2023 Supreme(SC) 277

SUPREME COURT OF INDIA
DHANANJAYA Y. Chandrachud, CJI., HIMA KOHLI, J.
State Bank of India & Ors - Appellants
Versus
Rajesh Agarwal & Ors - Respondents
Civil Appeal No. 7300 to 7307 of 2022, Writ Petition No. 138 of 2022
Decided on : 27-03-2023

IMPORTANT POINTS
(1) Loan frauds – Consistent with the principles of natural justice, lender banks should provide opportunity to a borrower by furnishing a copy of audit reports and allow borrower a reasonable opportunity to submit a representation before classifying account as fraud – Civil consequences which follow upon a classification of a borrower’s account as fraud are serious and prejudicial to interests of a borrower.
(2) Natural Justice – Applicability – Principles of natural justice are not applicable at stage of reporting a criminal offence – Rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions – It is mandatory to provide for opportunity of being heard when an administrative action results in civil consequences to a person or entity.

Headnote:

(A) Banking Regulation Act, 1949 – Section 35A – Loan frauds – Chapter VIII of RBI issued Master Directions on Frauds – Early Warning Signals(EWS) and Red Flagged Accounts (RFA) – Classification of a borrower’s account as fraud under Master Directions on Frauds has difficult civil consequences for borrower – Although procedure adopted for declaration of a wilful defaulter is different from that envisaged for classifying borrower’s account as fraud, they will face similar consequences – Classification of borrower’s account as fraud under Master Directions on Frauds virtually leads to a credit freeze for borrower, who is debarred from raising finance from financial markets and capital markets – Bar from raising finances could be fatal for borrower leading to its ‘civil death’ in addition to infraction of their rights under Article 19(1)(g) of Constitution – Since debarring disentitles a person or entity from exercising their rights and/or privileges, it is elementary that principles of natural justice should be made applicable and person against whom an action of debarment is sought should be given an opportunity of being heard – Debarment is akin to blacklisting a borrower from availing credit. (Paras 40, 41, 42 and 48)

(B) Banking Regulation Act, 1949 – Section 35A – Loan frauds – Consistent with principles of natural justice, lender banks should provide opportunity to a borrower by furnishing a copy of audit reports and allow borrower a reasonable opportunity to submit a representation before classifying account as fraud – Civil consequences which follow upon a classification of a borrower’s account as fraud are serious and prejudicial to interests of a borrower – Principles of fair play require that borrower ought to be given opportunity of being heard before classifying account as fraud in accordance with procedure laid down under Master Directions on Frauds – Master Directions on Frauds do not expressly exclude a right of hearing to borrowers before action to class their account as frauds is initiated – Principles of natural justice can be read into a statute or a notification where it is silent on granting opportunity of a hearing to a party whose rights and interests are likely to be affected by orders that may be passed – Principles of natural justice demand that borrowers must be served a notice, given opportunity to explain findings in forensic audit report, and to represent before account is classified as fraud under Master Directions on Frauds – Impugned decision to classify borrower account as fraud is vitiated by failure to observe rule of audi alteram partem. (Paras 51, 52, 53, 65, 79 and 81)

(C) Natural Justice – Audi Alteram Partem – Principles of natural justice are not mere legal formalities – They constitute substantive obligations that need to be followed by decision-making and adjudicating authorities – 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) no person should be a judge in their own cause; and (ii) a person affected by administrative, judicial or quasi-judicial action must be heard before a decision is taken – Courts generally favour interpretation of a statutory provision consistent with principles of natural justice because it is presumed that statutory authorities do not intend to contravene fundamental rights – Application of said principles depends on facts and circumstances of case, express language and basic scheme of statute under which administrative power is exercised, nature and purpose for which power is conferred, and final effect of exercise of that power. (Paras 29 and 30)

(D) Natural Justice – Applicability – Principles of natural justice are not applicable at stage of reporting a criminal offence – Rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions – It is mandatory to provide for opportunity of being heard when an administrative action results in civil consequences to a person or entity – Every order or proceeding which involves civil consequences or adversely affects a citizen should be in accordance with principles of natural justice. (Paras 32 and 36)

(E) Natural Justice – Statutory silence should be taken to imply need to observe principles of natural justice where substantial rights of parties are affected – Exigency of a situation is contextual – Court must lean in favour of reading in principles of natural justice when faced with a regulatory silence – Any exclusion must be confined to narrowest possible limits – Application of requirement of a prior hearing could be excluded only in situations where importing it would have effect of paralyzing entire process. (Paras 56 and 60)

(F) Constitution of India – Equality and non-arbitrariness – Fairness in action requires that procedures which permit impairment of fundamental rights ought to be just, fair, and reasonable – Principles of natural justice have a universal application and constitute an important facet of procedural propriety envisaged under Article 14 – Rule of audi alteram partem is recognized as being a part of guarantee contained in Article 14 – Administrative proceedings which entail significant civil consequences must be read consistent with principles of natural justice to meet requirement of Article 14 – Where possible, rule of audi alteram partem ought to be read into a statutory rule to render it compliant with principles of equality and non-arbitrariness envisaged under Article 14 – Master Directions on Frauds do not expressly provide borrowers an opportunity of being heard before classifying borrower’s account as fraud – Audi alteram partem must then be read into provisions of Master Directions on Frauds. (Paras 69 and 71)

Facts of the case:

Instant civil appeals arise out of a challenge to Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. Issued by the Reserve Bank of India, 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. High Court of Telangana has held in the impugned judgment 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.

Findings of Court:

Judgment of the Division Bench of High Court of Telangana dated 10 December 2020 is upheld. Judgments of the High Court of Telangana dated 22 December 2021 and 31 December 2021, and of the High Court of Gujarat dated 23 December 2021 are accordingly set aside. The Civil Appeals are disposed of. Writ Petition (C) No. 138 of 2022 is also disposed of.

Result : Civil Appeals disposed of.