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TMI Blog2024 (7) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... unts as fraud - this Court passed directions against the respondents to allow the petitioner and/or authorized representative to inspect the records of the company besides the records which are available and in possession of the IRP and once that bridge was passed, the petitioner was called upon to make representation and to be afforded an opportunity of hearing before passing appropriate directions. It is apparent that despite a clean chit given by the forensic auditor and the fact that the CIRP proceedings had been initiated from 20.04.2018, coupled with the fact that the petitioner No. 1 is described as Ex. Independent Director, a prima-facie ground is made that the impugned SCN is vulnerable in law. Further, the copies of the documents which have been relied upon, have not been supplied. The respondent is also duty bound to supply the report of the forensic audit conducted against it so as to consider what changes in the circumstances, if any, were brought out and in what manner if at all, the report was found to be not correct or unreliable. This Court finds that this is a fit case for issuance of notice and the same is apparently accepted by learned counsel for the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nown as Essar Projects (India) Limited]] had evidently availed certain loan facilities from a consortium of eight banks including the respondent-bank and although in the impugned SCN, it is alleged that some financial irregularities amounting to fraud were committed by the company in question, it is urged that the truth of the matter is that the company in question was facing economic hardships as its business had taken a down-turn due to reasons beyond its control. It is pointed out that a forensic auditor viz., Grant Thornton LLP was appointed at the behest of the respondent-bank, and pursuant thereto, the respondent-bank communicated to the company in question that the action of red flagging of its account had already been withdrawn by them. 5. It is then pointed out that eventually, proceedings under Section 7 of the IBC [Insolvency and Bankruptcy Code, 2016] were initiated against the corporate borrower before the NCLT [National Company Law Tribunal] , Mumbai in C.P. (I.B.) No. 1832/(MB)/2017 titled as IDBI Bank v. EPC Constructions India Ltd . due to purported defaults in repayment of credit facilities obtained by it. Accordingly, w.e.f. 20.04.2018 the company was admitted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne SC 342. ANALYSIS DECISION: 10. Having heard the learned counsel for the parties and on perusal of the record besides having gone through the case laws relied upon by the learned counsels for the parties, this Court finds that the issues raised by the learned Senior Advocate for the petitioners certainly require a deeper examination. 11. First things first, the decision in the case of Shantanu Prakash (supra), heavily relied upon by the learned counsel for the respondent, was one wherein this Court reiterated the decision in the case of Rajesh Agarwal (supra) and the petitioner, who was also an Ex-Director and a guarantor of the company, had availed various credit facilities from consortium of banks, of which the respondent banks were also members and it was found that there was not only a violation of the principles of nature justice inasmuch as relevant documents were not supplied to the petitioner, but also that the petitioner was not given any opportunity before classifying his accounts as fraud . Resultantly, this Court passed directions against the respondents to allow the petitioner and/or authorized representative to inspect the records of the company besides the records ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principles of natural justice, such statutory silence is taken to imply compliance with the principles of natural justice where substantial rights of parties are considerably affected. The application of natural justice becomes presumptive, unless found excluded by express words of statute or necessary intendment. Its aim is to secure justice or to prevent miscarriage of justice. Principles of natural justice do not supplant the law, but supplement it. These rules operate only in areas not covered by any law validly made. They are a means to an end and not an end in themselves. . 75. As mentioned above, Clause 8.9.6 of the Master Directions on Frauds contemplates that the procedure for the classification of an account as fraud has to be completed within six months. The procedure adopted under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud. During this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report. Given the wide time-frames contemplated under the Master Directions on Frauds as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not, however, conform to the judicial process in a court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing within the meaning of audi-alteram partem rule in a quasi-judicial or administrative inquiry. 81. Audi alteram partem, therefore, entails that an entity against whom evidence is collected must : (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the lender banks to classify the borrower accounts as fraud, is violative of the principles of natural justice. The banks would be at liberty to take fresh steps in accordance with this decision. ........... 98. The conclusions are summarised below: 98.1. No opportunity of being heard is required before an FIR is lodged and registered. 98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers. 98.3. 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. 98.4. 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. 98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the timeframe contemplated under the Master Directions on Frauds as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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