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HIGH COURT OF DELHI
Date of Decision: 4th December, 2025
ASHOK TIWARI .....Petitioner
Through: Mr. Ashutosh Thakur and Mr. Gunjesh Ranjan, Advocates.
Through: Mr. Dhaval Mehrotra, Mr. Aman Varma, Ms. Aditi Desai and Ms. Riya Wasade, Advocates for R-1/RBI.
Mr. Samarendra Kumar, Mr. Sandeep Soni, Mr. Vishnu Jaival, Mr. Adarsh Raj Singh, Ms. Priyanka Singh and Mr. Sumit Chanchal, Advocates for R-2/UBI.
JUDGEMENT
JYOTI SINGH, J. (ORAL)
JUDGMENT
1. This writ petition is filed on behalf of the Petitioner under Article 226 of the Constitution of India seeking the following reliefs:- “(i) Issuance of appropriate Writ/ Order or Directions in the nature of certiorari or any other appropriate writ thereby quashing & setting aside the classification / declaration of the account of Vayam Technologies Limited i.e. the Company as Fraud by Respondent No.2; and/or
(ii) Issuance of appropriate Writ/ Order or Direction in the nature of mandamus directing the Respondents not to take any action against the Petitioner or the Company or any of its Officers/Guarantors pursuant to the classification/declaration of the Account of the Company as Fraud; and/or
(iii) Issue of appropriate Writ/Order or Direction directing the
Respondents to withdraw any complaint or proceeding or publication that may have been initiated by them pursuant to the classification/declaration of the Account of the Company as Fraud; and/or
(iv) Issuance of appropriate writ/order or directions thereby declaring the action of Respondent no.2 as contrary to the Master Directions on Frauds–classification and reporting by commercial banks and select F.Is dated 01.07.2016 (as updated from time to time) which imbibes within itself the principles of natural justice as laid down by the Hon’ble Supreme Court of India in (2023) 6 SCC 1; and/or
(v) Issuance of an appropriate Writ/Order or Direction in the nature of mandamus or any other appropriate Writ/Order or Direction restraining the Respondents from acting on the said Master Directions.”
2. To the extent relevant, case of the Petitioner is that Petitioner is the Chairman & Managing Director/Promoter of M/s Vayam Technologies Limited (‘Vayam’) holding 81.92% shares of Vayam, which is engaged in providing IT services.
3. It is averred that on 08.06.2015, Reserve Bank of India came up with Strategic Debt Restructuring (‘SDR’) providing for conversion of loan into equity shares of the borrowers. Consortium of banks namely, (1) Canara Bank, (2) IDBI Bank Ltd., (3) Bank of Baroda (erstwhile Dena Bank), (4) Union Bank of India (erstwhile Corporation Bank) and (5) Axis Bank invoked SDR in case of Vayam on 31.05.2017 and entered into Management Framework Agreement dated 22.12.2017 by which outstanding Debt was converted into equity and shareholding of Petitioner dropped from 81.92% to 34.4%. Respondents became majority shareholders of Vayam with more than 56.6% equity shares and voting rights.
4. It is stated that consortium confirmed conversion of outstanding Debt/loan into equity shares of Vayam on 27.12.2017. On 24.01.2018, Ministry of Corporate Affairs was informed about the amended Articles and Memorandum of Association by filing form no. MGT-14. On 12.02.2018, RBI issued a circular by which the SDR circular dated 08.06.2015 was scrapped. The accounts of Vayam were classified as NPA on 23.05.2018 in view of this circular, even though consortium members had reiterated the fact that SDR scheme was implemented.
5. It is stated that Petitioner challenge this action before this Court in W.P. (C) No.7221/2018 in which a prima facie finding was rendered by the Court on 16.07.2018 that the contention of Dena Bank that SDR was not implemented as the allotted shares were not in dematerialized form seemed untenable. Conversion of Debt into equity shares is not dependent on the form of shares as also that any proceedings instituted by the banks for recovery of Debt would be contested on the ground that what is outstanding in favour of the bank is not a loan but outstanding share capital and their priority in the order of preference for payments would also be determined on the said basis.
6. It is further stated that on 23.07.2018, it was resolved in the consortium meeting that inter alia Vayam shall arrange a meeting with its strategic investor and also that there would be a change of management through open bidding process. In the 18th AGM of Vayam, consortium members participated as Vayam’s shareholders. The Supreme Court in judgment Dharani Sugars and Chemicals Limited v. Union of India and Others, (2019) 5 SCC 480, declared the RBI circular as ultra vires and writ petition of the Petitioner was allowed. On 13.02.2020, Respondent No.2/Union Bank of India wrote to RBI confirming Vayam’s account as a no-fraud account. However, since the banks froze the accounts of Vayam and threatened recovery, on 10.06.2020, Vayam filed W.P. (C) No.3437/2020 and banks were restrained to initiate any coercive action. Consortium banks filed a common counter affidavit on 17.06.2020 acknowledging the borrower as a viable company with receivables to the tune of Rs. 354 crores. On 23.12.2020, Court recorded a finding that consortium has to take its own decision being majority shareholders whether business of Vayam should continue or they wish to pursue other remedies. On 05.07.2021, Respondent No.2 issued loan recall notices to Vayam and the guarantors followed by Insolvency Notices to the personal guarantors. On 09.12.2021, Vayam and the Petitioner filed a joint petition being W.P. (C) No.14356/2021 seeking a direction to the banks to consider the revised investment proposal. On 25.03.2022, application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 by DBS Bank India Limited was admitted an IRP was appointed.
7. It is stated that on 27.06.2022, Respondent No.2 issued show cause notice to Vayam and the guarantors, as to why the accounts of Vayam be not declared as ‘Wilful Defaulters’. Petitioners challenged the action of Canara Bank taken under SARFAESI Act, 2002 by filing W.P. (C) No.10961/2022, which was withdrawn with liberty to challenge the coercive action, if any, owing to a statement by the bank that the impugned action had been recalled. On 20.03.2023, Canara Bank-Consortium filed counter affidavit in W.P. (C) No.2685/2023 filed by the Petitioner challenging order dated 01.02.2023 passed by learned ACMM under Section 14 of SARFAESI Act, from which the Petitioner learnt that the consortium was informed by Respondent No.2 in the meeting held on 01.12.2021 that it had declared the account of Vayam as ‘fraud’ and complaint had been filed. Petitioner gave a detailed representation to Respondent No.2 on 15.05.2023, highlighting that the impugned action was in the teeth of the judgment of the Supreme Court in State Bank of India and Others v. Rajesh Agarwal and Others, (2023) 6 SCC 1, where it was held that the lender banks should provide an opportunity to a borrower to make a representation after furnishing copy of audit reports, in consonance with principles of natural justice, however, the request of the Petitioner to reclassify the account was not acceded to.
8. Learned counsel for the Petitioner submits that account of Vayam has been classified as fraud by Respondent No.2 without prior show cause notice and/or opportunity of hearing, which is ex facie erroneous, arbitrary and against the principles of natural justice as also the judgment of the Supreme Court in Rajesh Agarwal (supra) and on this short ground, the account needs to be reclassified.
9. Learned counsel for Respondent No.2 is unable to deny the fact that no show cause notice was issued to the Petitioner prior to classification of the account as fraud.
10. Having heard learned counsels for the parties, it is clear that classification of the account of Vayam as fraud is without issuance of show cause notice granting opportunity to the Petitioner to represent his case. The law on this issue is no longer res integra. It is settled that even in the realm of administrative action, it is mandatory to provide an opportunity of hearing, where administrative action results in civil consequences against an individual or an entity. The nature of procedure to be adopted under RBI directions relating to classification of an account of a borrower as ‘fraud’ including applicability of principle of audi alteram partem came up for consideration before the Supreme Court in Rajesh Agarwal (supra) and it was held that application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. Principles of natural justice demand that borrowers must be served a notice. 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. Following this judgment, the Division Bench of this Court in IDBI Bank Ltd. v. Gaurav Goel and Others, 2025 SCC OnLine Del 935, held that the submission of the bank that proceedings consequent upon show cause notice under RBI directions are administrative proceedings and process of fair hearing will not be as a standard of judicial proceedings, can have no bearing in light of the judgment in Rajesh Agarwal (supra). Relevant passages from the judgment of the Supreme Court in Rajesh Agarwal (supra) are as follows:-
rights of parties are affected: (SCC pp. 453-54, para 10) “10. Even if a statute is silent and there are no positive words in the Act or the Rules made thereunder, there could be nothing wrong in spelling out the need to hear the parties whose rights and interest are likely to be affected by the orders that may be passed, and making it a requirement to follow a fair procedure before taking a decision, unless the statute provides otherwise. The principles of natural justice must be read into unoccupied interstices of the statute, unless there is a clear mandate to the contrary. No form or procedure should ever be permitted to exclude the presentation of a litigant's defence or stand. Even in the absence of a provision in procedural laws, power inheres in every tribunal/court of a judicial or quasi-judicial character, to adopt modalities necessary to achieve requirements of natural justice and fair play to ensure better and proper discharge of their duties. Procedure is mainly grounded on the principles of natural justice irrespective of the extent of its application by express provision in that regard in a given situation. It has always been a cherished principle. Where the statute is silent about the observance of the principles of natural justice, such statutory silence is taken to imply compliance with the principles of natural justice where substantial rights of parties are considerably affected. The application of natural justice becomes presumptive, unless found excluded by express words of statute or necessary intendment. … Its aim is to secure justice or to prevent miscarriage of justice. Principles of natural justice do not supplant the law, but supplement it. These rules operate only in areas not covered by any law validly made. They are a means to an end and not an end in themselves.” (emphasis supplied)
75. As mentioned above, Clause 8.9.[6] of the Master Directions on Frauds contemplates that the procedure for the classification of an account as fraud has to be completed within six months. The procedure adopted under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud. During this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report. Given the wide time-frames contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for banks to provide an adequate opportunity of a hearing to the borrowers before classifying their account as fraud.
76. The exclusion contemplated in the decision of this Court in Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398: 1985 SCC (L&S) 672] would not be applicable because giving an opportunity of a hearing to the borrowers will not obstruct the taking of prompt action under the Master Directions on Frauds.
79. In Swadeshi Cotton Mills [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664], this Court held that a company is entitled to an opportunity to explain the evidence collected against it and represent why the proposed action should not be taken: (SCC p. 707, para 85) “85. The contention does not appear to be well founded. Firstly, this documentary evidence, at best, shows that the Company was in debt and the assets of some of its “units” had been hypothecated or mortgaged as security for those debts. Given an opportunity the Company might have explained that as a result of this indebtedness there was no likelihood of fall in production, which is one of the essential conditions in regard to which the Government must be satisfied before taking action under Section 18-AA(1)(a). Secondly, what the rule of natural justice required in the circumstances of this case, was not only that the Company should have been given an opportunity to explain the evidence against it, but also an opportunity to be informed of the proposed action of take over and to represent why it be not taken.”
80. Audi alteram partem has several facets, including the service of a notice to any person against whom a prejudicial order may be passed and providing an opportunity to explain the evidence collected. In Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398: 1985 SCC (L&S) 672], this Court explained the wide amplitude of audi alteram partem: (SCC p. 476, para 96) “96. The rule of natural justice with which we are concerned in these appeals and writ petitions, namely, the audi alteram partem rule, in its fullest amplitude means that a person against whom an order to his prejudice may be passed should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses who are to give evidence against him examined in his presence and have the right to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not, however, conform to the judicial process in a court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing within the meaning of audi alteram partem rule in a quasi-judicial or administrative inquiry.”
81. Audi alteram partem, therefore, entails that an entity against whom evidence is collected must: (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decision to classify an account as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or through a JLF, have to decide whether a borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds.
87. Administrative proceedings which entail significant civil consequences must be read consistent with the principles of natural justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory rule to render it compliant with the principles of equality and non-arbitrariness envisaged under Article 14. The Master Directions on Frauds do not expressly provide the borrowers an opportunity of being heard before classifying the borrower's account as fraud. Audi alteram partem must then be read into the provisions of the Master Directions on Frauds.
95. In light of the legal position noted above, we hold 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. On perusal of the facts, it is indubitable that the lender banks did not provide an opportunity of hearing to the borrowers before classifying their accounts as fraud. Therefore, the impugned decision to classify the borrower account as fraud is vitiated by the failure to observe the rule of audi alteram partem. In the present batch of appeals, this Court passed an ad interim order [Shree Saraiwwalaa Agrr Refineries Ltd. v. Union of India, 2022 SCC OnLine SC 1905] restraining the lender banks from taking any precipitate action against the borrowers for the time being. In pursuance of our aforesaid reasoning, we hold that the decision by the lender banks to classify the borrower accounts as fraud, is violative of the principles of natural justice. The banks would be at liberty to take fresh steps in accordance with this decision.
98. The conclusions are summarised below:
98.1. No opportunity of being heard is required before an FIR is lodged and registered.
98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers.
98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.[1] of the Master Directions on Frauds results in serious civil consequences for the borrower.
98.4. Such a debarment under Clause 8.12.[1] of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted.
98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time-frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud.
98.6. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order.
98.7. 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.”
11. In view of the aforementioned judgments, there can be no doubt that the impugned action of Respondent No.2 in classifying the account of Vayam as ‘fraud’ sans issuance of show cause notice and/or opportunity of being heard is illegal and arbitrary. Accordingly, declaration and classification of the account of Vayam cannot be sustained and is hereby set aside. This will, however, not preclude Respondent No.2 from issuing a show cause notice and proceeding further, in accordance with law.
12. Writ petition stands disposed of in the aforesaid terms along with pending application.
JYOTI SINGH, J DECEMBER 4, 2025