2023 (3) TMI 1205 - SC - Indian Laws

NPA - classifying their accounts as fraudulent - Violation of principles of natural justice (particularly the rule of audi alteram partem) - validity of Master Directions on Frauds Issued by the Reserve Bank of India RBI - 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 - default in repayment of credit facilities. HELD 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 borrowers for the time being. 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 penal 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. Appeal disposed off.

Summary

Issues Involved:
1. Whether the principles of natural justice should be read into the provisions of the Master Directions on Frauds.
2. Whether the classification of a borrower's account as fraud entails civil consequences.
3. Whether the Master Directions on Frauds impliedly exclude the right to be heard.
4. Challenge to the constitutional validity of the Master Directions on Frauds.

Summary:

Issue 1: Whether the principles of natural justice should be read into the provisions of the Master Directions on Frauds.
The court held that the principles of natural justice, particularly the rule of audi alteram partem, must be read into the Master Directions on Frauds to save them from arbitrariness. The classification of an account as fraud entails serious civil consequences for the borrower, thus necessitating the observance of natural justice principles.

Issue 2: Whether the classification of a borrower's account as fraud entails civil consequences.
The court determined that classifying a borrower's account as fraud leads to significant civil consequences, including debarment from accessing institutional finance for five years, akin to blacklisting. This classification affects the borrower's right to reputation and their ability to carry on business, thereby necessitating an opportunity of being heard before such classification.

Issue 3: Whether the Master Directions on Frauds impliedly exclude the right to be heard.
The court found that the Master Directions on Frauds do not expressly exclude the right to be heard. It emphasized that the principles of natural justice should be read into the provisions where the statute is silent, especially when the action involves significant civil consequences. The court concluded that it is reasonably practicable for banks to provide an opportunity of hearing to borrowers before classifying their accounts as fraud.

Issue 4: Challenge to the constitutional validity of the Master Directions on Frauds.
The court upheld the Master Directions on Frauds as constitutionally valid but emphasized that the implementation of these directions must comply with the principles of natural justice. The court held that any policy decision with serious civil consequences must be open to challenge for arbitrariness if natural justice principles are not applied.

Conclusion:
1. No opportunity of being heard is required before an FIR is lodged and registered.
2. Classification of an account as fraud results in serious civil consequences against the borrowers.
3. Debarring borrowers from accessing institutional finance under Clause 8.12.1 is akin to blacklisting.
4. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds.
5. The principles of natural justice demand that borrowers must be served a notice, given an opportunity to explain the forensic audit report, and allowed to represent before their account is classified as fraud.
6. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing, audi alteram partem must be read into the provisions to save them from arbitrariness.

The court upheld the judgment of the Division Bench of the High Court of Telangana dated 10 December 2020 and set aside the judgments of the High Court of Telangana dated 22 December 2021 and 31 December 2021, and of the High Court of Gujarat dated 23 December 2021.