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IN THE HIGH COURT OF FOR THE STATE OF TELANGANA
R.S. CHAUHAN, B. VIJAYSEN REDDY, JJ.
Rajesh Agarwal – Appellant
Versus
Reserve Bank of India and Ors. – Respondents
Writ Petition No. 19102 of 2019
Decided On : 10-12-2020
The Master Circular issued by the Reserve Bank of India (RBI) under Section 35-A of the Banking Regulation Act, 1949, for the classification and reporting of frauds by commercial banks and select financial institutions, is a statutory direction with the purpose of detecting and reporting frauds early, taking timely action like reporting to investigative agencies, and initiating staff accountability proceedings. The Master Circular prescribes an elaborate procedure for early detection and reporting of frauds, including checks and investigations during different stages of the loan life cycle. However, the Master Circular does not explicitly incorporate the principles of natural justice, particularly the right to a hearing, before a borrower's account is classified as 'fraud'.
Fact of the Case:
The petitioner, a former Chairman and Managing Director of a company, challenged the decision of the Joint Lenders Forum (JLF) classifying the company's account as 'fraud' and the subsequent resolution of the Fraud Identification Committee (FIC) confirming the classification. The petitioner argued that the Master Circular was unconstitutional as it did not provide for an opportunity of hearing before declaring an account as 'fraud', which adversely affected his fundamental rights under Articles 19(1)(g) and 21 of the Constitution of India. The respondents, including the RBI and the banks involved, contended that the Master Circular did not require a hearing and that the petitioner had no locus standi to challenge the impugned decisions since the company was under insolvency proceedings.
Finding of the Court:
The High Court held that the principles of natural justice, especially the principle of audi alteram partem (right to a hearing), should be read into Clauses 8.9.4 and 8.9.5 of the Master Circular, which deal with the decision-making process of the JLF and the FIC in classifying accounts as 'fraud'. The Court found that the classification of an account as 'fraud' had grave civil consequences for the borrower, including debarment from raising funds from financial institutions and potential criminal prosecution. Therefore, the denial of an opportunity of hearing before such a classification violated the principles of natural justice and was arbitrary and unreasonable.
Issues: 1. Whether the principles of natural justice, particularly the right to a hearing, should be read into the Master Circular issued by the RBI for the classification and reporting of frauds by banks and financial institutions. 2. Whether the classification of a borrower's account as 'fraud' without providing an opportunity of hearing violates the fundamental rights of the borrower under Articles 19(1)(g) and 21 of the Constitution of India.
Ratio Decidendi: 1. The principles of natural justice, including the right to a hearing, are fundamental principles of fairness and reasonableness that apply to administrative and quasi-judicial decisions. These principles are not explicitly stated in the Master Circular, but they can be implied to ensure that the classification of an account as 'fraud' is not arbitrary or unreasonable. 2. The classification of a borrower's account as 'fraud' has grave civil consequences, including debarment from raising funds from financial institutions and potential criminal prosecution. Such a classification, without providing an opportunity of hearing to the borrower, violates the principles of natural justice and is arbitrary and unreasonable. 3. The Master Circular aims to detect and report frauds early, but this objective cannot be achieved at the cost of fundamental principles of fairness and justice. The principles of natural justice can be adapted to urgent situations by providing a short but substantive and effective hearing, rather than a full-blown trial.
Final Decision: The High Court allowed the writ petition and set aside the decision of the JLF classifying the company's account as 'fraud' and the resolution of the FIC confirming the classification. The Court directed the JLF to provide an opportunity of hearing to the petitioner and the Official Liquidator before taking any further decision on the matter. The Court also directed the FIC to consider the JLF's decision after the hearing and pass a fresh resolution.
JUDGMENT :
R.S. Chauhan, J.
1. Aggrieved by the non-inclusion of principles of natural justice in the Master Directions on Fraud ('the Master Circular', for short), dated 01.07.2016, issued under Section 35-A of the Banking Regulation Act, 1949 by the Reserve Bank of India, aggrieved by the decision of the Joint Lenders Forum ('the JLF', for short) dated 15-02-2019, and aggrieved by the resolution of the Fraud Identification Committee ('FIC', for short) dated 31.07.2019, whereby both the JLF and the FIC have classified the account of M/s. B. S. Limited, ('the Company', for short), of which the petitioner was the former Chairman and Managing Director, as 'fraud' and 'willful defaulter', the petitioner, Mr. Rajesh Agarwal, has approached this Court.
2. Briefly, the facts of the case are as under:
2.1. The petitioner was the Chairman and the Managing Director of the Company-a Company incorporated and registered under the Companies Act, 1956, having its registered office at Hyderabad. The Company was engaged in the business of Power Transmission & Distribution, Passive Telecom Infrastructure; it also worked in the area of Renewable Energy, and Mineral Resources. During the period 2006-2014, in the course of its business, the Company approached several banks, including the respondent Banks, and availed a loan of Rs. 1406.00 Crores. In the year 2013, the Madhya Pradesh Power Transmission Company Limited ('MPPTCL') awarded the work of construction of 220KVA and 132KVA Sub-Stations, Transmission Lines, Augmentation Works and Feeder Way works to the Company. However, according to the MPPTCL, as there was delay in execution of the works, and shortage of working capital, it terminated the contract with the Company. Consequently, the MPPTCL also encashed the bank guarantees of Rs. 140.00 Crores. Due to the cancellation of contract, and the encashment of the bank guarantee, the Company suffered huge financial losses. Consequently, the Company was unable to repay the loan amount to the Lender Banks. It, thus, committed default in repayment of the loan amounts.
2.2. As per the Circular Guidelines of the Reserve Bank of India ('RBI'), respondent No. 1, all Lender Banks, with the State Bank of India ('SBI'), respondent No. 2 as the Lead Bank, formed the JLF (a Joint Lenders Forum). On 29.06.2016 the JLF declared the Company's accounts as Non-Performing Assets ('NPAs', for short). On the same day, the JLF requested the Company to provide a Corrective Action Plan towards regularization of its account. Moreover, in accordance with the Scheme for Sustainable Structuring of Stressed Assets ('S4A', for short)-a scheme announced by the RBI vide Circular dated 13.06.2016, the JLF decided to adopt the said S4A scheme, and to conduct a Forensic Audit and Techno-Economic Viability ('TEV') in its meeting held on 11.07.2016.
2.3. According to the petitioner, the Company submitted clarifications to the Forensic Auditor. Basing on the Forensic Audit Report, dated 29.08.2016, on 31.08.2016, the JLF closed the issue observing that "there were no irregularities, with regard to fraudulent transactions pointed out in the Forensic Audit Report".
2.4. However, basing on the TEV Report, dated 14.09.2016, in its meeting, on 14.09.2016 itself, the JLF observed that the Company was ineligible for S4A scheme as there were no minimum prescribed free cash flows by the Company. Therefore, the JLF requested the Company to submit an alternative plan for regularization of its account. Consequently, the Company proposed a scheme under One Time Settlement ('OTS', for short). However, the said proposal was rejected by the JLF in February, 2018. Thereafter, one of the lender Banks, i.e. IDBI Bank, the respondent No. 9, declared the account of the Company as "Red Flagged Account" ('RFA', for short). Moreover, basing on the Second Forensic Audit Report, dated 06.04.2018, on 21.04.2018, the IDBI Bank called for explanation from the Company. Promptly, the Company submitted its reply on 24.0
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