.5 of the Master Directions on Fraud. Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud. A reasoned order has to be issued on the objections addressed by the borrower.
Order Copy:
