Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2023 Supreme(Guj) 766

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
NIKHIL S. KARIEL, J.
Suresh Chhajuram Singal – Petitioner
Versus
Bank of Maharastra – Respondent
Special Civil Application No. 8624 of 2022
Decided On : 03-08-2023

Advocates:
Advocate Appeared:
For the Petitioners: Bhadresh Raju, Dhanesh R. Patel.
For the Respondents: Amar N. Bhatt, Bhargav Hasurkar.

The central legal point established in the judgment is the requirement for banks to adhere to the principles of natural justice, including providing notice and opportunity for representation, before classifying an account as fraudulent.

Headnote:
Fraudulent Accounts - Banking - [Sec. 14, Sec. 19(1)(g) of the Constitution of India, Master Circular dated 1.7.2016] - The court quashed the action of the respondent bank in classifying the accounts of the petitioners as fraudulent and directing their names to appear in the Central Fraud Registry. The court directed the removal of the names of the petitioners from the CFR and granted liberty to the bank to take appropriate action under the Master Directions on frauds if deemed necessary.
Fact of the Case:

The petitioners, who were directors in three companies, had their accounts declared as Non Performing Assets (NPA) and later classified as fraudulent accounts by the respondent bank. The Central Bureau of Investigation also registered a case against the petitioners and some bank officers. The petitioners' names were reflected in the Central Fraud Registry, leading to rejection of their application for financial facilities from another bank.
Finding of the Court:

The court found that the bank did not provide adequate opportunity to the petitioners before classifying their accounts as fraudulent and entering their names in the CFR. The court also noted that the bank had entered into a one-time settlement with the petitioners without informing them about the classification of their accounts as fraudulent.
Issues: The issues revolved around the classification of the petitioners' accounts as fraudulent, their reflection in the Central Fraud Registry, and the lack of adequate opportunity provided by the bank before taking such actions.
Ratio Decidendi: The court held that the bank's actions lacked adherence to the principles of natural justice and the application of audi alteram partem rule, as mandated by the Master Directions on frauds. The court emphasized the need for the bank to issue a notice, provide an opportunity for explanation, and pass a reasoned order before classifying an account as fraudulent.
Final Decision: The court quashed the classification of the petitioners' accounts as fraudulent and directed the removal of their names from the Central Fraud Registry. The bank was granted liberty to take appropriate action under the Master Directions on frauds if deemed necessary.

JUDGMENT :

NIKHIL S. KARIEL, J.

1. Heard learned Advocate Mr. Bhadresh S. Raju for and on behalf of Mr. Dhanesh R. Patel, learned Advocate for the petitioners; Mr. Bhargav Hasurkar, learned Advocate for and on behalf of the respondent No. 1 and Mr. Amar N.Bhatt, Learned Advocate for and on behalf of the respondent No. 2.

2. By way of this petition, the petitioners have sought for the following prayers:

(A) Your Lordships be pleased to issue a writ of mandamus, or any other appropriate writ, order or direction, quashing and setting aside the impugned action of respondent No. 1-Bank in declaring the petitioners accounts as fraud and reporting it to respondent No. 2 as fraud account as being illegal, arbitrary, suffering from vices of mala-fides, in breach of principles of natural justice and also violative of Art.14 and 19(1)(g) of the Constitution of India.

(B) Your Lordships be pleased to issue a writ of mandamus, or any other appropriate writ, order or direction, quashing and setting aside the impugned circular dated 1.7.2016 issued by the respondent No. 2 as being unconstitutional, violative of Art.14 and 19(1)(g) of the Constitution of India, in breach of principles of natural justice and bad in law.

(C) Yours Lordships be pleased to stay the implementation, operation and execution of impugned action of respondent No. 1-bank in declaring the petitioners as fraud, pending the admission, hearing and final disposal of this petition.

(D) Your Lordships be pleased to further direct the respondents to delete/remove the name of the petitioners from CFR (Central Fraud Registry) constituted by respondent No. 2 through Master Circular dated 1.7.2016.

(E) Your Lordship be pleased to grant such other and further reliefs as may be deemed fit in the interest of justice.

3. It would appear that the petitioners were Directors in three companies namely (1) M/s. Micro Polyester Pvt. Ltd. (2) M/s. Prime Polyweave Ltd. and (3) M/s. Good Luck Synthetics Pvt. Ltd. and whereas, the said companies had availed financial facility from the respondent No. 1-Bank in the early 2000 and whereas, it would also appear that the respondent-bank had also later on increased the sanctioned limit to the companies. It appears that somewhere in the financial year 2004-05, the companies according to the petitioners had suffered huge financial loss and resultantly, all the accounts of the Companies were declared Non Performing Assets (NPA) on 30th September, 2005. It also appears that the companies had also disputes with other banks from whom, they had obtained the financial facilities. It appears that as far as the present respondent no. 1 bank is concerned, the petitioners, had submitted a proposal for OTS for all the three companies and whereas, vide a communication dated 17.12.2008 issued by the Managing Committee of Board of Directors, the same was accepted and whereas, the full and final settlement had been arrived at somewhere in the year 2008-2010. It would also appears that in the interregnum, the respondent Bank has also initiated the proceedings before the Debt Recovery Tribunal, Ahmedabad by filing Original Application Nos. 3 of 2007; 4 of 2007 and 104 of 2008 against the companies respectively. It would appear that while the petitioners had settled with the respondent No. 1-Bank and the matter had stood as such in the interregnum, the Central Bureau of Investigation (referred to hereinafter “the CBI”) had registered a suo moto FIR against the petitioners as well as some of the officers of the respondent No. 1-Bank and whereas, it would appear that as of now, vide an order dated 25.8.2017, the Hon’ble Apex Court had stayed all the proceedings pending before the learned Additional Chief Judicial Magistrate, Ahmedabad in CBI Special Case No. 2 of 2010 arising from the FIR registered by the CBI referred to hereinabove.

3.1. It would appear that when the things stood as such, another company namely M/s. Akshat Paper Ltd. in which the petitioner no. 1 was a Director ha

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