IMPORTANT POINT
The classification of an account as fraud must adhere to principles of natural justice, including providing a reasoned order and opportunity to be heard.

ORDER :

Heard Mr.TPS Harsha, learned counsel appearing on behalf of the petitioner, Mr.Gadi Praveen Kumar, learned Deputy Solicitor General of India, appearing on behalf of respondent No.1, and Mr.V.Aneesh, learned counsel appearing on behalf of respondent No.3.

2. The Petitioner approached the Court seeking prayer as under :

“…to issue a writ of mandamus or any other appropriate writ, order or direction (i) Declaring the action of Respondent No.3 in classifying the Petitioner’s account as ‘Fraud’, as arbitrary, illegal, unconstitutional, in violation of the principles of natural justice and the mandate laid down by the Hon’ble Supreme Court, and set aside the same; (ii) Consequently, declare all actions taken by the Respondents in pursuance of the action of the Respondent No.3 in classifying the Petitioner’s account as ‘Fraud’ as arbitrary, illegal, unconstitutional, in violation of the principles of natural justice and the mandate laid down by the Hon’ble Supreme Court, and set aside the same;(iii) and pass such other order or orders..”

3. The case of the Petitioner, in brief, as per the averments made in the affidavit filed in support of the present writ petition :

The Petitioner i.e., KARVY Stock Broking Limited, Gachibowli, Hyderabad, account had been classified as ‘Fraud’ on 26.08.2021 by the Respondent No.3 and the same had been reported to the Respondent No.2. It is the specific case of the Petitioner that the classification of the Petitioner Company’s Account as fraud was done without the issuance of prior notice to the petitioner and without providing the copy of any final forensic audit report to the Petitioner and the petitioner was denied a reasonable opportunity to be heard. It is further the case of the Petitioner that no reasonable opportunity had been provided to the Petitioner by Respondent No.3 prior to declaring Petitioner’s account as ‘fraud’. The main grievance of the Petitioner is that in the event of an opportunity of hearing had been provided to the Petitioner the Petitioner would have been able to demonstrate as to how there was no fraud in the operation of Petitioner’s account. However, no such opportunity of being heard had been provided to the petitioner. Aggrieved by the same the Petitioner filed the present writ petition.

PERUSED THE RECORD

4. The interim orders of this Court dated 16.08.2023 passed in W.P.No.21223/2023 read as under :

“Heard the learned senior counsel Mr.Avinash Desai appearing on behalf of the petitioner.

This Court vide its order dated 08.08.2023 permitted the learned senior counsel for the petitioner to take out personal Notice on the respondents through RPAD and to file proof of service into the registry.

The learned senior counsel for the petitioner represents that the order dated 08.08.2023 had been complied with and a memo has been filed vide USR No.77361 of 2023 on 14.08.2023.

A bare perusal of the contents of the Memo, dated 14.08.2023 indicates that the Notice has been served on the Respondent No.3 and in so far as 2nd respondent is concerned it indicates as "Item Dispatched".

It is the specific case of the petitioner that the petitioner's account has been classified as 'fraud' by the respondent No.3 and reported to the respondent No.2 and the same was done without the issuance of any prior notice to the petitioner and without providing the copy of any such final forensic audit report to the petitioner in order to provide the petitioner with a reasonable opportunity to be heard.

The Apex Court in the Judgment reported in 2023 (6) SCC 1 in State Bank of India and others vs. Rajesh Agarwal and others at paras 94 and 95 observed as under:

"94. Before concluding, we also want to address the argument by the borrowers that the requirement of passing a reasoned order must be read into the Master Directions on Frauds. The borrowers also relied on Jah Developers wherein it was held that a final decision of the Review Committee declaring the borrower as a "willful defaulter' must be made by