INTRODUCTION
In a significant ruling, the division bench of the Supreme Court (“SC”) in State Bank of India & Ors v. Rajesh Agarwal & Ors, (Civil Appeal No. 7300 of 2022) on 27 March 2023 considered the long pending issue that whether the principles of natural justice should be read into the vittles of the Reserve Bank of India’s (“RBI”) Master Directions on Frauds – type and Reporting by marketable banks and handpick FIs dated 1 July 2016 (“Master Direction”).
The SC disposed of a bunch of solicitations challenging the orders before several High Courts on the contention that no occasion of being heard is given to borrowers before classifying their accounts as fraudulent.
BACKGROUND OF THE CASE
In Rajesh Agarwal v. Reserve Bank of India and Others (writ supplication no 19102 of 2019) dated 10 December 2020, the Telangana High Court allowed a writ filed by the chairman and managing director of BS Limited under Article 226 (Power of High Courts to issue certain writs) of the Constitution of India, 1949 (“Constitution”) on the contention that the principles of natural justice must be read into the Master Direction and an occasion of hail should be given to a borrower before the declaration of its account as fraudulent.
As a background, the BS Limited engaged in the business of power transmission failed to meet its payment scores to lender banks, thereby defaulting in repayment of credit installations. In agreement with the Master Direction, the lender banks formed a common lenders forum with SBI as the lead bank and declared the means of BS Limited as non- performing assets (“NPA”) by invoking Clause 2.2.1 (type of Frauds) of the Master Directions.
JUDGMENT OF THE TELANGANA HIGH COURT
In view of the below, the Telangana High Court directed the lender banks
(i) To give an occasion of a hail to the borrowers after furnishing a dupe of the forensic examination report; and
(ii) To give an occasion of a particular hail to the borrower before classifying their account as fraud.
Still, this judgment was challenged by the banks before the Supreme Court and the order that a particular hail be given was stayed by the SC.
It’s to be noted that the Telangana High Court in Yashdeep Sharma vs. Reserve Bank of India and Ors. dated 31 December 2021 took a contrary view of the below judgment inferior that the Master Direction formerly provides a comprehensive medium on fraud type with the participation of the borrower and the banks. Further, it was also observed that the forensic examination prepared by the adjudicator is predicated upon the documents supplied by the borrower and the fraud type is not a unilateral exercise on part of the forensic adjudicator of the bank. Therefore, the court took a contrary opinion from the earlier judgments pressing that the manner of type of fraud under the Master Direction is in line with the due process of law. As against the Rajesh Agarwal case, this judgment created a contradiction for banks and lenders for annuity of occasion of hail before type of account as fraud owing to the fact that the Master Direction (MD) is silent on the issue.
SUPREME COURT’S VERDICT
The SC made the following obedience’s upholding the Rajesh Agarwal case
- Violation of principles of natural justice Principles of natural justice are n’t bare legal formalities but are substantial scores that need to be followed by the decision timber and adjudging authorities. Therefore, the principles of Audi Alteram Partem has to be read with the Master Direction to save it from the vice of arbitrariness.
- SC placed reliance on Union of India v. Col. J N Sinha dated 12 August 1970, stating that the rule of Audi Alteram Partem applies to administrative conduct, piecemeal from judicial and quasi- judicial functions as applicable in this case. SC also reckoned on State of Orissa v. Dr (Miss) Binapani Dei dated 7 February 1967 wherein it held that “every authority which has the power to take corrective or dangerous action has a duty to give a reasonable occasion to be heard”. Further, an administrative action which involves civil consequences must be made harmonious with the rules of natural justice. Therefore, in view of nature of the procedure espoused by the banks, it’s practicable for the lenders to give an occasion of a hail before classifying borrowers regard as fraud.
- No inferred rejection of Audi Alteram Partem Master Direction does not expressly count the right of hail to the borrowers before type of an account as fraudulent. The principles of natural justice can be read into an enactment or an advertisement where it’s silent on granting an occasion of a hail to a party whose rights and interests are likely to be affected by the verdicts that may be passed.
- Civil and lawless Consequences Bracket of an account as fraud may lead to serious civil and lawless consequences against the interest of borrowers indeed though the Master Direction is conceived in public interest. It amounts to “blacklisting” a borrower from serving any credit and affect an existent’s CIBIL score.
- SC also commented that the judgment in State Bank of India v. Jah Developers dated 9 May 2019 will be exactly applicable in the present case since the effect of declaring a borrower as wilful defaulter under Master Circular on wilful delinquent dt. 1 July 2015 has similar out turn when the borrower’s accounts is classified as fraud under the Master Direction.
- Violation of Composition 19( 1)( g) of the Constitution Bracket of an account as fraud debars the borrower from raising institutional finances, thus, negatively affects the fundamental rights of a promoter/ director to carry on a trade or a business, which is guaranteed under Composition 19 (1)( g) of the Constitution. Therefore, the bank has unilateral power to declare a person/ company as ‘a fraudulent borrower’ who violates the provisions of Article 19 (1) (g) of the Constitution.
- In view of the afore findings, the SC upheld the order passed by the Telangana High Court stating that a “ reasoned order ” and “ an occasion for hail ” should be given before type of an account as fraudulent.
ANALYSIS AND CONCLUSION
A borrower account is declared as fraud predicated on the findings of a forensic report where interest or top payment is overdue for 90 days, which results in classifying a loan as an NPA. Further, the Master Direction cites Indian Penal Code vittles, including misappropriation, fraudulent deals, cheating and phony, for the type of accounts as fraud. Therefore, the judgment is significant for the banking sector as it affects the right of borrowers as well as the enterprises of lenders against dereliction. As banks have the unilateral power to take classify accounts as fraudulent, SC judgment will have ramifications for banks to dock the same. This will also ensure that the goodwill and character of the borrowers are defended.
Further, the decision will ensure securing the right of being heard before a negative type of the borrower and will ensure an occasion to explain the conclusions arrived at by the bank by their internal policy for fraud trouble operation and fraud exploration. That said, the judgment may have certain negative consequences for banks as ‘fraudulent borrowers’ will now have the capability to delay the process followed by banks.
~By
LEEVANSHIQA
[Kalinga University, Raipur]
FREQUENTLY ASKED QUESTION(S)
Q. What are the Principles of Audi Alteram Partem?
Ans. The principle of Audi Alteram Partem is a fundamental legal principle that states that all parties involved in a dispute must be given a fair hearing and the opportunity to respond to evidence against them. This principle is based on the idea that a fair decision can only be reached when all sides of an argument are considered.
Q. What is Article 226 of the Indian Constitution?
Ans. Article 226 of the Indian Constitution grants the power to High Courts to issue writs, orders, and directions to any person or authority, including the government, within the territories they have jurisdiction over. This power can be used to enforce fundamental and non-fundamental rights.
