Gujarat High Court
M/S Association High Pressure ... vs Union Bank Of India, Byculla Branch on 22 December, 2023
Author: Sangeeta K. Vishen
Bench: Sangeeta K. Vishen
NEUTRAL CITATION
C/SCA/18067/2023 JUDGMENT DATED: 22/12/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 18067 of 2023
FOR APPROVAL AND SIGNATURE:
HONOURABLE MS. JUSTICE SANGEETA K. VISHEN Sd/-
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1 Whether Reporters of Local Papers may be allowed No
to see the judgment ?
2 To be referred to the Reporter or not ? No
3 Whether their Lordships wish to see the fair copy No
of the judgment ?
4 Whether this case involves a substantial question No
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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M/S ASSOCIATION HIGH PRESSURE TECHNOLOGIES (P) LTD.
Versus
UNION BANK OF INDIA, BYCULLA BRANCH
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Appearance:
MR MEHUL SHARAD SHAH(773) for the Petitioner(s) No. 1,2,3,4,5
MR AS PANESAR(5390) for the Respondent(s) No. 1
NOTICE SERVED for the Respondent(s) No. 2
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CORAM:HONOURABLE MS. JUSTICE SANGEETA K. VISHEN
Date : 22/12/2023
ORAL JUDGMENT
With the consent of learned advocates appearing for
respective parties, the matter is taken up for final disposal.
2. Issue rule, returnable forthwith. Mr A.S. Panesar, learned
advocate waives service of notice of rule on behalf of the
respondents.
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C/SCA/18067/2023 JUDGMENT DATED: 22/12/2023
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3. By this petition, the petitioners have prayed for quashing and
setting aside the action of respondent banks, declaring the account
of the petitioner no.1, its directors and members as fraud pursuant
to the Reserve Bank of India (Frauds classification and reporting by
commercial banks and select FIs) Directions 2016 (hereinafter
referred to as the 'Master Directions 2016'). Proceedings were
initiated before various fora. Also, the petitioners, have given the
proposal for One Time Settlement (OTS); however, according to the
petitioner without following the due procedure of law, the
respondent banks had declared the petitioners as willful defaulters
and the account of the company as fraudulent account on the basis
of Master Directions 2016.
4. Being aggrieved, the petitioners had filed a writ petition being
Special Civil Application no.8550 of 2021 and the co-ordinate bench,
after considering the submissions and counter-submissions, vide
detailed judgment dated 18.01.2023, partly allowed the writ
petition. So far as the aspect of declaration of willful defaulter is
concerned, this Court, had held and observed that the respondent
banks have failed to comply with the mechanism provided under the
revised master circular, as the petitioners were never informed by
the Identification Committee by issuing a show cause notice. Notice
was issued by the bank, to which the petitioners, filed a detailed
reply, but the order passed by the Identification Committee was
never provided to the petitioners. Action of declaring the petitioners
as willful defaulters, was quashed and set aside; however, the action
of the respondent banks, declaring the petitioners account as fraud,
was directed to continue to operate. As the matter, was pending
before the Apex Court, the co-ordinate bench has observed that the
action shall be governed by the decisions to be rendered by the
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C/SCA/18067/2023 JUDGMENT DATED: 22/12/2023
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Apex Court. It is thereafter, that the Apex Court, has passed
judgment in the case of State Bank of India vs. Rajesh Agarwal
reported in (2023) 6 SCC 1. Hence, the captioned writ petition.
5. Mr Mehul Sharad Shah, learned advocate for the petitioners,
has made submissions along the lines of the averments made in the
writ petition. It is submitted that in the Special Civil Application
no.8550 of 2021 prayers were two fold. This Court, was kind enough
to quash and set aside the action of declaration of the petitioners as
willful defaulters by the respondent bank on the ground that the
same, is in violation of principles of natural justice; however, the
action of declaring the account of the petitioners as fraud, was
made subject to the outcome of the proceedings pending before the
Apex Court. It is submitted that now, since the Apex Court has
concluded that the principles of audi alteram partem has to be read
in clauses 8.9.4 and 8.9.5 of the Master Directions on fraud, that the
action of the respondent banks deserves to be quashed and set
aside.
5.1 It is further submitted that it is not in dispute that the
opportunity of hearing was not provided to the petitioners before
classifying their accounts as fraud, which stand, is clear from the
affidavit filed by the respondent bank, stating that the petitioners
were never provided any opportunity of hearing and in support of
the said contention, stand taken is that, even after passing of the
judgment in the case of State Bank of India vs. Rajesh Agarwal
(supra), there is no change in the RBI directives.
5.2 It is next submitted that judgment now would govern the
process of declaring the accounts as fraud and detailed procedure,
has been set out. It provides that the application of audi alteram
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partem cannot be impliedly excluded under the Master Directions on
fraud. In view of the time frame contemplated under the Master
Directions on fraud as well as the nature of the procedure adopted,
it would be reasonable for the lender banks to provide an
opportunity of hearing to the borrowers before classifying their
accounts as fraud. It has further been provided that 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 Masters Directions on fraud.
It is therefore, submitted that when there are undisputed facts that
the petitioners, have not been offered the opportunity of hearing,
neither by the Identification Committee nor by the Review
Committee, the action on the part of the respondent banks,
deserves to be quashed and set aside.
6. On the other hand, Mr A.S. Panesar, learned advocate for the
respondents submitted that the Master Directions 2016, does not
provide for any opportunity of hearing to be afforded to the
borrowers before classifying their accounts as fraud and therefore,
the action, was completely in accordance with the provisions of the
Master Directions 2016.
6.1 It is submitted that even after the passing of the judgment by
the Apex Court in the case of State Bank of India vs. Rajesh Agarwal
(supra), no amendment or any revised guidelines have been issued
by the Reserve Bank of India; making it incumbent upon the
respondent banks to follow the procedure and offer opportunity to
the petitioners. In absence of any change, it cannot be said that the
action of the respondents banks in classifying the account of the
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petitioners as fraud, was illegal and bad. However, it is fairly
conceded that the principle laid down in the judgment by the Apex
Court in the case of State Bank of India vs. Rajesh Agarwal (supra),
would apply to the facts of the present case but the same, may not
have any bearing on the criminal prosecution lodged against the
petitioners.
7. Heard the learned advocates appearing for the respective
parties.
8. As referred to herein above, the petitioners in past, had filed a
writ petition being Special Civil Application no.8550 of 2021 which,
came to be decided by detailed judgment dated 18.01.2023. The
challenge in the writ petition, inter alia, was for quashing and
setting aside the action of the respondent nos.1 and 2, declaring the
account of the petitioner no.1 company as fraud and the
consequential action.
9. After considering the submissions made by the learned
advocate for the respective parties at length, the co-ordinate bench,
considered viz; the provisions of the Master Directions of 2016; the
judgments on the point in the case of, (i) M/s. Kanchan Motors vs.
Bank of India reported in 2018 SCC OnLine Bom 1761; (ii) State
Bank of India vs. Jah Developers reported in (2019) 6 SCC 787 and
concluded that the respondent banks has failed to comply with the
provisions inasmuch, the petitioners were never informed by the
Identification Committee before declaring petitioners as willful
defaulters. The action of the respondent banks, identifying the
account of the petitioners as willful defaulters and subsequent
reporting of the names of the petitioners to RBI/CIBIL as willful
defaulters was quashed and set aside. So far as the action of the
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respondent banks, declaring the petitioners account as fraud as per
the Circular dated 01.07.2015 is concerned, the same was directed
to be continued and was subject to the judgment which may be
rendered by the Apex Court in the case of State Bank of India vs.
Rajesh Agarwal (supra). Paragraph 13 and 14 read thus:
"13. However, so far as action of the respondent bank for declaring
the petitioners' account as "Fraud" as per RBI circular dated
01.07.2016 is concerned , the same would continue to operate as
the matter pertaining to such action is pending before the Hon'ble
Supreme Court and such action shall be governed by the decision
to be rendered by the Apex Court and as such contentions of both
the sides in that respect are not dealt with and are kept open to be
raised in future.
14. In view of the foregoing reasons, the petition succeeds in part.
The impugned action of the respondent bank identifying the
account of the petitioners as willful defaulters and subsequent
reporting of the names of the petitioners to RBI/CIBIL as willful
defaulters is hereby quashed and set aside and the matter is
remanded back to the Identification Committee of the respondent
bank to follow the procedure as prescribed in Master Circular dated
1st July, 2015 by issuing a show cause notice to the petitioners and
providing opportunity to the petitioners as per Clause-3 of the said
circular. Such exercise by the Identification Committee and
thereafter by the Review Committee shall be completed within the
period of six months from the date of receipt of this order."
10. Pertinently, the issue is no longer res integra. The Apex Court
in the case of State Bank of India vs. Rajesh Agarwal (supra) has
held and observed that the rule of audi alteram partem is to be read
in clauses 8.9.4 and 8.9.5 of the Master Directions on fraud. The
Apex Court has also held and observed that consistent with the
principles of natural justice, the lender bank should provide an
opportunity to the 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 a fraud. It is further
pointed out that a reasoned order has to be issued on the objections
addressed by the borrower. Paragraph 81 of the said judgment,
reads thus:
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"81. 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 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 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."
11. Therefore, now, it is well settled that any steps by the bank
declaring the account as fraud, has to be in conformity with the
principles of natural justice. In the present case, admittedly, no
opportunity of hearing was afforded to the borrowers before
classifying their account as fraud. Therefore, on this limited ground,
the action of the respondents banks, including the order dated
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17.12.2019, is hereby quashed and set aside. The matter, is
remitted to the respondents and the respondents shall follow the
procedure as prescribed in the Master Directions of 2016 as well as
the procedure, in terms of the directions contained in the judgment
of the Apex Court in the case of State Bank of India vs. Rajesh
Agarwal (supra). Such exercise, shall be undertaken and completed
within a period of six months from the date of receipt of copy of this
order. So far as the criminal proceedings are concerned, this Court
has not expressed any opinion.
12. The petition, stands allowed to the aforesaid extent. Rule is
made absolute to the aforesaid extent. No order as to costs.
Sd/-
(SANGEETA K. VISHEN,J)
BINOY B PILLAI
