LexSTATE BANK OF INDIA & ORS versus RAJESH AGARWAL & ORS
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A B C D E F G H 476 SUPREME COURT REPORTS [2023] 7 S.C.R. [2023] 7 S.C.R. 476 476 STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS (Civil Appeal No. 7300 of 2022) MARCH 27, 2023 [DR. DHANANJAYA Y CHANDRACHUD, CJI AND HIMA KOHLI, J.] Reserve Bank of India Act, 1934 – Banking Regulation Act, 1949 – Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 – Master Directions on Frauds – Principle of Natural Justice – Rule of Audi Alteram Partem – The civil appeals arise out of a challenge 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 primarily on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent – Whether the principles of natural justice should be read into the provisions of the Master Directions on Frauds – Held : 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 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. Reserve Bank of India Act, 1934 – Banking Regulation Act, 1949 – Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 – Principle of Natural Justice – Civil consequences to borrowers – Whether the classification of a borrower’s account as fraudulent under the Master Directions on Frauds entails civil consequences to borrowers – Held: Clause 8.12 of the Master Directions on Frauds A B C D E F G H 477 deals with the penal measures for borrowers – Clause 8.12.1 provides that penal provisions as applicable to wilful defaulters would apply to fraudulent borrowers, including the promoters and directors of the borrower company – In addition, borrowers are also liable to suffer the following consequences under the Master Directions on Frauds : a) No restructuring may be made in the case of an RFA or fraud accounts (clause 8.12.2); b) No compromise on settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued (clause 8.12.3) – The classification of a borrower’s account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower – 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 – Since, debarring disentitles a person or entity from exercising their rights and/or privileges, it is elementary that the principles of natural justice should be made applicable and the person against whom an action of debarment is sought should be given an opportunity of being heard. Reserve Bank of India Act, 1934 – Banking Regulation Act, 1949 – Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 – No implied exclusion of audi alteram partem – The RBI and the lender banks have contended that the Master Directions on Frauds impliedly exclude the right to be heard – Held: The Master Directions on Frauds do not expressly exclude a right of hearing to the borrowers before action to class their account as frauds is initiated – The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed. Principles/Doctrines – Principles of natural justice – Two fundamental principles of natural justice are entrenched in Indian jurisprudence: (i) nemo judex in causa sua, which means that no person should
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