DHARMESH SHARMA, J. (ORAL)

1. Learned counsel for the respondent no. 1 bank appears on advance notice and submits that the Court may pass appropriate directions as per the law. Learned counsels for respondent no. 2 & 3 although have given their attendance are not present.

2. Having heard learned counsels for the parties, it is clear that the declaration of „Fraud‟ on the petitioners‟ account, who are the suspended directors of the respondent no. 11 company, by the respondent banks no. 1 to 3 is clearly in violation of the judgment passed by the Supreme Court in the case of State Bank of India v. Rajesh Aggarwal 1 . The Supreme Court has categorically held that the Principles of Natural Justice, particularly the Rule of Audi alteram partem, must be necessarily read into the Master Directions on „Fraud‟ to prevent it from being arbitrary. It has been categorically held that classification of „Fraud‟ entails serious civil consequences for the borrower; therefore, a reasonable opportunity must be granted to the concerned persons. The relevant findings by the Supreme Court are as under:

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67. The Master Directions on Frauds do not expressly exclude a right of hearing to the borrowers before action to class their account as frauds is initiated. The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed.

70. In Mangilal v. State of M.P. [Mangilal v. State of M.P., (2004) 2 SCC 447 : 2004 SCC (Cri) 1085] , a two-Judge Bench of this Court held that the principles of natural justice need to be observed even if the statute is silent in that regard. In other words, a statutory silence should be taken to imply the need to observe the principles of natural justice where substantial rights of parties are affected : (SCC pp. 453- 54, para 10) “10. Even if a statute is silent and there are no positive words in the Act or the Rules made thereunder, there could be nothing wrong in spelling out the need to hear the parties whose rights and interest are likely to be affected by the orders that may be passed, and making it a requirement to follow a fair procedure before taking a decision, unless the statute provides otherwise. The principles of natural justice must be read into unoccupied interstices of the statute, unless there is a clear mandate to the contrary. No form or procedure should ever be permitted to exclude the presentation of a litigant's defence or stand. Even in the absence of a provision in procedural laws, power inheres in every tribunal/court of a judicial or

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quasi-judicial character, to adopt modalities necessary to achieve requirements of natural justice and fair play to ensure better and proper discharge of their duties.

Procedure is mainly grounded on the principles of natural justice irrespective of the extent of its application by express provision in that regard in a given situation. It has always been a cherished principle. Where the statute is silent about the observance of the principles of natural justice, such statutory silence is taken to imply compliance with the principles of natural justice where substantial rights of parties are considerably affected. The application of natural justice becomes presumptive, unless found excluded by express words of statute or necessary intendment. … Its aim is to secure justice or to prevent miscarriage of justice. Principles of natural justice do not supplant the law, but supplement it. These rules operate only in areas not covered by any law validly made. They are a means to an end and not an end in themselves.”

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75. As mentioned above, Clause 8.9.6 of the Master Directions on Frauds contemplates that the procedure for the classification of an account as fraud has to be completed with