Borrower to be given opportunity of hearing before classifying their account as fraud – SC

Banks to offer opportunity of hearing to borrowers before classifying their account as fraud – Supreme Court

ABCAUS Neutral Case Law Citation:
ABCAUS 3693 (2023) (03) SC

In the instant case, RBI and various banks had challenged the order passed by the High Court holding that the principles of natural justice must be read into the provisions of the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016.

The above Directions were challenged in various High Courts on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent.

A Division Bench of the Hon’ble Supreme Court consisting of Chief Justice held 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. Since the classification of an account as fraud entails serious civil consequences for the borrower, the  directions must be construed reasonably by reading into them   the requirement of observing the principles of natural justice.

The summary of the conclusions reached by their Lordships is as under:

(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) 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. 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 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/Joint Lenders Forum 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.

Accordingly, the appeals were disposed off

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