IMPORTANT POINT
The court established that the principles of natural justice require that a borrower be given notice and an opportunity to respond before their account is classified as fraud.

JUDGMENT :

SHAMPA SARKAR, J.

1. The writ petition has been filed challenging an order passed by the State Bank of India declaring the petitioners’ bank account as fraud. The ground for challenge is that personal hearing was not given to the petitioner. The second ground is that the forensic audit report that was relied upon, had not been supplied.

2. The petitioner places emphasis on the issue of violation of the principles of natural justice. It is submitted that the jurisdiction of this Court is being invoked as the principle of audi alteram partem being an essential element of any decision making process, had been not followed.

3. It is also submitted that the petitioner ceased to be a Director of the bank/borrower company from 2018 and the declaration of NPA was made later. Thus, the bank could not proceed against the petitioner who was neither a whole time director nor a promoter at the relevant time.

4. It is submitted by Mr. Banerjee, learned Senior Advocate, representing the petitioners that the Hon’ble Apex Court and the Hon’ble High Court had repeatedly held that any document relied on by the Bank, should be supplied to the borrower and the borrower must be given an opportunity to explain his defence against the proposed allegations of the lender/Bank.

5. Reliance has been placed on the decision of a Coordinate Bench in the matter of Hemant Kanoria-vs.-Bank of India, reported in 2024 SCC Online Cal 1012.

6. Mr. Rai, learned Advocate appearing on behalf of the State Bank of India submits that personal hearing was not necessary. He relies on a decision of the Hon’ble Apex Court passed in Misc. Application No. 810 of 2023 arising out of Civil Appeal No. 7300 of 2022 (State Bank of India & Ors.-vs.-Rajesh Agarwal & Ors.) The miscellaneous application was filed by the Union of India for a clarification of the observations made by the Hon’ble Apex Court in the decision of State Bank of India & Ors.-vs.-Rajesh Agarwal & Ors., reported in (2023) 6 SCC 1.

7. To counter such argument, Mr. Rai submits that although the Master Circular of 2015 provides for grant of an opportunity of hearing to the borrower before the borrower is declared to a wilful defaulter, such provision is not applicable in case of declaration of fraud. A personal hearing is not required to be provided. To substantiate such claim, Mr. Rai, submits that as per the direction of the Hon’ble Apex Court in Rajesh Agarwal (supra), the grounds on which the bank proposed to declare the account as fraud were to be informed to the borrower and the borrower was to be given sufficient opportunity to reply to such show cause. No further hearing was necessary. The adjudication was not akin to a court proceeding.

8. Relying on the order of the Hon’ble Apex Court in the Misc. Application, Mr. Rai submits that the Hon’ble Apex Court had clarified the directions in Rajesh Agarwal & Ors. (supra) and went on to hold that opportunity of being heard would not mean a personal oral hearing. Reliance has been placed on the first paragraph of the order which is quoted below:-

“The apprehension which has been expressed by the Solicitor General of India is that since the judgment of the Division Bench of the High Court of Telengana dated 10 December, 2022 was upheld in the judgment of this Court dated 27 March, 2023, the judgment of this Court may be interpreted in the future to mean that the grant of a personal hearing is mandatory though it has not been so directed in the conclusions set out in paragraph 81 of the judgment.”

9. Having heard Learned Advocates for the respective parties, this Court finds that admittedly, a hearing was not given to the petitioner. Secondly, the order of the Bank indicates that the bank had relied on some prior decision of the ICICI Bank and AXIS Bank and two forensic audit reports. The order of the Committee for Identification of the account as fraud and the proceedings of the meeting indicate that weightage was given to the decision of the ICICI Bank and the Ax