The principle of Audi Alteram Partem must be applied before classifying an account as fraud under RBI guidelines, ensuring borrowers are given a fair opportunity to be heard.

ORDER :

(ANIRUDDHA P. MAYEE, J.) 

1. By the present writ petition, the petitioners pray for an appropriate direction to quash and set aside the declaration of the account of petitioner No.1 as fraud under the RBI Circular, declared on 12.4.2021 in FIR No.RC0572022S0001 dated 27.3.2022.

2. Learned counsel Mr. Arjun Sheth appearing on behalf of the petitioners submits that the petitioners were never issued any show cause notice nor any opportunity of hearing was accorded to the petitioners before declaring the account of petitioner No.1 as fraud on 12.4.2021. Mr. Sheth submits that it appears that the respondent Bank has relied upon the Forensic Audit Report dated 12.3.2020 given by M/s. R.K. Doshi & Co. LLP before arriving at such an adverse conclusion against the petitioners. Mr. Sheth submits that the respondent Bank has not supplied any material, including the Forensic Audit Report, to the petitioners before declaring the account of petitioner No.1 as fraud account. In support of his submissions, Mr. Sheth relies upon the judgment of the Apex Court in the case of State Bank of India and Others v. Rajesh Agarwal and Others reported in (2023) 6 SCC 1, wherein it has been held that the Master Directions on fraud issued by the RBI do not expressly provide an opportunity of hearing to the petitioner- borrowers before classifying their accounts as fraud. The principle of Audi Alteram Partem has to be read into the Master Directions to save the borrowers from the vice of arbitrariness. Mr. Sheth, therefore, submits that the declaration dated 12.4.2021 by the respondent Bank declaring the bank account of the petitioner No.1 as fraud account be set aside in view of the law laid down by the Hon’ble Apex Court.

3. Learned counsel Mr. Manish S. Shah appearing on behalf of the respondent Bank does not dispute the legal position laid down by the Hon’ble Apex Court in the afore-mentioned judgment in the case of State Bank of India v. Rajesh Agarwal (supra). Mr. Shah submits that the action of the respondent Bank was taken under the master directions issued by the RBI, which did not envisage an opportunity of hearing before declaring the bank account as fraud account and the respondent Bank has acted as per said master directions and no error can be attributed to the respondent Bank for deliberately not providing an opportunity of hearing to the petitioners.

4. Considered the submissions of the learned counsels for the parties and perused the documents on record.

5. The Apex Court in the case of State Bank of India v. Rajesh Agarwal (supra) has held in para-81 as under:-

“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 decision to classify an account as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or through a JLF, have to decide whether a borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds.

“E. Conclusion 81

98. The conclusions are summarized 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 investigating agencies, but also has other penal and civil consequences against the borrowers;

98.3. Deba