SBI Bank should provide an opportunity to hear from borrowers before labelling their accounts as fraudulent: The Supreme Court of India

Title- State Bank of India and Ors VS. Rajesh Agarwal and Ors.

Court- The Supreme Court of India.

Case No. – Civil Appeal No. 7300 of 2022.

Decided on- March 27, 2023.

Coram- Before Dr. Dhananjaya Y Chandrachud, CJI and Hima Kohli, J

Introduction- Here in this case, the appellant challenged to 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 on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent. In this case, the Supreme Court considered the long pending issue that whether the principles of natural justice, particularly the rules of audi alteram partem, should be necessarily read in to the Master Directions on Frauds to save it from the vice of arbitrariness.

Facts- B.S. Limited company availed loans from various banks. The company failed to meet its payment obligations to lender banks, thereby defaulting in repayment of credit facilities. All lenders banks have established a Joint Lender Forum (JLF) as per the Master Directives on Frauds, with State Bank of India as the lead bank.

The JLF declared the company’s assets as Non-Performing Assets on 29 August 2016. The IDBI bank red flagged the account of the company. 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 and Fraud Identification Committee also 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.

The judgment of a Division Bench of the High Court on 10 December, 2020, 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.

Issues- Whether opportunity of being heard should be provided to borrowers?

Appellants argued that,

8. Under Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds, no notice was given to the borrowing company or its promoters, and directors including whole-time directors. They are not given the opportunity to present a defence, and even a copy of the final decision was not provided to them.
9. There was a direct impact on the fundamental rights of the individuals concerned as a consequence of the classification of an account as fraud.
10. 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.
11. 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.
12. 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.

Respondents contended that,

1. It was necessary to protect the interests of the depositors and banks by the Master Directions on Frauds from the growing instances of frauds.
2. The provisions of the Master Directions on Frauds must be construed keeping in mind the following thresholds: (i) justness; (ii) fairness towards the parties aggrieved; (iii) reasonability; and (iv) proportionality between the mischief and the corrective measure.
3. The procedure for classifying an account as fraud under the Master directions on Frauds is not arbitrary.
4. Principles of natural justice are not applicable at the stage of setting the process of criminal law in motion.
5. The requirement of notice or prior hearing could be excluded if it impedes the taking of prompt action.

Court Analysis and Decision- The Supreme Court concluded that, debarment under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower and the Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted. The Court held that the application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. It is reasonably practicable for the lender banks to provide on opportunity of a hearing to the borrowers before classifying their account as fraud. The Court held “Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness.”

The Supreme Court set aside the judgments of the High Court of Telangana and the High Court of Gujarat. The appeal was also disposed.

Insight- What is reasonable opportunity of being heard?

This is the first principle of civilised jurisprudence and is accepted by laws of men and god. It means before an order is passed against any person, reasonable opportunity of being heard must be given to him.

WRITTEN BY:Nireesha rao

The Supreme Court of India

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