The Delhi High Court set aside the classification of the petitioner’s bank accounts as fraud for failure to provide an opportunity of hearing, affirming that natural justice must be observed before such classification under RBI Master Directions.
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W.P.(C) 6869/2019, 6873/2019 & 6883/2019 HIGH COURT OF DELHI W.P.(C) 6869/2019 MANISH JAIN ..... Petitioner Through: Mr. Davinder N. Grover with Mr. Harsh Gupta, Advocates.
VERSUS
RESERVE BANK OF INDIA AND ORS. ..... Respondents Through: Mr. Ramesh Babu with Ms. Manisha Singh, Ms. Nisha Sharma, Ms. Jagriti Bharti and Mr. Rohan Srivastava, Advocates for respondent/RBI. Mr. Vipin Jai with Mr. Ujjwal Goel, Advocates for respondent no. 2/OBC. Mr. Shreyas Mehrotra with Mr. Manish Kumar Mishra and Mr. Anant Roy, Advocates for respondent no. 3. Ms. Reema Khorana with Mr. Vikash Kumar, Advocates for respondent NO. 5/Allahabad Bank.
W.P.(C) 6873/2019 Through: Mr. Pankaj Vivek with Mr. Arjeet Gaur, Mr. Atul Tripathi and Mr. Himanshu Prakash, Advocates.
VERSUS
Advocates for respondent/RBI. Ms. Mayuri Raghuvanshi with Ms. Jyom Raghuvanshi and Ms. Akanksha Rathore, Advocates for respondent no. 3.
W.P.(C) 6883/2019 Through: Mr. Davinder N. Grover with Mr. Harsh Gupta, Advocates.
VERSUS
Advocates for respondent no. 1/RBI. Mr. Anmol Mehta, Advocate for respondent no. 2 and 5. Ms. Reema Khorana with Mr. Vikash Kumar, Advocates for respondent NO. 3/Central Bank of India. Date of Decision: 25th July, 2023
CORAM:
HON'BLE MR. JUSTICE MANMOHAN HON'BLE MS. JUSTICE MINI PUSHKARNA
JUDGMENT
MANMOHAN, J: (ORAL)
1. Present writ petitions have been filed challenging legality and validity of the circular dated 1st July, 2016 bearing number DBS.CO.CFMC.BC. No.1/23.04.001/2016-17 (Master Direction on Fraud) issued by the Respondent No.1-Reserve Bank of India to the extent it violates Article 14 of the Constitution of India as well as the decision/order of the Respondent- Banks declaring and categorising and reporting the accounts of the petitioner as ‘fraud’.
2. The Supreme Court in State Bank of India & Ors. Vs. Rajesh Agarwal & Ors., 2023 SCC OnLine SC 342 has held that the rule of audi alteram partem ought to be read in Clauses 8.9.[4] and 8.9.[5] of the Master Direction on Fraud. The relevant portion of the said judgment is reproduced hereinbelow:-
“79. 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
restraining the lender banks from taking any precipitate action against the
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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.
xxx xxx xxx xxx
81. The conclusions are summarized below:-
i. No opportunity of being heard is required before an FIR is lodged and registered; ii. Classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other panel and civil consequences against the borrowers; iii. 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; iv. 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; v. 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; vi. 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; and vii. 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.”
3. As urged by learned counsel for the petitioner the aforesaid judgment passed by the Supreme Court is squarely applicable to the facts of the present cases as here also no opportunity of hearing was granted to the petitioner, which fact has not been controverted by learned counsel for the Respondent-Banks.
4. Accordingly, the orders declaring the petitioner herein as ‘Fraud’ are hereby set aside. However, liberty is granted to the Respondent-Banks to proceed ahead with the process in accordance with law in light of the judgment delivered by the Supreme Court. The petitions stand disposed of in the aforesaid terms along with the pending application.
5. At this stage, learned counsel for the respondent-banks state that they have filed applications for clarification and review in the Supreme Court in the case of State Bank of India & Ors. Vs. Rajesh Agarwal & Ors. (supra).
Needless to state, any clarification or any order passed by the Supreme
Court shall be binding on the parties.
MANMOHAN, J
MINI PUSHKARNA, J
JULY 25, 2023 c
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