Jagdish Prasad Saboo vs State Bank Of India
2023 Latest Caselaw 6357 Guj

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      C/SCA/12000/2021                                  ORDER DATED: 31/08/2023

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             IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

         R/SPECIAL CIVIL APPLICATION NO.               12000 of 2021

                               With
           R/SPECIAL CIVIL APPLICATION NO. 2233 of 2021
                               With
          R/SPECIAL CIVIL APPLICATION NO. 18621 of 2021
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                          JAGDISH PRASAD SABOO
                                  Versus
                           STATE BANK OF INDIA
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Appearance in SCA 12000 of 2021:
ADITYA A GUPTA(7875) for the Petitioner(s) No. 1,2
MOHIT A GUPTA(8967) for the Petitioner(s) No. 1,2
MR AR GUPTA(1262) for the Petitioner(s) No. 1,2
MS DHARMISHTA RAVAL(707) for the Respondent(s) No. 1
Appearance in SCA 2233 of 2021:
ADITYA A GUPTA(7875) for the Petitioner(s) No. 1,2,3
MOHIT A GUPTA(8967) for the Petitioner(s) No. 1,2,3
MR VISHWAS K SHAH for the Respondent(s) No. 1
Appearance in SCA 18621 of 2021:
MR RAVI PAHWA FOR THAKKAR AND PAHWA ADVOCATES (1357)for
the Petitioner(s) No. 1, 2
MR AMAR N BHATT(160) for the Respondent(s) No. 2
MS NALINI S LODHA(2128) for the Respondent(s) No. 1
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     CORAM:HONOURABLE MR. JUSTICE NIRZAR S. DESAI

                              Date : 31/08/2023

                              COMMON ORAL ORDER

1. Heard learned advocate Mr. Aditya Gupta and learned advocate Mr. Ravi Pahwa for the petitioners in respective petitions and learned advocate Ms. Dharmishta Raval, learned advocate Ms. Nalini Lodha and learned advocate Mr. Vishwas Shah for respective banks in each of the petitions and learned advocate Mr. Amar Bhatt for Reserve Bank of India in each of

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the petitions.

2. Looking to the prayer made in each of the petitions, though the prayer is worded differently, the principal grievance of each of the petitioners is against the action of the respective banks by classifying their loan account as 'fraud account' and that is how the aforesaid action has been challenged by each of the petitioners by respective petitions.

3. Learned advocates appearing for the petitioners drew attention of this Court to the judgment of the Hon'ble Supreme Court in case of State Bank of India and others v. Rajesh Agarwal and others decided by the Hon'ble Supreme Court on 27.03.2023 while deciding Civil Appeal No.7300 of 2022 and allied matters. It is submitted by learned advocates appearing for the petitioners that the aforesaid judgment is reported in (2023) 6 SCC 1. However, the copy of the judgment produced before this Court is having citation of 2023 SCC Online SC 342.

4. Learned advocates for the petitioners relied upon the relevant paragraphs of the aforesaid judgment being para Nos. 83, 85 and 87, which are reproduced as under:

"83. It has been elucidated in the preceding paragraphs that the classification of a borrower's account as fraud in accordance with

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the procedure laid down in the Master Directions on Frauds entails significant civil consequences for the borrower. Since the Master Directions on Frauds do not expressly provide an opportunity of being heard to the borrower before classifying an account as fraud, the rule of audi alteram partem has to be read into the provisions of the said directions to save them from the vice of arbitrariness.

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85. 79. 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 58 Kranti Associates (P) Ltd. v. Masood Ahmed Khan, (2010) 9 SCC 496 not provide an opportunity of hearing to the borrowers before classifying their accounts as

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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.

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E. Conclusion

87. The conclusions are summarized below:

i. No opportunity of being heard is required before an FIR is lodged and registered;

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

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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 practicable 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 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; and vii. Since the Master Directions on Frauds do not expressly provide an opportunity of

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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."

5. It is canvassed on behalf of learned advocates for the petitioners that as the entire judgment of the Hon'ble Supreme Court is based on observance of principles of natural justice before classifying the loan account to be a fraud account and as the Hon'ble Supreme Court has held that the principles of natural justice is required to be observed before classifying any loan account to be fraud account and as in the instant case, the principles of natural justice are not followed, the aforesaid judgment is squarely applicable to the facts of the present case and the matter is required to be remanded back to the concerned committee of the respective banks for considering the issue about whether the loan account of the petitioners be declared as fraud account or not, afresh after giving opportunity of hearing to the present petitioners. It is also pointed out by the learned advocates for the petitioners that the Hon'ble Supreme Court has dismissed two applications being Misc. Application No.810 of 2023 in Civil Appeal No.7300 of 2022 vide order dated 12th May, 2023 as well as Review Petition (Civil) (Diary No. 23627 of 2023) in Civil Appeal No.7300 of 2022 which was decided by the Hon'ble Supreme Court vide order dated

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18.07.2023, whereby, by two separate orders as referred to hereinabove, both the applications were dismissed by the Hon'ble Supreme Court and with the dismissal of both the aforesaid applications even the question about whether the aforesaid judgment would operate retrospectively or prospectively is also put to rest and the judgment of the Hon'ble Supreme Court would be operating retrospectively. The aforesaid legal position could not be disputed by learned advocates appearing for the respective banks as well as learned advocate Mr. Amar Bhatt appearing for RBI.

6. In view of that, learned advocates appearing for the respective banks as well as learned advocate Mr. Amar Bhatt appearing for RBI also could not dispute the submissions of learned advocates appearing for the petitioners that the matter be remanded back to the concerned committee constituted by concerned bank for considering it afresh after hearing the petitioners and thereafter only the question as to whether to classify the loan account of the petitioners to be fraud account or not can be decided. In view of aforesaid undisputed position, following order is passed.

7 In each of the petitions, the impugned action of the respective banks of classifying the account of the petitioners, who are borrowers of the respective banks, to be fraud account, is hereby quashed and set aside. The respondents - respective banks are

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directed to decide the grievance of the petitioners after observing the principles of natural justice in accordance with the aforesaid judgment of the Hon'ble Supreme Court.

8. It is clarified that this Court has not gone into the merits of the matter. With the aforesaid directions, the petitions are disposed of. Notice discharged. No order as to costs.

9. It is expected that each of the petitioners would cooperate when the respective banks initiate such action and such exercise is expected to get over preferably within a period of six months from today. It is clarified that this order is confined only to the action of respondent banks of classifying the loan accounts of the petitioners as fraud account and each of the advocates for the petitioners have agreed before this Court that this order shall not affect ongoing criminal proceedings against each of the petitioners as they are in process of availing appropriate remedy against such action or proceedings, as the case may be.

(NIRZAR S. DESAI,J) LAVKUMAR J JANI