Delhi High Court - Orders
Ballarpur International Holdings B. V vs Reserve Bank Of India & Anr on 8 February, 2024
$~56
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 1826/2024 & CM APPLs. 7640/2024 & 7641/2024
BALLARPUR INTERNATIONAL HOLDINGS B. V...... Petitioner
Through: Mr. Sajan Poovayya, Senior Advocate
with Mr. Anand Shrivastava,
Mr. Palash Maheshwari, Ms. Amrita
Bakhshi and Mr. Yash Sharma,
Advocates.
(M): 7087242405
Email: [email protected]
versus
RESERVE BANK OF INDIA & ANR. ..... Respondents
Through: Mr. Sidhartha Barua, Advocate for
respondent no. 2.
CORAM:
HON'BLE MS. JUSTICE MINI PUSHKARNA
ORDER
% 08.02.2024 CM APPL. 7641/2024 (For Exemption)
1. Exemption allowed, subject to just exceptions.
2. Application is disposed of.
W.P.(C) 1826/2024 & CM APPL. 7640/2024
3. The present petition has been filed with prayer for setting aside the declaration of the petitioner's account and of its directors, as red flag account and/or fraud by the respondent bank and all proceedings or actions initiated or taken consequent to such declaration. There is further prayer for direction to the respondent no. 1 to ensure that respondent no. 2 does not This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:40 take any fresh/further action under the Master Directions on Fraud Classification and Reporting by Commercial Banks and Select Financial Institutions dated 01st July, 2016 ("Master Directions on Fraud"), issued by the Reserve Bank of India, without providing an opportunity of being heard to the petitioner and its directors.
4. Learned Senior Counsel appearing for the petitioner submits that the respondent-bank, without following the Principles of Natural Justice and providing any opportunity of hearing to the petitioner, has declared the account of the petitioner as 'fraud' under the Master Directions on Fraud.
5. It is further submitted that the respondent-bank did not inform the petitioner either about the Forensic Audit Report, nor was any information provided to the petitioner or its authorised directors, about the reasons for classifying the petitioner's account as 'fraud'.
6. It is further submitted that the petitioner was kept in the dark regarding 'fraud' classification for over two years. The petitioner came to know about the 'fraud' being reported in its account maintained with the respondent-bank only when the petitioner was asked to join the investigation pursuant to the registered case i.e. RC No. 2192023E0007 dated 29th March, 2023.
7. Learned Senior Counsel for the petitioner submits that the aforesaid action of the respondent-bank is in clear violation of the judgment of the Supreme Court in the case of State Bank of India and Others Versus Rajesh Agarwal and Others, 2023 SCC OnLine SC 342. It is submitted that the Supreme Court has categorically held that the Principles of Natural Justice have to be complied with before declaration of 'fraud' for account of any borrower.
This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:40
8. Mr. Sidhartha Barua, learned counsel appearing on advance notice on behalf of respondent no. 2, concedes to the fact that no Show Cause Notice was issued to the petitioner. He submits that the declaration of the petitioner's account was done much prior to the judgment of the Supreme Court in the case of Rajesh Agarwal (supra). He submits that at that point of time, the law did not as such require issuance of any notice for declaration of the bank account of borrower as 'fraud'.
9. Having heard learned counsel for the parties and having perused the record, this Court is of the view that once the Supreme Court has declared in the aforesaid case of Rajesh Agarwal (Supra) that Principles of Natural Justice have to be followed and Show Cause Notice has to be issued before declaration of a person's account as 'fraud', the declaration in the present case having been made without following the due process, as aforesaid, has to be necessarily set aside.
10. This Court notes that in the case of Rajesh Agarwal (supra), the Supreme Court has held in categorical terms that the Principles of Natural Justice have to be read into the provisions of the Master Directions on Fraud. The Supreme Court has further directed the banks to provide an opportunity of hearing to the borrowers before classifying their accounts as 'Fraud'. Since in the present case, the respondent did not intimate the petitioner about the classification of its account with the respondent-bank as 'Fraud', the present declaration of 'Fraud' by the respondent is clearly in the teeth of aforesaid judgment of the Supreme Court and in violation of the Principles of Natural Justice.
11. Holding that Principles of Natural Justice have to be followed before declaration of a borrower's account as 'fraud', the Supreme Court in the This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:41 judgment of Rajesh Agarwal (Supra), has held as follows:-
"xxx xxx xxx
75. As mentioned above, Clause 8.9.6 of the Master Directions of Frauds contemplates that the procedure for the classification of an account as fraud has to be completed within six months. The procedure adopted under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud. During this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report. Given the wide time-frames contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for banks to provide an adequate opportunity of a hearing to the borrowers before classifying their account as fraud.
xxx xxx xxx
79. In Swadeshi Cotton Mills, this Court held that a company is entitled to an opportunity to explain the evidence collected against it and represent why the proposed action should not be taken: (SCC p.707, para 85) "85. The contention does not appear to be well founded. Firstly, this documentary evidence, at best, shows that the Company was in debt and the assets of some of its "units" had been hypothecated or mortgaged as security for those debts. Given an opportunity the Company might have explained that as a result of this indebtedness there was no likelihood of fall in production, which is one of the essential conditions in regard to which the Government must be satisfied before taking action under Section 18-AA(1)(a). Secondly, what the rule of natural justice required in the circumstances of this case, was not only that the Company should have been given an opportunity to explain the evidence against it, but also an opportunity to be informed of the proposed action of take over and to represent why it be not taken."
80. Audi alteram partem has several facets, including the service of a notice to any person against whom a prejudicial order may be passed and providing an opportunity to explain the evidence collected. In Tulsiram Patel, this Court explained the wide amplitude of audi alteram partem:
"96. The rule of natural justice with which we are concerned in these appeals and writ petitions, namely, the audi alteram partem rule, in its fullest amplitude means that a person against whom an order to his prejudice may be passed should be informed of the allegations and charges against him, be given This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:41 an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses who are to give evidence against him examined in his presence and have the right to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not, however, conform to the judicial process in a court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing within the meaning of audi alteram partem rule in a quasijudicial or administrative inquiry."
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.
xxx xxx xxx
85. Fairness in action requires that procedures which permit impairment of fundamental rights ought to be just, fair, and reasonable. The principles of natural justice have a universal application and constitute an important facet of procedural propriety envisaged under Article 14. The rule of audi alteram partem is recognised as being a part of the guarantee contained in Article 14. A Constitution Bench of this Court in Tulsiram Patel has categorically held that violation of the principles of natural justice is a violation of Article 14. The Court held that any State action in breach of natural justice implicates a violation of Article 14: (SCC p. 476, para 95) "95. The principles of natural justice have thus come to be recognised as being a part of the guarantee contained in Article 14 because of the new and dynamic interpretation given by this This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:41 Court to the concept of equality which is the subject-matter of that article. Shortly put, the syllogism runs thus : violation of a rule of natural justice results in arbitrariness which is the same as discrimination; where discrimination is the result of State action, it is a violation of Article 14 : therefore, a violation of a principle of natural justice by a State action is a violation of Article 14. Article 14, however, is not the sole repository of the principles of natural justice. What it does is to guarantee that any law or State action violating them will be struck down. The principles of natural justice, however, apply not only to legislation and State action but also where any tribunal, authority or body of men, not coming within the definition of "State" in Article 12, is charged with the duty of deciding a matter. In such a case, the principles of natural justice require that it must decide such matter fairly and impartially." xxx xxx xxx
95. 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 not provide an opportunity of hearing to the borrowers before classifying their accounts as 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
98. The conclusions are summarised 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 the investigating agencies, but also has other penal and civil consequences against the borrowers.
98.3. Debarring the borrowers from accessing institutional finance under This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:41 Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower.
98.4. 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. 98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the timeframe 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.
98.6. 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.
98.7. 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. xxx xxx xxx "
12. At this stage, learned counsel appearing for the respondent no. 2 bank draws the attention of this Court to paragraph 37 of the aforesaid judgment in the case of Rajesh Agarwal (Supra). In the aforesaid paragraph, Supreme Court has categorically clarified that the Principles of Natural Justice are not applicable at the stage of reporting a criminal offence, which is a consistent provision of law adopted by the Supreme Court. Para 37 of the judgment in the case of Rajesh Agarwal (Supra), reads as under:-
"xxx xxx xxx
37. While the borrowers argue that the actions of banks in classifying borrower accounts as fraud according to the procedure laid down under the Master Directions on Frauds is in violation of the principles of natural justice, RBI and lender banks argue that these principles cannot be applied at the stage of reporting a criminal offence to investigating agencies. At the outset, we clarify that principles of natural justice are not applicable at the stage of reporting a criminal offence, which is a consistent position of law adopted by this Court.
This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:41
38. In Union of India v. W.N. Chadha, a two-Judge Bench of this Court held that that providing an opportunity of hearing to the accused in every criminal case before taking any action against them would "frustrate the proceedings, obstruct the taking of prompt action as law demands, defeat the ends of justice and make the provisions of law relating to the investigation lifeless, absurd, and self-defeating". Again, a two-Judge Bench of this Court in Anju Chaudhary v. State of U.P. has reiterated that the Code of Criminal Procedure, 1973 does not provide for right of hearing before the registration of an FIR.
xxx xxx xxx "
13. Accordingly, the present petition is allowed and the declaration of petitioner's account as 'fraud' is hereby set aside. However, liberty is granted to the respondent bank to initiate fresh proceedings against the petitioner in accordance with law, as laid down by the Supreme Court in the case of Rajesh Agarwal (supra).
14. Needless to state, any criminal proceedings against the petitioner shall continue and the present order shall have no bearing on the said proceedings.
15. With the aforesaid directions, the present petition is disposed of, along with the pending applications.
MINI PUSHKARNA, J FEBRUARY 8, 2024 c This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 12/02/2024 at 22:25:41