Ensuring Fair Procedure before declaring Fraud in Bank Loan: Providing Relevant Documents and Opportunity to be Heard

Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2024 (5) TMI 1323 - DELHI HIGH COURT

Introduction

The judgement under analysis pertains to a writ petition filed by an ex-director and guarantor of a company (hereinafter referred to as "the Petitioner") against various banks (hereinafter referred to as "the Respondents"). The Petitioner challenged the Show Cause Notices (SCNs) issued by the Respondents for declaring the account of the company as 'Fraud'. The crux of the matter revolved around the alleged non-compliance with the agreed terms of the loan documents and various irregularities in the loan account, leading to suspicion of fraudulent activities.

Arguments Presented

Petitioner's Arguments

The Petitioner contended that the SCNs were issued without providing the requisite documents, which formed the basis of the allegations. The Petitioner argued that the absence of such documents rendered it impossible to submit a proper reply to the SCNs. The Petitioner highlighted the following key points:

• The Petitioner did not have access to the banking transactions, bank loans, and other documents of the company, as they were under the control of the Resolution Professional (RP) appointed after the company was admitted into Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016.
• The Petitioner had written multiple letters to the Respondents seeking relevant documents, but the Respondents did not respond.
• The Petitioner relied on various judgments, including T. Takano Versus Securities and Exchange Board of India & Anr. - 2022 (2) TMI 907 - Supreme Court, State Bank of India & Ors Versus Rajesh Agarwal & Ors - 2023 (3) TMI 1205 - Supreme Court, RELIANCE INDUSTRIES LIMITED Versus SECURITIES AND EXCHANGE BOARD OF INDIA & ORS. - 2022 (8) TMI 423 - Supreme Court, and Mr. Milind Patel Versus Union Bank of India, Reserve Bank of India, Trans Union CIBIL Limited (formerly known as Credit Information Bureau (India) Limited) , Experian Credit Information Company of India Private Limited, Equifax Credit Information Services Private Limited, CRIF High Mark Information Services Private Limited, Mumbai - 2024 (3) TMI 397 - BOMBAY HIGH COURT, to support the argument that the Principles of Natural Justice require the provision of relevant documents to enable an effective reply.

Respondents' Arguments

The Respondents contended that the requisite documents had already been provided to the Petitioner. The lead bank, State Bank of India (SBI), submitted that it was ready to grant an inspection of the company's records available with it. Additionally, the Respondents argued that:

• No final decision had been taken by the banks, and only SCNs had been issued at this stage.
• The judgments relied upon by the Petitioner were not applicable to the present case, and they did not provide for granting a personal hearing to the Petitioner.
• The Respondents relied on the Supreme Court's order in Rajesh Agarwal's case to contend that granting a personal hearing by the banks was not mandatory.

Discussions and Findings of the Court

The Court discussed the settled principles of law regarding the applicability of the Principles of Natural Justice and the requirement to provide relevant documents forming the basis of a SCN. The Court relied on the Supreme Court judgments in Kanwar Natwar Singh & Kanwar Jagat Singh Versus Directorate of Enforcement - 2010 (10) TMI 156 - Supreme Court and T. Takano v. Securities and Exchange Board of India to emphasize the importance of disclosing relevant materials to enable an effective reply.

The Court also referred to the Supreme Court's decision in State Bank of India v. Rajesh Agarwal, which held that the classification of an account as 'Fraud' under the Reserve Bank of India's Master Directions on Frauds leads to a credit freeze for the borrower. Consequently, the Principles of Natural Justice must be followed, and the borrower should be given an opportunity to be heard before classifying the account as fraud.

Analysis and Decision by the Court

The Court acknowledged that fair procedure and the Principles of Natural Justice require the provision of requisite documents forming the basis of a SCN to enable the concerned party to submit a proper reply. Failure to provide relevant documents would render the entire procedure of issuing a SCN and filing a reply an empty formality.

The Court emphasized that the relevant documents forming the basis of the SCN must be provided to the concerned party to enable them to raise an effective defense. Denying this fundamental right by not providing the requisite documents would violate the Principles of Natural Justice.

Considering the submissions made by the lead bank (SBI) and the Petitioner's counsel regarding the availability of the company's records with the RP, the Court issued the following directions:

1. The Petitioner and/or his authorized representative shall be allowed to inspect the records of the company available with SBI (the lead bank).
2. The Petitioner and/or his authorized representative shall also be allowed to inspect the records of the company available with the RP.
3. Upon inspection, the Petitioner shall state the specific documents required from the company's records that form the basis of the SCNs. These documents shall be provided to the Petitioner.
4. The cost of providing copies of the relevant documents shall be borne by the Petitioner.
5. The process of inspection, stating the specific documents, and providing the relevant documents shall be completed within specified timelines.
6. Upon receipt of the documents, the Petitioner shall file a reply to the respective SCNs within a specified timeline.
7. The Petitioner is at liberty to request a personal hearing from the respective banks, which shall be considered accordingly.

The Court disposed of the writ petition in terms of the aforesaid directions.

Doctrine or Principle Discussed

The primary doctrine discussed in the judgement is the Principles of Natural Justice, specifically the principle of audi alteram partem (hear the other side). The Court emphasized the importance of providing relevant documents and an opportunity to be heard before taking an adverse decision against a party.

Comprehensive Summary

The judgement dealt with a writ petition challenging Show Cause Notices (SCNs) issued by various banks for declaring the account of a company as 'Fraud'. The primary issue was the alleged non-compliance with the agreed terms of the loan documents and various irregularities in the loan account, leading to suspicion of fraudulent activities.

The Petitioner, an ex-director and guarantor of the company, argued that the SCNs were issued without providing the requisite documents forming the basis of the allegations. The Petitioner contended that the absence of such documents rendered it impossible to submit a proper reply, violating the Principles of Natural Justice.

The Court discussed the settled principles of law regarding the applicability of the Principles of Natural Justice and the requirement to provide relevant documents forming the basis of a SCN. The Court relied on various Supreme Court judgments, including T. Takano v. Securities and Exchange Board of India and State Bank of India v. Rajesh Agarwal, to emphasize the importance of disclosing relevant materials and providing an opportunity to be heard before taking an adverse decision.

The Court acknowledged that fair procedure and the Principles of Natural Justice require the provision of requisite documents forming the basis of a SCN to enable the concerned party to submit a proper reply. Failure to provide relevant documents would render the entire procedure an empty formality.

Considering the submissions made by the lead bank (SBI) and the Petitioner's counsel regarding the availability of the company's records with the Resolution Professional (RP), the Court issued directions for the Petitioner and/or his authorized representative to inspect the records of the company available with SBI and the RP. The Petitioner was directed to state the specific documents required from the company's records that formed the basis of the SCNs, and these documents were to be provided to the Petitioner within specified timelines.

The Court also directed that upon receipt of the documents, the Petitioner shall file a reply to the respective SCNs within a specified timeline. Additionally, the Petitioner was granted the liberty to request a personal hearing from the respective banks, which shall be considered accordingly.

The Court disposed of the writ petition in terms of the aforesaid directions, upholding the Principles of Natural Justice and the right to access relevant documents and be heard before an adverse decision is taken.

 

 

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Full Text:

2024 (5) TMI 1323 - DELHI HIGH COURT