Calcutta High Court (Appellete Side)
Sweta Agarwal vs State Bank Of India on 7 August, 2024
Author: Shampa Sarkar
Bench: Shampa Sarkar
F.J(2)
IN THE HIGH COURT AT CALCUTTA
CONSTITUTIONAL WRIT JURISDICTION
APPELLATE SIDE
PRESENT :
THE HON'BLE JUSTICE SHAMPA SARKAR
W.P.A. NO. 10601 OF 2024
SWETA AGARWAL
-vs.-
STATE BANK OF INDIA
FOR THE PETITIONERS : Mr. Ratnanko Banerji,
Mr. S. Manot,
Mr. A. Kumar Awasthi
FOR THE BANK : Om Narayan Rai
HEARD ON : 07.08.2024
JUDGMENT ON : 07.08.2024
SHAMPA SARKAR, J. :
1. The writ petition has been filed challenging an order passed by the State
Bank of India declaring the petitioners' bank account as fraud. The
ground for challenge is that personal hearing was not given to the
petitioner. The second ground is that the forensic audit report that was
relied upon, had not been supplied.
2. The petitioner places emphasis on the issue of violation of the principles of
natural justice. It is submitted that the jurisdiction of this Court is being
invoked as the principle of audi alteram partem being an essential
element of any decision making process, had been not followed.
3. It is also submitted that the petitioner ceased to be a Director of the
bank/borrower company from 2018 and the declaration of NPA was made
later. Thus, the bank could not proceed against the petitioner who was
neither a whole time director nor a promoter at the relevant time.
4. It is submitted by Mr. Banerjee, learned Senior Advocate, representing the
petitioners that the Hon'ble Apex Court and the Hon'ble High Court had
repeatedly held that any document relied on by the Bank, should be
supplied to the borrower and the borrower must be given an opportunity
to explain his defence against the proposed allegations of the lender/Bank.
5. Reliance has been placed on the decision of a Coordinate Bench in the
matter of Hemant Kanoria-vs.-Bank of India, reported in 2024 SCC
Online Cal 1012.
6. Mr. Rai, learned Advocate appearing on behalf of the State Bank of India
submits that personal hearing was not necessary. He relies on a decision
of the Hon'ble Apex Court passed in Misc. Application No. 810 of 2023
arising out of Civil Appeal No. 7300 of 2022 (State Bank of India & Ors.-
vs.-Rajesh Agarwal & Ors.) The miscellaneous application was filed by the
Union of India for a clarification of the observations made by the Hon'ble
Apex Court in the decision of State Bank of India & Ors.-vs.-Rajesh
Agarwal & Ors., reported in (2023) 6 SCC 1.
7. To counter such argument, Mr. Rai submits that although the Master
Circular of 2015 provides for grant of an opportunity of hearing to the
borrower before the borrower is declared to a wilful defaulter, such
provision is not applicable in case of declaration of fraud. A personal
hearing is not required to be provided. To substantiate such claim, Mr.
Rai, submits that as per the direction of the Hon'ble Apex Court in Rajesh
Agarwal (supra), the grounds on which the bank proposed to declare the
account as fraud were to be informed to the borrower and the borrower
was to be given sufficient opportunity to reply to such show cause. No
further hearing was necessary. The adjudication was not akin to a court
proceeding.
8. Relying on the order of the Hon'ble Apex Court in the Misc. Application,
Mr. Rai submits that the Hon'ble Apex Court had clarified the directions
in Rajesh Agarwal & Ors. (supra) and went on to hold that opportunity of
being heard would not mean a personal oral hearing. Reliance has been
placed on the first paragraph of the order which is quoted below:-
"The apprehension which has been expressed by the
Solicitor General of India is that since the judgment of the Division
Bench of the High Court of Telengana dated 10 December, 2022
was upheld in the judgment of this Court dated 27 March, 2023,
the judgment of this Court may be interpreted in the future to
mean that the grant of a personal hearing is mandatory though it
has not been so directed in the conclusions set out in paragraph 81
of the judgment."
9. Having heard Learned Advocates for the respective parties, this Court
finds that admittedly, a hearing was not given to the petitioner. Secondly,
the order of the Bank indicates that the bank had relied on some prior
decision of the ICICI Bank and AXIS Bank and two forensic audit reports.
The order of the Committee for Identification of the account as fraud and
the proceedings of the meeting indicate that weightage was given to the
decision of the ICICI Bank and the Axis Bank. The banks had declared the
account of the petitioner as fraud. Further, reliance has been placed on
the forensic audit report of Suman Kumar Agarwal and associates dated
November 2, 2020 and R. Dokania and Co. dated December 24, 2022,
which were not supplied to the petitioner. The show cause notice which
was issued to the petitioner and to which the petitioner replied, did not
contain any reference to the decisions of the ICICI Bank and the Axis
bank. No reference was made to the two forensic audit reports.
10. On the other hand, when the order was passed, by declaring the
petitioner's account as fraud, the decisions of the ICICI Bank and the Axis
Bank, were relied upon. Two forensic audit reports of the Chartered
Accountants were also relied upon. The rule of natural justice is an
essential component of Article 14 of the Constitution of India. It has been
well settled that if the authority places reliance on any report while
arriving at a decision against any person, such report must be supplied to
the person before any final decision is taken. Reference is made to the
decision of the Hon'ble Apex Court in the matter of ECL-vs.-B.
Karunakar, reported in (1993) 4 SCC 727.
11. Closer to the subject matter involved, the decision of the Hon'ble Apex
Court in Rajesh Agarwal & Ors. (supra) is relied upon. Paragraphs
80 and 81 of the said judgment are quoted below for convenience.
"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: (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)
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."
12. The Hon'ble Apex Court held that principles of natural justice demanded
that the borrowers were to be served with notice, given an opportunity to
explain the findings in the forensic audit report and to represent their case,
before the account was classified as fraud under the Master Directions on
Frauds.
13. In the interpretation of this Court, specific directions had been passed with
regard to service of notice, opportunity to explain the contents of the notice
and to represent. The expression 'represent' implies that the person who
had filed the reply to the show cause notice, should be allowed to represent
his case by explaining to the authority why the account should not be
declared as fraud. Representation and filing of an explanation are two
distinct and separate steps prescribed by the Hon'ble Apex Court.
However, the Hon'ble Apex Court has also clarified such position on the
request of the learned Attorney General of India which is a part of the order
passed in the Miscellaneous Application.
14. Mr. Rai's submission that the Apex Court had held in the miscellaneous
application that personal hearing need not been granted to the borrower, is
not correct. Section 'E' of the judgment is the conclusion arrived at by the
Hon'ble Apex Court after discussing the issues involved. Relevant portion
of Section 'E' is quoted below:-
"E. 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."
15. Paragraphs 98.5 and 98.6 of the order deal with concluding directions.
Hon'ble Apex Court directed that it would be reasonably practicable for the
lender bank to provide an opportunity of hearing to the borrowers before
classifying their accounts as fraud. Paragraph 98.6 indicates that the
Hon'ble Apex Court held that the principles of natural justice demanded
that the borrowers must be served a notice, given an opportunity to explain
the conclusion of the forensic audit report and be allowed to represent
before the bank declares the account as fraud.
16. The Hon'ble Apex Court was of the view that not only should a person be
allowed to answer to the show cause notice, but the forensic audit report
which if not supplied, should be supplied to the borrower, even if the
borrower was present during such audit. The borrower was allowed to
represent his case before the authority concerned.
17. Upon a meaningful reading of the decision in Rajesh Agarwal and another
(supra) and the order passed in the miscellaneous application, this Court
holds that before declaring an account as fraud, the documents relied upon
by the identification committee should be mentioned in the show cause
notice and also supplied to the borrower. The borrower should be allowed
to represent his case by filing an answer to the show cause notice and also
by dealing with the documents which the committee proposed to rely upon.
The borrower should be allowed to represent his case before the authority,
by way of a personal hearing and thereafter, the order may be passed with
reasons.
18. Under such circumstances, the order of the Identification Committee of the
State Bank of India, is set aside. The decision of the ICICI Bank and the
Axis Bank to the extent available with the State Bank of India, as also, the
two forensic audit reports shall be supplied to the petitioner within two
weeks from date. The petitioner will be allowed an opportunity to file an
additional reply before the committee, by dealing with those documents,
within two weeks thereafter. The committee will then proceed with the
matter in accordance with law and pass a reasoned order. An opportunity
of hearing shall be given to the petitioner's representatives.
19. The Reserve Bank of India shall not take any step with regard to the
proposal already sent by the bank as the decision of the identification
committee has been set aside by this Court.
20. Accordingly, the writ petition is disposed of.
21. However, there will be no order as to costs.
22. Parties are directed to act on the basis of the server copy of this order.
(SHAMPA SARKAR, J.)
