The Supreme Court on Monday rejected the State Bank of India's appeal, upholding the Telangana High Court's order and ruled that it is reasonably practicable for the lender banks to provide an opportunity for a hearing to the borrowers before classifying their accounts as fraud.
A bench of Chief Justice Dhananjaya Y Chandrachud and justice Hima Kohli uphold the judgment of the Division Bench of the High Court of Telangana dated December 10, 2020. The court set aside the judgments of the High Court of Telangana dated December 22, 2021 and December 31, 2021, and of the High Court of Gujarat dated December 23, 2021.
The top court said that the principles of natural justice demand that the borrowers must be served notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks before their account is classified as fraud.
In addition, the decision classifying the borrower's account as fraudulent must be made by reasoned order, the court held.
"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," the court said.
Classification of an account as a fraud not only results in reporting the crime to investigative agencies but also has other penal and civil consequences against the borrowers, the top court said.
The court said that debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower.
The court said that 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 for a hearing ought to be provided before a person is blacklisted.
The court was hearing the civil appeals arising out of a challenge to the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. These directions were challenged before different High Courts primarily on the ground that no opportunity of being heard is envisaged by borrowers before classifying their accounts as fraudulent.
The High Court of Telangana has held in the impugned judgment that the principles of natural justice must be read into the provisions of the Master Directions on Frauds. The decision has been assailed by the RBI and lender banks through these civil appeals.
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