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TMI Blog2023 (3) TMI 1205X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ................................................ 39 D.4 Challenge to constitutional validity .................................................................................. 48 E. Conclusion .............................................................................................................. 57 A. Background 1. 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. Master Directions on Frauds Issued by the Reserve Bank of India RBI , 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. The High Court of Telangana has held in the impugned judgment Writ Petition No. 19102 of 2019 that the principles of natural justice must be read into the provisions of the Master Directions on Frauds. The decision has been assailed by the RBI and lender banks through these civil appeals. 2. In this background the court has to consider whether the principles of natural justice should be read into the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a judgment dated 10 December 2020, a Division Bench of the High Court allowed the writ petition by holding that the principle of audi alteram partem ought to be read into Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds. The High Court further directed the lender banks: (i) to give an opportunity of a hearing to the borrowers after furnishing a copy of the forensic audit report; and (ii) to provide an opportunity of a personal hearing to the borrower before classifying their account as fraud. The judgment of the High Court was challenged in SLP (C) No. 3931 of 2021. On 15 April 2021, this Court, while issuing notice, partially stayed the directions issued by the Telangana High Court in the following terms: Meanwhile, the Minutes/Order dated 15.02.2019 passed by the Joint Lenders Meeting is not to be acted upon. The High Court insofar as it observed that a personal hearing be given is stayed. II. SLP (C) No. 762 of 2022; SLP (C) No. 873 of 2022; and SLP (C) No. 1514 of 2022 6. The appellant is a company involved in the manufacture of edible oils, fats, rice and semolina products in the State of Telangana. From 2003 to 2015, the appellant availed of credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt came to know about the classification of their account as fraud in 2021, when they received a copy of the FIR. The appellant filed a writ petition before the High Court of Telangana challenging the validity of the Master Directions on Frauds. The High Court by its judgment dated 31 December 2021 held that no relief could be granted to the appellant on the issue of personal hearing since SLP (C) No. 3931 of 2021 was pending before this Court. The High Court also held that the appellant s account was rightly classified as fraudulent in view of the adverse findings in the forensic audit report. IV. Writ Petition (C) No. 138 of 2022 and SLP (C) No. 3388 of 2022 9. The appellant is one of the directors of a company called M/s Vimal Oil Foods Limited. The said company availed of loan facilities from various financial institutions over a period of time. In 2015, the auditor of the respondent bank flagged certain irregularities in the accounts of the company. Based on a special audit, the respondent bank declared the account of the company as NPA on 30 September 2015. Thereafter, on 05 July 2016, the company s account was red-flagged by the respondent bank. In the meantime, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CBI and debarment of the promoters and directors from accessing institutional finance. Further, the action of the banks of classifying an account as fraud is stigmatic, akin to blacklisting the borrower, which affects their right to reputation. Thus, there is a direct impact on the fundamental rights of the individuals concerned, as a consequence of the classification of an account as fraud. c. The Master Directions on Frauds are violative of Articles 14, 19, and 21 of the Constitution of India as they debar a company and its promoters and directors from accessing financial and credit markets for a period of five years without even providing a show cause notice or opportunity of being heard. d. There are other facets to the principle of audi alteram partem apart from a personal hearing. The Master Directions on Frauds does not stand good on other facets of audi alteram partem such as notice of allegations levelled and evidence collected, notice of the penalty proposed, among others. According to the procedure laid down under the Master Directions on Frauds, a company or its promoters and directors are not even informed that they have been classified as fraud and that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest to ensure that fraudulent borrowers are brought to justice and loss caused to the banks is mitigated. The clauses of the Master Directions on Frauds, therefore, must be interpreted in light of their purpose and objective, that is, timely detection and dissemination of information and reporting about the fraud. b. The provisions of the Master Directions on Frauds must be construed keeping in mind the following thresholds: (i) justness; (ii) fairness towards the parties aggrieved; (iii) reasonability; and (iv) proportionality between the mischief and the corrective measure. Considering that the Master Directions on Frauds is an economic policy decision, this Court must exercise greater latitude while construing its provisions. c. The procedure for classifying an account as fraud under the Master Directions on Frauds is not arbitrary. The classification is done only for reporting the matter to law enforcement agencies. The banks already have in place a structured organizational setup to identify and investigate fraudulent activities in bank accounts. Banks file complaints before law enforcement agencies, who conduct an investigation. The ultimate decision on fraud is render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which modifications or cancellation shall have effect. 14. RBI has been issuing master directions on diverse issues since 2016. These directions encompass the instructions on that particular subject. The master directions are updated whenever there is a change in policy, and such changes get reflected on RBI s website. In exercise of the power conferred by Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit facilities extended for reward or for illegal gratification d. Cash shortages. e. Cheating and forgery f. Fraudulent transactions involving foreign exchange g. Any other type of fraud not coming under the specific heads as above. 17. Clause 3 advises banks to make full use of the Central Fraud Registry CFR (a database created by RBI to enable banks to share information on fraudulent accounts) for timely identification, control, reporting, and mitigation of risks associated with fraud. Clause 3.3 of the said directions emphasizes the need to provide timely information on frauds and penalizes banks for non-adherence to timelines: 3.3.1 Banks should ensure that the reporting system is suitably streamlines so that delays in reporting of frauds, submission of delayed and incomplete fraud reports are avoided. Banks must fix staff accountability in respect of delays in reporting fraud cases to RBI. 3.3.2. Delay in reporting of frauds and the consequent delay in alerting other banks about the modus operandi and dissemination of information through Caution Advice/ CFR against unscrupulous borrowers could result in similar frauds being perpetrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suspicion of fraudulent activity is thrown up by the presence of one or more EWS. EWS which should alert bank officials about wrongdoings in a loan account are set out in Annexure II. Some of those enumerated are set out below: i. a. Default in undisputed payment to statutory bodies as declared in the annual report; b. Dishonour of high value cheques; ii. Delay in payment of outstanding dues; iii. Funds coming from other banks to liquidate the outstanding loan amount except in the normal course; iv. Exclusive collateral charged to a number of lenders without NOCs of existing charge holders; v. Dispute on title to collateral securities; and vi. Critical issues in the stock audit report. 21. EWS provide indications of wrongdoing which may later turn out to be frauds. A bank is put on alert by the presence of EWS and must use them to trigger a detailed investigation into the concerned bank account. According to Clause 8.3.5, the officer responsible for operations in the account should promptly report any manifestation of EWS to the Fraud Monitoring Group FMG constituted by the bank. The clause directs banks to take cognizance of EWS and launch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed within a maximum period of three months from the date of the JLF meeting authorizing the audit. Within 15 days of the completion of the forensic audit, the JLF shall reconvene and decide on the status of the account, either by consensus or the majority rule as specified above. In case the decision is to classify the account as a fraud, the RFA status shall be changed to Fraud in all banks and reported to RBI and on the CRILC platform within a week of the said decision. Besides, within 30 days of the RBI reporting, the bank commissioning/ initiating the forensic audit should lodge a complaint with the CBI on behalf of all banks in the consortium/MBA. For this purpose, if the bank initiating the forensic audit is a private sector bank, the complaint shall be lodged with the CBI by the PSU bank with the largest exposure to the account in the consortium/MBA. If there is no PSU bank in the consortium/MBA or it is a solo bank lending by a private sector bank/ foreign bank, the private bank/foreign bank shall report to the Police as per extant instructions. This would be in addition to the complaint already lodged by the first bank which had detected the fraud and informed the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company insofar as raising of funds from the banking system or from capital markets by companies with which they are associated is concerned, etc. In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from Scheduled Commercial Banks, Development Financial Institutions, Government owned NBFCs, Investment Institutions, etc., for a period of five years from the date of full payment of the defrauded amount. After this period, it is for individual institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their complicity. 8.12.2 No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts. However, in cases of fraud/malfeasance where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, banks and JLF may take a view on restructuring of such accounts based on their viability, without prejudice to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating authorities. The principles of natural justice act as a guarantee against arbitrary action, both in terms of procedure and substance, by judicial, quasi-judicial, and administrative authorities. Two fundamental principles of natural justice are entrenched in Indian jurisprudence: (i) nemo judex in causa sua, which means that no person should be a judge in their own cause; and (ii) audi alteram partem, which means that a person affected by administrative, judicial or quasi-judicial action must be heard before a decision is taken. The courts generally favor interpretation of a statutory provision consistent with the principles of natural justice because it is presumed that the statutory authorities do not intend to contravene fundamental rights. Application of the said principles depends on the facts and circumstances of the case, express language and basic scheme of the statute under which the administrative power is exercised, the nature and purpose for which the power is conferred, and the final effect of the exercise of that power. Union of India v. Col. J N Sinha, (1970) 2 SCC 458 30. While the borrowers argue that the actions of banks in classifying borrower accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n administrative action results in civil consequences to a person or entity. 33. In State of Orissa v. Dr (Miss) Binapani Dei AIR 1967 SC 1269 , a two-judge bench of this Court held that every authority which has the power to take punitive or damaging action has a duty to give a reasonable opportunity to be heard. This Court further held that an administrative action which involves civil consequences must be made consistent with the rules of natural justice: 9. [ ] The rule that a party to whose prejudice an order is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set-up that every citizen is protected against exercise of arbitrary authority by the State or its officers. Duty to act judicially would therefore arise from the very nature of the function intended to be performed: it need not be shown to be super-added. If there is power to decide and determine to the prejudice of a person, duty to act judicially is implicit in the exercise of such power. If the essentials of justice b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damages. In its wide umbrella comes everything that affects a citizen in his civil life. (emphasis supplied) There is a consistent pattern of judicial thought that civil consequences entail infractions not merely of property or personal rights, but also of civil liberties, material deprivations, and non-pecuniary damages. Every order or proceeding which involves civil consequences or adversely affects a citizen should be in accordance with the principles of natural justice. 37. The next question that requires our consideration is whether the classification of a borrower s account as fraudulent under the Master Directions on Frauds entails civil consequences to borrowers. 38. The RBI and lender banks have argued that the civil consequences contemplated in Clause 8.12.1 of the Master Directions on Frauds are reasonable. Under the said clause, the borrower, including the promoters and directors of the company, are barred from availing credit from financial markets and credit markets for a period of five years, and possibly even beyond. According to RBI and lender banks, such a restriction has to be perceived from the perspective of public interest. While acknowledging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Master Directions affects the fundamental right of the borrower to carry on business. On the other hand, the RBI and lender banks have argued that reliance on the observations in Jah Developers (supra) is misplaced because the decision dealt with the classification of a borrower as wilful defaulter, whereas the present batch of appeals deal with the classification of a borrower s account as fraud. 41. The question in Jah Developers (supra) was whether a person who is declared to be a wilful defaulter according to the procedure laid down in the Master Circular on Wilful Defaulters is entitled to be represented by a lawyer of their choice before such a declaration is made. The Court held that a borrower does not have the right to be represented by a lawyer in the course of in-house proceedings envisaged in Paragraph 3 of the Master Circular on Wilful Defaulters. Paragraph 3 of the Master Circular on Wilful Defaulters provides a two-tier process for identification of a wilful defaulter. At the first stage, a First Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the bank must, after examining the evidence of wilful default and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. (emphasis supplied) In Jah Developers (supra), this Court construed the Master Circular on Wilful Defaulters by harmonizing it with the principles of natural justice. Particularly, it was directed that: (i) the First Committee must give its order to the borrower as soon as possible; (ii) the Borrower, thereafter, can file a written representation against the order of First Committee to the Review Committee; and (iii) the Review Committee must pass a reasoned order which must be provided to the borrower. 42. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the government. This Court held that since blacklisting affects the privileges of the blacklisted person, fundamentals of fair play require that such a person be provided an opportunity of being heard: 20. Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purposes of gains. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist. 45. In Joseph Vilangandan v. Executive Engineer (1978) 3 SCC 36 , the issue before the two-judge pertained to debarment of a government contractor from seeking any further contract with the government without providing an opportunity of being heard. The material sentence of the notice there read as follows: You are therefore requested to show cause ... why the work may not be arranged otherwise at your risk and loss, through other agencies after debarring you as a defaulter.... (emphasis original) This Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of business. It also entails significant civil consequences as it jeopardizes the future of the business of the borrower. Therefore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds. The action of classifying an account as fraud not only affects the business and goodwill of the borrower, but also the right to reputation. 49. In State of Maharashtra v. Public Concern for Governance Trust (2007) 3 SCC 587 , a two-judge bench of this Court held that a decision taken by any authority affecting the right to reputation of an individual has civil consequences. Therefore, in such situations the principles of natural justice would come into play. The Court held that any order or decision of the authority adversely affecting the personal reputation of an individual must be taken after following the principles of natural justice: 41. It is thus amply clear that one is entitled to have and preserve one's reputation and one also has a right to protect it. In case any authority in discharge of its duties fastened upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 54. In a decision of a three-judge bench of this Court in Swadeshi Cotton Mills v. Union of India (1981) 1 SCC 664 , the issue was whether the Central government was required to comply with the requirements of audi alteram partem before it took over the management of an industrial undertaking under Section 18-AA(1)(a) of the Industries (Development and Regulation) Act, 1951 IDR Act, 1951 . R S Sarkaria, J speaking for the majority consisting of himself and D A Desai, J laid down the following principles of law: 44. In short, the general principle as distinguished from an absolute rule of uniform application seems to be that where a statute does not, in terms, exclude this rule of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprehend a wide spectrum of situations ranging from the one where the likelihood of the happening of the apprehended event is imminent to that where it may be reasonably anticipated to happen sometime in the near future. Cases of extreme urgency where action under Section 18-AA(1)(a) to prevent fall in production and consequent injury to public interest, brooks absolutely no delay, would be rare. In most cases, where the urgency is not so extreme, it is practicable to adjust and strike a balance between the competing claims of hurry and hearing. (emphasis supplied) Sarkaria, J observed that that the owner of an undertaking is entitled to a fair hearing at the pre-decisional stage because the power of the Central government under Section 18AA-(1)(a) to take over is far-reaching and adversely affects the rights and interests of owners. 56. In Mangilal v. State of Madhya Pradesh (2004) 2 SCC 447 , a two-judge bench of this Court held that the principles of natural justice need to be observed even if the statute is silent in that regard. In other words, a statutory silence should be taken to imply the need to observe the principles of natural justice where substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and an opportunity to be heard could be excluded if allowing for such a right would obstruct the taking of prompt action: 101. [ ] So far as the audi alteram partem rule is concerned, both in England and in India, it is well established that where a right to a prior notice and an opportunity to be heard before an order is passed would obstruct the taking of prompt action, such a right can be excluded. This right can also be excluded where the nature of the action to be taken, its object and purpose and the scheme of the relevant statutory provisions warrant its exclusion; nor can the audi alteram partem rule be invoked if importing it would have the effect of paralysing the administrative process or where the need for promptitude or the urgency of taking action so demands, [ ] 58. The borrowers have dwelt on Clause 8.9.6 of the Master Directions on Frauds according to which the entire exercise commencing from the detection of fraud by an individual bank upto the declaration of fraud by the JLF is to be completed within six months. Clause 8.9.6 provides thus: 8.9.6 It may be noted that the overall time allowed for the entire exercise to be completed is six months from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure adopted, it is reasonably practicable for banks to provide an adequate opportunity of a hearing to the borrowers before classifying their account as fraud. The exclusion contemplated in the decision of this Court in Tulsiram Patel (supra) would not be applicable because giving an opportunity of a hearing to the borrowers will not obstruct the taking of prompt action under the Master Directions on Frauds. 61. The RBI and lender banks have further submitted that the requirement of natural justice is already fulfilled under the Master Directions on Frauds as the borrower is allowed to participate during the preparation of the forensic audit report. On the other hand, the borrowers have submitted that the Master Directions do not expressly provide for participation of the borrowers during forensic audit report. It was also submitted that merely seeking inputs of borrowers during the preparation of the forensic audit report does not satisfy the requirements of the principles of natural justice as the borrowers should also be heard before classifying them as fraud. 62. In Keshav Mills Co. Ltd. v. Union of India (1973) 1 SCC 380 , this Court was dealing with the issue of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company should have been given an opportunity to explain the evidence against it, but also an opportunity to be informed of the proposed action of take over and to represent why it be not taken. (emphasis supplied) 64. Audi alteram partem has several facets, including the service of a notice to any person against whom a prejudicial order may be passed and providing an opportunity to explain the evidence collected. In Tulsiram Patel (supra), this Court explained the wide amplitude of audi alteram partem: 96. The rule of natural justice with which we are concerned in these appeals and writ petitions, namely, the audi alteram partem rule, in its fullest amplitude means that a person against whom an order to his prejudice may be passed should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses who are to give evidence against him examined in his presence and have the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing system. Hence, the Master Directions on Frauds lay down the procedure for banks, who in case of a breach of loan agreements by borrowers, can seek appropriate remedies by approaching law enforcement agencies and debarring borrowers from accessing further institutional finance. However, any policy decision which contemplates serious civil consequences for any person will be open to challenge for being arbitrary if the principles of natural justice are not applied during the process. 68. In E P Royappa v. State of Tamil Nadu (1974) 4 SCC 3 , this Court held that an arbitrary state action is violative of Article 14 of the Constitution. Again, in Maneka Gandhi (supra) this court reiterated that the principle of non-arbitrariness pervades Article 14. An administrative action can be tested for constitutional infirmities under Article 14 on four grounds: (i) unreasonableness or irrationality; (ii) illegality; (iii) procedural impropriety; State of AP v. McDowell, (1996) 3 SCC 709; Om Kumar v. Union of India, (2001) 2 SCC 386 and (iv) proportionality. However, the scope of such judicial review is limited to ascertaining the deficiency in the decision-making process, and not the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alteram partem is arbitrary and violative of Article 14. 71. Administrative proceedings which entail significant civil consequences must be read consistent with the principles of natural justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory rule to render it compliant with the principles of equality and non-arbitrariness envisaged under Article 14. The Master Directions on Frauds do not expressly provide the borrowers an opportunity of being heard before classifying the borrower s account as fraud. Audi alteram partem must then be read into the provisions of the Master Directions on Frauds. 72. In Olga Tellis v. Bombay Municipal Corporation (1985) 3 SCC 545, a Constitution Bench of this Court was called upon to adjudge the validity of Section 314 of the Bombay Municipal Corporation Act, 1888. The provision enabled the Municipal Commissioner to remove, without notice, any object, structure or fixture which was set up in or upon any street. Chief Justice Y V Chandrachud delivering the judgment of the Constitution Bench held that the impugned provision must be construed to ensure that the procedure contem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Bench held that where the validity of a provision would be open to serious challenge for want of an opportunity of being heard, Courts have read such a requirement into the provision. In C B Gautam (supra), this Court read the principles of natural justice into the provisions of Chapter XX-C to save them from the vice of arbitrariness. The Constitution Bench held: 30. [ ] Again, there is no express provision in Chapter XX-C barring the giving of a show-cause notice or reasonable opportunity to show cause nor is there anything in the language of Chapter XX-C which could lead to such an implication. The observance of principles of natural justice is the pragmatic requirement of fair play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an order for purchase by the Central Government is made by an appropriate authority under Section 269-UD must be read into the provisions of Chapter XX-C. There is nothing in the language of Section 269-UD or any other provision in the said Chapter which would negate such an opportunity being given. Moreover, if such a requirement were not read into the provisions of the said Chapter, they wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard. [ ] 32. In our view, therefore, if the requirement of an opportunity to show cause is not read into the said Rule, an action thereunder would be open to challenge as violative of Article 14 of the Constitution of India on the ground that the power conferred on the competent authority under the provision is arbitrary. (emphasis supplied) 77. It has been elucidated in the preceding paragraphs that the classification of a borrower s account as fraud in accordance with the procedure laid down in the Master Directions on Frauds entails significant civil consequences for the borrower. Since the Master Directions on Frauds do not expressly provide an opportunity of being heard to the borrower before classifying an account as fraud, the rule of audi alteram partem has to be read into the provisions of the said directions to save them from the vice of arbitrariness. 78. Before concluding, we also want to address the argument by the borrowers that the requirement of passing a reasoned order must be read into the Master Directions on Frauds. The borrowers also relied on Jah Developers (supra) where it was held that a final decision of the Review Committee declaring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity of being heard before reporting them to Indian Banks Association. We are unable to accept this argument of the borrowers in light of the fact that the borrowers and the third parties stand on a different footing because: (i) the borrowers are the main perpetrators of fraud, while the third parties are merely facilitators; and (ii) it is the borrowers who face the significant civil consequences stipulated under clauses 8.12.1 and 8.12.2, while the third party service providers are merely referred to the Indian Banks Association which maintains a caution list of such service providers. However, this view does not affect our conclusions in view of the discussion in the preceding paragraphs. E. Conclusion 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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