Full Judgement
Delhi High Court
Ashish Gupta & Ors. vs State Bank Of India & Ors. on 21 March, 2024
$~131
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 4340/2024 & CM APPL. 17772/2024, CM APPL.
17773/2024
ASHISH GUPTA & ORS. ..... Petitioners
Through: Mr. Hemant, Mr. Arjun Sanjay, Mr.
Vasu Goyal & Mr. Ranjan Vyas,
Advs.
M: 9899500164
Versus
STATE BANK OF INDIA & ORS. ..... Respondents
Through: Mr. Rajiv Kapur, Mr. Akshit Kapur &
Mr. Aditya Saxena, Advs. for R-1.
M: 9716076533
Email: [email protected]
Mr. Rajat Prakash, Advocate for R-2
Mob: 9872505902
Email: [email protected]
% Date of Decision: 21st March, 2024
CORAM:
HON'BLE MS. JUSTICE MINI PUSHKARNA
JUDGMENT
MINI PUSHKARNA, J: (ORAL) CM APPL. 17772/2024 (For Exemption)
1. Exemption allowed, subject to just exceptions.
2. Application is disposed of.
W.P.(C) 4340/2024 & CM APPL. 17773/2024
3. The present petition has been filed seeking quashing of the declaration of the account of M/s Delhi Control Devices Pvt. Ltd., i.e., respondent no. 6- company, as a „Fraud‟ account vide separate declarations by respondent nos. 1 to 5.
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 1 of 9 By:PREETI Signing Date:27.03.2024 18:39:55
4. Learned counsel appearing for the petitioner submits that the account of the respondent no. 6 was declared as „Fraud‟ by respondent no. 2 on 29th July, 2020 and by respondent no. 1 on 29th May, 2021. He further submits that respondent nos. 3 to 5 have also declared the account of respondent no. 6-company as „Fraud‟ account, however, the decisions with regard thereto have not been communicated to the petitioners till date.
5. Learned counsel appearing for the petitioners submits that the petitioners were the ex-directors of the respondent no. 6-company. The company had availed of various credit facilities from respondent nos. 1 to 5 under consortium agreement.
6. It is submitted that as per the allegations in the complaint filed with the Central Bureau of Investigation ("CBI"), from October, 2014 onwards, the company failed to meet payment obligations. Thus, the account of respondent no. 6-company was declared as Non Performing Asset ("NPA") on 25th January, 2016.
7. It is submitted that the classification/declaration of the account as „Fraud‟ of the respondent no. 6-company by the respondent nos. 1 to 5 is bad in law and is liable to be struck down. It is submitted that while declaring the account of the company as „Fraud‟, the petitioners herein were never given any opportunity of hearing.
8. It is submitted that the petitioners were not even informed of the declarations which took place on 29th July, 2020 or 29th May, 2021 or by the respondent nos. 3 to 5. Thus, it is submitted that the petitioners are yet to be provided with a copy of the declaration order dated 29th July, 2020 or order dated 29th May, 2021 or any other order passed by respondent nos. 3 to 5, by which the account of the respondent no. 6-company have been declared as a
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 2 of 9 By:PREETI Signing Date:27.03.2024 18:39:55 „Fraud‟ account.
9. Learned counsel appearing for the petitioner submits that the aforesaid action by the respondents is in violation of the Principles of Natural Justice and the Principle of Audi Alteram Partem, as laid down by the Supreme Court in the case of State Bank of India & Ors. Versus Rajesh Agarwal & Ors., 2023 SCC OnLine SC 342.
10. It is further submitted that the petitioners gained knowledge of such declaration only when the FIR was lodged and copy of the same was provided to the petitioners during the investigation.
11. Issue notice. Notice is accepted by learned counsel appearing for respondent nos. 1 and 2.
12. Learned counsel appearing for respondent no. 1 categorically submits that since in the present case the declaration of fraud happened in the year 2020 and 2021, therefore, no Show Cause Notices were issued to the petitioners and no opportunity of any representation against the said Show Cause Notices was granted to the petitioners.
13. The law in this regard is no longer res-integra that the Principles of Natural Justice have to be read into the Master Directions for Declaration of Fraud, as issued by the Reserve Bank of India. Supreme Court in the case of Rajesh Agarwal (Supra) has categorically held as follows:
"xxx xxx xxx
65. The competence of RBI to issue the Master Directions on Frauds is not a bone of contention in these appeals. RBI, in its estimation, has the power to determine and frame economic measures in the public interest to ensure the proper management of banking companies. The point however is that the implementation of a decision to secure the health of banking companies must comport with the due process of law. The civil consequences which follow upon a classification of a borrower's account as fraud are serious and prejudicial to the
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 3 of 9 By:PREETI Signing Date:27.03.2024 18:39:55 interests of a borrower. Principles of fair play require that the borrower ought to be given an opportunity of being heard before classifying the account as fraud in accordance with the procedure laid down under the Master Directions on Frauds. xxx xxx xxx
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.
68. In a decision of a three-Judge Bench of this Court in Swadeshi Cotton Mills v. Union of India [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664] , the issue was whether the Central Government was required to comply with the requirements of audi alteram partem before it took over the management of an industrial undertaking under Section 18-AA(1)(a) of the Industries (Development and Regulation) Act, 1951. R.S. Sarkaria, J. speaking for the majority consisting of himself and D.A. Desai, J. laid down the following principles of law : (SCC p. 689, para 44) "44. In short, the general principle -- as distinguished from an absolute rule of uniform application -- seems to be that where a statute does not, in terms, exclude this rule of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage. Conversely, if the statute conferring the power is silent with regard to the giving of a pre-decisional hearing to the person affected and the administrative decision taken by the authority involves civil consequences of a grave nature, and no full review or appeal on merits against that decision is provided, courts will be extremely reluctant to construe such a statute as excluding the duty of affording even a minimal hearing shorn of all its formal trappings and dilatory features at the pre-decisional stage, unless, viewed pragmatically, it would paralyse the administrative progress or frustrate the need for utmost promptitude. In short, this rule of fair play „must not be jettisoned save in very exceptional circumstances where compulsive necessity so demands‟. The court must make every effort to salvage this cardinal rule to the maximum extent possible, with situational modifications. But, to recall the words of Bhagwati, J., the core of it must, however, remain, namely, that the person affected must have reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise."
(emphasis supplied)
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 4 of 9 By:PREETI Signing Date:27.03.2024 18:39:55 xxx xxx xxx
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 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
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 [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] , this Court explained the wide amplitude of audi alteram partem : (SCC p. 476, para 96) "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 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 quasi-judicial or administrative inquiry."
(emphasis supplied
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 5 of 9 By:PREETI Signing Date:27.03.2024 18:39:55 xxx xxx xxx
87. Administrative proceedings which entail significant civil consequences must be read consistent with the principles of natural justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory rule to render it compliant with the principles of equality and non-arbitrariness envisaged under Article 14. The Master Directions on Frauds do not expressly provide the borrowers an opportunity of being heard before classifying the borrower's account as fraud. Audi alteram partem must then be read into the provisions of the Master Directions on Frauds. 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 [Shree Saraiwwalaa Agrr Refineries Ltd. v. Union of India, 2022 SCC OnLine SC 1905] 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.
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98.3. 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. 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 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.
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"
(Emphasis Supplied)
14. This Court also notes that vide order dated 18th December, 2023 passed in W.P.(C) No. 15835/2023, a Coordinate Bench of this Court has held as follows:
"xxx xxx xxx
4. He also submits that the principle of law laid down in the case of State Bank of India and Ors. v. Rajesh Agarwal and Ors. would not have any application as the said decision has been rendered by the Hon‟ble Supreme Court on 27.03.2023, whereas, the impugned decision was taken prior to the pronouncement of the decision by the
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 7 of 9 By:PREETI Signing Date:27.03.2024 18:39:55 Hon‟ble Supreme Court.
5. The parties also submit that the account of the petitioner has been settled and no due certificate has also been issued to the respondent.
6. I have considered the submissions made on behalf of the learned counsel appearing on behalf of the parties and perused the record.
7. Similar objection with respect to prospective applicability of the decision in the case of Rajesh Agarwal and Ors. (supra) has been considered by this court in W.P.(C) 9302/2022. The relevant paragraphs of W.P.(C) 9302/2022 read as under:
"7. A perusal of the entire counter affidavit would not even remotely suggest that the principles of natural justice have been followed in the instant case. It is the respondent-Bank‟s contention that the decision of Rajesh Aggarwal (supra) will not have application in the instant case. However, a careful scrutiny of Rajesh Aggarwal (supra) reveals that the Hon‟ble Supreme Court has clarified that the RBI Master Circular bearing No. DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated 01.07.2016 should adhere to the principles of natural justice.
8. It is also to be noted that the Hon‟ble Supreme Court in Asstt.
Commissioner v. Saurashtra Kutch Stock Exchange, held as under
that:
"35. In our judgment, it is also well settled that a judicial decision acts retrospectively. According to Blackstonian theory, it is not the function of the court to pronounce a "new rule" but to maintain and expound the "old one". In other words, Judges do not make law, they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, it (the later decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. To put it differently, even where an earlier decision of the court operated for quite some time, the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood. 36. Salmond in his well- known work states: "The theory of case law is that a judge does not make law; he merely declares it; and the overruling of a previous decision is a declaration that the supposed rule never was law. Hence any intermediate transactions made on the strength of the supposed rule are governed by the law established in the overruling decision. The overruling is retrospective, except as regards matters that are res judicatae or accounts that have been settled in the meantime. " 37. It is no doubt true that after a historic decision in Golak Nath v. State of Punjab, (1967) 2 SCR 762 this Court has accepted the doctrine of "prospective overruling". It is
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 8 of 9 By:PREETI Signing Date:27.03.2024 18:39:55 based on the philosophy: "The past cannot always be erased by a new judicial declaration." It may, however, be stated that this is an exception to the general rule of the doctrine of precedent."
(emphasis supplied)
9. In view of the abovementioned legal position, it is clear that the effect of Rajesh Aggarwal (supra) will have full application in the instant case as it does not alter the scope of RBI Master Circular bearing No. DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated 01.07.2016, rather it interprets the circular in tune with the intention behind it and included principles of natural justice in the implementation of the circular. Thus, this Court finds no merit in the respondent-Bank‟s contention. Irrespective of the fact whether the decision is taken post Rajesh Aggarwal (supra) or pre Rajesh Aggarwal (supra), the principles enshrined in Rajesh Aggarwal (supra) will full have application in the instant case.
xxx xxx xxx"
(Emphasis Supplied)
15. In view of the aforesaid, it is clear that once law has been laid down by the Supreme Court, the same has to be followed in its letter and spirit by all parties.
16. Accordingly, in view of the clear position as aforesaid, the present petition is allowed. The decision of the respondent banks in categorizing the account of respondent no. 6-company as „Fraud‟ is hereby set aside. However, liberty is granted to the respondent banks to carry out fresh action against the petitioners herein, who are the ex-directors of the respondent no. 6-company after following due procedure by issuance of notice to the petitioner in that regard and passing appropriate order.
17. With the aforesaid directions, the present petition is disposed of along with the pending applications.
MINI PUSHKARNA, J MARCH 21, 2024/ ak
Signature Not Verified Digitally Signed W.P.(C) 4340/2024 Page 9 of 9 By:PREETI Signing Date:27.03.2024 18:39:55
