Delhi High Court
Arun Mittal & Anr. vs Punjab National Bank & Anr. on 30 April, 2024
$~111
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 6835/2023 & CM APPL. 25139/2024
ARUN MITTAL & ANR. ..... Petitioners
Through: Mr. Anshuman Sharma and Mr. Azad
Ahmed, Advocates
Mob: 9910207302
Email: [email protected]
versus
PUNJAB NATIONAL BANK & ANR. ..... Respondents
Through: Mr. Santosh Kumar Rout, Ms. Dharna
Veragi, Advocates for R-1.
Email: [email protected]
Mob: 9990432878
% Date of Decision: 30th April, 2024
CORAM:
HON'BLE MS. JUSTICE MINI PUSHKARNA
JUDGMENT
MINI PUSHKARNA, J: (ORAL)
1. The present is an application for early hearing and disposal, in view of
the counter affidavit filed on behalf of the respondent.
2. Considering the submissions made in the present application, the
present petition is taken up for hearing today itself.
3. The next date of hearing, i.e., 11th September, 2024 stands cancelled.
4. With the aforesaid directions, the present application is disposed of.
W.P.(C) 6835/2023
5. The present writ petition has been filed seeking quashing and setting
aside of the impugned order dated 26th August, 2022 and all connected
proceedings prior and subsequent thereto, including the proceedings of
Minutes of the Meeting dated 31st December, 2020 of the respondent no. 1-
Punjab National Bank ("PNB"). By way of the said order dated 26th August,
2022, the respondent no. 1-bank has declared the petitioners‟ account as
„Fraud‟ in terms of the Reserve Bank of India ("RBI") Master Directions on
Frauds - Classification and Reporting by Commercial Banks and Select FIs.
6. It is submitted that the aforesaid declaration of the petitioners‟
account as „Fraud‟, is in complete violation of the Principles of Natural
Justice and also in complete disregard to the binding judgment passed by the
Supreme Court in the case of State Bank of India and Others Versus
Rajesh Agarwal and Others, 2023 SCC OnLine SC 342.
7. Learned counsel appearing for the petitioners submits that as per the
aforesaid judgment passed by the Supreme Court, for the purposes of
following the Principles of fair play and equality, the respondent-bank was
required to issue a Show Cause Notice to the petitioners and the petitioners
were required to be granted due opportunity of representation to put forth
their defence before the respondent-bank.
8. However, it is submitted that the procedure as laid down by the
Supreme Court, has not been followed. Thus, it is submitted that the
declaration of the account of the petitioners as „Fraud‟, is totally illegal and
cannot stand the test of law.
9. Attention of this Court has been drawn to the judgment dated 8 th May,
2023 passed by the Division Bench of this Court in W.P.(C) 1213/2023 and
W.P.(C) 1153/2023, wherein the Division Bench of this Court has
categorically held that in case an opportunity of hearing and the process as
envisaged by the Supreme Court in the case of Rajesh Agarwal (Supra), is
not followed, then such an order cannot be sustained.
10. Responding to the same, learned counsel appearing for the respondent
submits that declaration of the accounts of the petitioners as „Fraud‟, has
been done on the basis of the procedure as envisaged in Master Directions of
the RBI. He refers to the counter affidavit filed on behalf of respondent no.
1-Punjab National Bank, to submit that the petitioners are in breach of the
terms and conditions of the loan agreements, therefore, the respondent-bank
has rightly exercised its power to declare the loan account of petitioners, as
„Fraud‟. It is further submitted that the said action was taken after duly
considering the Forensic Audit Report and the Transaction Audit Report, in
terms of the stipulation of the Master Directions of the RBI.
11. He further submits that the account of the petitioners was declared as
„Fraud‟, much prior to the judgment of the Supreme Court in the case of
Rajesh Agarwal (Supra).
12. Having heard learned counsel appearing for the parties, it is manifest
that the impugned order has been passed without following the procedure as
laid down by the Supreme Court in the case of Rajesh Agarwal (Supra).
Thus, the impugned order declaring the accounts of the petitioners as
„Fraud‟, cannot be sustained.
13. Division Bench of this Court in the case of Aditya Malhotra and
Another Versus Reserve Bank of India and Ors., vide order dated 8th May,
2023 in W.P.(C) No. 1213/2023, while referring to the judgment of the
Supreme Court in the case of Rajesh Agarwal (Supra), has held as follows:
"xxx xxx xxx
4. Thus, to summarise, the Hon‟ble Supreme Court in its judgment
has held as under:
(i) No opportunity of being heard is required before an FIR is
lodged and registered against the borrower;
(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 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 practical 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 make representations before 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.
xxx xxx xxx"
14. It is to be noted that the Hon‟ble Supreme Court in the aforesaid case
of Rajesh Agarwal, has categorically held that the Principles of Natural
Justice and Audi Alteram Partem, have to be read into the Master Directions,
as issued by the RBI. Thus, it has been held as follows:
"xxx xxx xxx
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.
D.4. Challenge to constitutional validity
82. The borrowers have argued that the Master Directions on Frauds
will have to be struck down as arbitrary and unconstitutional for
conferring unguided and unbridled powers on banks. To counter the
submission, RBI and lender banks have relied upon the decision
in Delhi Cloth & General Mills Co. Ltd. v. Union of India [Delhi
Cloth & General Mills Co. Ltd. v. Union of India, (1983) 4 SCC 166]
to submit that the provisions of the Master Directions on Frauds are
not arbitrary as they have a reasonable nexus to the object sought to
be achieved. It was further argued that the Courts should not interfere
with and supplant their wisdom in an economic policy decision unless
there is blatant perversity, arbitrariness, or mala fides.
83. RBI has the right to take all such measures as are necessary to
protect the health of the banking system. Hence, the Master Directions
on Frauds lay down the procedure for banks, who in case of a breach
of loan agreements by the borrowers, can seek appropriate remedies
by approaching law-enforcement agencies and debarring borrowers
from accessing further institutional finance. However, any policy
decision which contemplates serious civil consequences for any
person will be open to challenge for being arbitrary if the principles
of natural justice are not applied during the process.
xxx xxx xxx"
15. Considering the aforesaid, the order declaring the account of the
petitioners as „Fraud‟, is hereby set aside.
16. However, liberty is granted to the respondent-bank to proceed ahead
in accordance with law, in the light of the judgment of the Supreme Court in
the case of Rajesh Agarwal (Supra).
17. Accordingly, the present petition is disposed of, with the aforesaid
directions.
MINI PUSHKARNA, J
APRIL 30, 2024
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