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TMI Blog2024 (2) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... e that, the petitioners are the promoters, suspended directors and share holders of the company. Company vide order dated 06.04.2021 is currently in the Corporate Insolvency Resolution Process (CIRP) under the provisions of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "the Code of 2016"). It is around 04.07.2020, the company came to know about the South Indian Bank i.e. a member of the consortium banks i.e. respondent nos.3 to 19 having taken steps to notify fraud in relation to the loan account of the company. 2.1 It is the case of the petitioners that meetings were convened on 18.08.2020 and 29.09.2020 and during that period, forensic audit reports dated 11.08.2020 and 18.09.2020 were discussed. Also, issues were discussed including the issue about the account being declared as a fraud by the South Indian Bank. In the meeting dated 29.09.2020 on the basis of the forensic audit report dated 11.08.2020 and supplementary forensic audit report dated 18.09.2020, the account of the company was declared as fraud illegally. Moreover, the petitioners have learnt about the said declaration of fraud by the Punjab National Bank, Punjab & Sind Bank, Karnataka Bank Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any as fraud were never supplied to the petitioners and what was shared, was the observations of the draft forensic audit report to the petitioners. Reliance is placed on the judgment in the case of State Bank of India and Others v. Rajesh Agarwal and Others reported in (2023) 6 SCC 1. It is submitted that Master Directions of 2016 were challenged before the different High Courts primarily on the ground that no opportunity of being heard is envisaged to the borrowers before classifying their accounts as fraudulent. The issue before the Apex Court was whether the principles of natural justice should be read into the provisions of the Master Directions of 2016 on Frauds. Apex Court has held and observed that the principles of natural justice, particularly the rule of audi alteram partem, has to be necessarily read into the Master Directions on Frauds to save it from the vice of arbitrariness. The Apex Court has further held that rule of of audi alteram partem ought to be read into Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds. Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, it is submitted that it will apply to the respondent no.20 and owing to the assignment deed executed, it will be the respondent no.20 who would now be taking steps against petitioners. 5. Mr S. N. Soparkar, learned senior counsel with Mr Masoom K. Shah, learned advocate appearing for respondent no.20, has vehemently opposed the stand taken by the respondent lender banks it being incorrect for, vide order dated 06.04.2021, the Tribunal was pleased to admit the company into the Corporate Insolvency Resolution Process (CIRP) under the provisions of the Code of 2016. Respondent no.20 is an Asset Reconstruction Company which was one of the successful resolution applicants in the CIRP of company. As a result of the proceedings before the Tribunal, that the respondent no.20 and the company have mutually agreed that respondent no.20 shall extinguish the balance financial debt. Pursuant to which, an 'Agreement for Extinguishment of Debt', came to be executed whereby, the balance financial debt was extinguished. Therefore, so far as respondent no.20 is concerned, it has no relationship of the lender and the borrower. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt or NPA account as RFA or Fraud at the individual level and the responsibility of the bank to report the RFA or Fraud status of the account on the CRILC platform so that other banks are alerted. Clause 8.9.5 envisages completion of forensic audit within a stipulated period. It also provides that in case the decision is to classify the account as a fraud, the RFA status shall be changed to fraud in all banks and to report to Reserve Bank of India and on the CIRLC platform within a stipulated period. 10. Master Direction of 2016 on frauds, was subject matter of challenge before various High Courts on the ground that no opportunity of being heard is envisaged to the borrowers before classifying the account as fraudulent. The judgment rendered by the High Court of Telangana was subject matter of challenge before the Apex Court wherein, it was held that the principles of natural justice must be read into the provisions of Master Directions of 2016 on frauds. The issue before the Apex Court was as to whether the principles of natural justice should be read into Master Directions of 2016 on frauds. The Apex Court, held and observed that the principles of natural justice and more parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds. 93. 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. 94. 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 wherein it was held that a final decision of the Review Committee declaring the borrower as a "wilful defaulter" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... barment 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. 98.5. 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. 98.6. 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. 98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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