Gujarat High Court
Amit Suresh Bhatnagar vs Bank Of India on 31 August, 2023
Author: Nirzar S. Desai
Bench: Nirzar S. Desai
NEUTRAL CITATION
C/SCA/9665/2021 ORDER DATED: 31/08/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 9665 of 2021
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AMIT SURESH BHATNAGAR
Versus
BANK OF INDIA
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Appearance:
MR MANISH R. BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.
(5953) for the Petitioner(s) No. 1,2
MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2
MR ABHISHEK M MEHTA(3469) for the Respondent(s) No. 1
MR MASOOM K SHAH(6516) for the Respondent(s) No. 3
MR. SAHIL M SHAH(6318) for the Respondent(s) No. 4
NOTICE SERVED for the Respondent(s) No. 2
VIJAY H PATEL(7361) for the Respondent(s) No. 5
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CORAM:HONOURABLE MR. JUSTICE NIRZAR S. DESAI
Date : 31/08/2023
ORAL ORDER
1. Heard learned Senior advocate Mr. Manish R. Bhatt with learned advocate Mr. Munjaal Bhatt for the petitioners. Learned advocate Mr. Abhishek Mehta for Bank of India and learned advocate Mr. Sahil Shah for ICICI Bank.
2. Learned Senior Advocate Mr. Manish Bhatt, upon instructions, states that the petitioners confine this petition only to the action of respondent No.1 Bank of India of classifying their loan accounts as 'fraud account' and does not press for rest of the prayers in this petition, keeping all the rights of the petitioners open to challenge rest of the actions Page 1 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined for which the petition is preferred by availing appropriate legal remedy available to the petitioners under the law.
3. It is specific case of the petitioners as canvassed by learned Senior Advocate Mr. Bhatt that (1) before classifying the loan account of the petitioners as 'fraud account' the respondent bank has neither issued them show cause notice showing their intention to classify their account as fraud account; (2) that no forensic audit report was supplied to the petitioners before passing the order, whereby the loan account of the petitioners was classified as fraud account and (3) at no point of time the respondents have observed the principles of natural justice.
4. Learned Senior Advocate Mr. Bhatt appearing for the petitioners drew attention of this Court to the judgment of the Hon'ble Supreme Court in case of State Bank of India and others v. Rajesh Agarwal and others, reported in 2023 SCC Online SC 342. Learned Senior Advocate Mr. Bhatt for the petitioners relied upon the relevant paragraphs of the aforesaid judgment being para Nos. 83, 85 and 87, which are reproduced as under:
"83. It has been elucidated in the preceding paragraphs that the classification of a borrower's account as fraud in accordance with Page 2 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined the procedure laid down in the Master Directions on Frauds entails significant civil consequences for the borrower. Since the Master Directions on Frauds do not expressly provide an opportunity of being heard to the borrower before classifying an account as fraud, the rule of audi alteram partem has to be read into the provisions of the said directions to save them from the vice of arbitrariness.
xxx xxx xxx
85. 79. In light of the legal position noted above, we hold that the rule of audi alteram partem ought to be read in Clauses 8.9.4 and 8.9.5 of the Master Directions on Fraud. Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud. A reasoned order has to be issued on the objections addressed by the borrower. On perusal of the facts, it is indubitable that the lender banks did 58 Kranti Associates (P) Ltd. v. Masood Ahmed Khan, (2010) 9 SCC 496 not provide an opportunity of hearing to the borrowers before classifying their accounts as Page 3 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined fraud. Therefore, the impugned decision to classify the borrower account as fraud is vitiated by the failure to observe the rule of audi alteram partem. In the present batch of appeals, this Court passed an ad-interim order restraining the lender banks from taking any precipitate action against the borrowers for the time being. In pursuance of our aforesaid reasoning, we hold that the decision by the lender banks to classify the borrower accounts as fraud, is violative of the principles of natural justice. The banks would be at liberty to take fresh steps in accordance with this decision.
xxx xxx xxx E. Conclusion
87. The conclusions are summarized below:
i. No opportunity of being heard is required before an FIR is lodged and registered;
ii. 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;
iii. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of Page 4 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined the Master Directions on Frauds results in serious civil consequences for the borrower;
iv. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted;
v. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud;
vi. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order; and Page 5 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined vii. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."
5. It is canvassed on behalf of learned Senior Advocate Mr. Bhatt for the petitioners that as the entire judgment of the Hon'ble Supreme Court is based on observance of principles of natural justice before classifying the loan account to be a fraud account and as the Hon'ble Supreme Court has held that the principles of natural justice is required to be observed before classifying any loan account to be fraud account and as in the instant case, the principles of natural justice are not followed, the aforesaid judgment is squarely applicable to the facts of the present case and the matter is required to be remanded back to the concerned committee of the respective banks for considering the issue about whether the loan account of the petitioners be declared as fraud account or not, afresh after giving opportunity of hearing to the present petitioners. It is also pointed out by the learned Senior Advocate Mr. Bhatt for the petitioners that the Hon'ble Supreme Court has dismissed two applications being Misc. Application No.810 of 2023 in Civil Appeal No.7300 of 2022 vide order dated 12th May, 2023 as Page 6 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined well as Review Petition (Civil) (Diary No. 23627 of 2023) in Civil Appeal No.7300 of 2022 which was decided by the Hon'ble Supreme Court vide order dated 18.07.2023, whereby, by two separate orders as referred to hereinabove, both the applications were dismissed by the Hon'ble Supreme Court and with the dismissal of both the aforesaid applications even the question about whether the aforesaid judgment would operate retrospectively or prospectively is also put to rest and the judgment of the Hon'ble Supreme Court would be operating retrospectively.
6. Learned advocate Mr. Abhishek Mehta appearing for Bank of India vehemently opposed this petition and submitted that the ratio of the aforesaid judgment relied on by learned Senior Advocate Mr. Bhatt for the petitioners cannot be questioned. However, he draws attention of this Court to the conduct of the petitioners and states that though the loan account of the petitioners was classified as fraud account on 13.03.2018, after sitting idle for more than 3 years, the petition is preferred in the month of November, 2021 and this inordinate delay has not been explained in the petition. Mr. Mehta submitted that the petitioners are fence sitter and they preferred the petition only after the Telangana High Court in similar set of facts passed an order in favour of the borrower to the extent that before classifying the loan account of a borrower as fraud account, the borrower is required to be heard. He Page 7 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined submitted that in view of the aforesaid conduct of the petitioners though the ratio of the Hon'ble Supreme Court's judgment in case of Rajesh Agarwal and others (supra) is very clear, considering the facts of the matter and conduct of the present petitioners, the petition be dismissed.
7. It is reported by learned Senior Advocate Mr. Bhatt that against the aforesaid judgment, two applications were filed before the Hon'ble Supreme Court which are dismissed by way of two separate orders and as the aforesaid applications which were preferred to declare that the judgment of the Hon'ble Supreme Court would operate prospectively, are dismissed, the judgment of the Hon'ble Supreme Court would operate retrospectively and therefore the case of the petitioners is squarely covered by the aforesaid decision.
8. Learned advocate Mr. Abhishek Mehta appearing for the Bank despite all his vehemence could not dispute the aforesaid fact.
9. In view of the aforesaid as well as considering the fact that though a specific query was put to learned advocate Mr. Abhishek Mehta as to whether the petitioners were served with a show cause notice or whether they were provided with the forensic audit report before the decision to classify the loan account of the petitioners as 'fraud account' was Page 8 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined taken, learned advocate Mr. Mehta fairly conceded that it is true that none of the aforesaid procedure was followed by the bank and he resists this petition only on the ground of conduct of the petitioners and on the ground of delay in preferring the petition.
10. I have heard learned counsels for the parties and I have gone through the judgment of the Hon'ble Supreme Court in the case of Rajesh Agarwal and others (supra). The Hon'ble Supreme Court in para 87 of the judgment, and more particularly, in clause Nos. 4, 5, 6 and 7 has categorically observed thus:
iv. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted;
v. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud;Page 9 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023
NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined vi. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order; and vii. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."
11. In view of that, what has been considered by the Hon'ble Supreme Court is that before classifying the account of a borrower as 'fraud account', he is required to be served with a show cause notice as well as he must be provided with forensic audit report and then only such decision to classify the loan account of a borrower as 'fraud account' can be taken. In the instant case, admittedly the aforesaid procedure has not been followed and though the forensic audit report was served upon the petitioners but the same was done after the account of the Page 10 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined petitioners was classified as fraud account. In view of that, as the respondent bank has not observed the principles of natural justice as stipulated by the Hon'ble Supreme Court in para 87 while giving conclusion in respect of the issue before the Hon'ble Supreme Court, the impugned action of respondent Bank of India of classifying the loan account of the petitioners as 'fraud accounts' is in contravention of observance of principles of natural justice and therefore the same is required to be quashed and set aside.
12. The matter is remanded back, as far as the issue of classifying the loan account of the petitioners as 'fraud account', to the respondent bank and the respondent bank is directed to decide the issue afresh keeping in view the aforesaid observations of the Hon'ble Supreme Court. The petitioners are directed to cooperate in the entire procedure that the bank may follow and the bank is expected to take a decision and pass a reasoned order in accordance with the judgment of the Hon'ble Supreme Court as early as possible and preferably within a period of six months from today. It is clarified that this Court has not gone into the merits of the matter and the rights and contentions of all the parties are kept open.
13. It is clarified that since a statement is made by learned Senior Advocate Mr. Bhatt that by way of Page 11 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023 NEUTRAL CITATION C/SCA/9665/2021 ORDER DATED: 31/08/2023 undefined this petition, he is challenging only the action of Bank of India, the aforesaid order is confined only to the action of Bank of India and shall not come in way of ICICI Bank.
14. It is further clarified that this order is confined only to the action of respondent bank of classifying the loan account of the petitioners as 'fraud account' and learned Senior Advocate Mr. Bhatt for the petitioners has agreed before this Court that they are in process of availing appropriate remedy against the criminal proceedings initiated against the petitioners.
15. With the aforesaid observations and directions, petition stands disposed of. Notice discharged.
(NIRZAR S. DESAI,J) LAVKUMAR J JANI Page 12 of 12 Downloaded on : Sun Sep 17 03:03:58 IST 2023