Kerala High Court
M/S.Tip Top Furniture Land vs The Reserve Bank Of India on 17 March, 2025
Author: C.S.Dias
Bench: C.S.Dias
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W.P (C) 3719 of 2025 1
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE C.S.DIAS
MONDAY, THE 17TH DAY OF MARCH 2025 / 26TH PHALGUNA, 1946
WP(C) NO. 3719 OF 2025
PETITIONERS:
1 M/S.TIP TOP FURNITURE LAND
DOOR NO.KP 1/1167, NH, KOTTAKKAL, MALAPPURAM,
REPRESENTED BY ITS MANAGING PARTNER
K.T.SAIDALAVI., PIN - 676503
2 K.T.SAIDALAVI
AGED 70 YEARS
S/O.KUNHIKOYA KUNNATHODI, KUNNATHODI HOUSE,
PUTHUR, KOTTAKKAL.P.O., MALAPPURAM DISTRICT., PIN
- 676503
3 A.THITTUMMA
AGED 62 YEARS
W/O.K.T.SAIDALAVI, KUNNATHODI HOUSE, PUTHUR,
KOTTAKKAL.P.O., MALAPPURAM DISTRICT., PIN - 676503
4 A.SABIRA
AGED 49 YEARS
W/O.BASHEER, KUNNATHODI HOUSE, CHAPPANANGADI.P.O,
VATTAPARAMBA, PONMALA, MALAPPURAM., PIN - 676503
5 K.T.SULFIKAR ALI
AGED 43 YEARS
S/O.SAIDALAVI, KUNNATHODI HOUSE, ATTEERI,
KOTTAKKAL.P.O, MALAPPURAM DISTRICT ., PIN - 676503
6 K.T.YASAR ARAFATH
AGED 38 YEARS
S/O. SAIDALAVI, KUNNATHODI HOUSE, ATTEERI,
KOTTAKKAL.P.O, MALAPPURAM DISTRICT., PIN - 676503
7 K.T.ASKAR ALI
AGED 39 YEARS
S/O.SAIDALAVI, KUNNATHODI HOUSE, ATTEERI,
KOTTAKKAL.P.O, MALAPPURAM DISTRICT., PIN - 676503
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W.P (C) 3719 of 2025 2
BY ADVS.
ZAKEER HUSSAIN
K.A.SANJEETHA
RESPONDENTS:
1 THE RESERVE BANK OF INDIA
REPRESENTED BY ITS REGIONAL DIRECTOR, REGIONAL
OFFICE, THIRUVANANTHAPURAM., PIN - 695033
2 IDBI BANK LTD
GHIYATHI TOWER, CHANGUVETTY, KOTTAKKAL, MALAPPURAM
DISTRICT . REP. BY ITS CHIEF MANAGER, PIN - 676501
3 FRAUD EXAMINATION COMMITTEE (FEC)-II
IDBI BANK LTD, IDBI TOWER, WTC COMPLEX, CUFFE
PARADE, MUMBAI . REP. BY ITS EXECUTIVE DIRECTOR,
PIN - 400005
BY ADVS.
C.AJITH KUMAR
VARSHA S.S.(K/000877/2024)
THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION
ON 20.02.2025, THE COURT ON 17.03.2025 DELIVERED THE
FOLLOWING:
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W.P (C) 3719 of 2025 3
"C.R"
C.S.DIAS, J.
============================
W.P (C )No.3719 of 2025
=============================
Dated this the 17th March, 2025
JUDGMENT
The first petitioner is a firm and the petitioners 2 to 7 are its
partners. The 1st petitioner is one of the units of M/s.Tip Top
Furniture Group. The Group manufactures, trades, imports, and
exports wooden and other allied furniture. The six units of the
Group had availed financial assistance from the HDFC Bank,
which was taken over by the 2 respondent bank ('Bank', in
nd
short) in 2015. Since the petitioners defaulted in repaying some
of the loans, the Bank initiated recovery proceedings, which are
pending consideration before the Debt Recovery Tribunal - 1,
Ernakulam. The Bank had also initiated proceedings for the
liquidation of one of the Units of the Company under the
Insolvency and Bankruptcy Code, 2016. The National Company
Law Board, Kochi, had ordered the liquidation of the company,
and the official liquidator conducted the sale of the company's
assets in a public auction. The Group had submitted several one-
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time settlement proposals to the Bank, but they were all rejected.
Surprisingly, the 1st petitioner was served with Ext.P5 show
cause notice by the Bank stating that their competent authority
had examined the utilisation of credit facilities by the petitioners
and found that they had committed the acts of fraud in terms of
Ext.P6 RBI Master Directions of Frauds issued by the Reserve
Bank of India (RBI) ― the 1st respondent. The main allegation in
the show cause notice is that the petitioners had not conducted
any Forensic Audit/Transaction Audit of the Group. Even though
the names of petitioners 2 to 7 are mentioned in the show cause
notice, no notice was served on them. The 1st petitioner had
submitted Ext.P7 reply notice specifically requesting the Bank to
provide the details of the audit report of the competent
authority. Thereafter, nothing was heard from the Bank. While
matters stood so, Exhibit.P6 Master Directions was superseded
by Ext.P9 Master Directions of Frauds. Shockingly, the
petitioners were served with Ext.P8 order passed by the 3rd
respondent classifying the petitioners as fraud in terms of Ext.P.9
Master Directions. It is stated in Exhibit.P8 order that the Bank
would be taking a further course of action to report the names of
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the petitioners as fraud to the RBI. Exhibit.P8 order has been
passed, ignoring the valid contentions put forth by the petitioners.
Moreover, the petitioners were denied an opportunity of being
heard. The actions of the respondents are illegal, unjust and
arbitrary.
2. The respondents 2 and 3 have filed a counter affidavit
contending that the Group had availed various financial facilities
from the Bank. The borrowers had committed default in repaying
the loan, resulting in the loan accounts being classified as Non-
Performing Assets. Further, O.A 148/2020 was filed to recover
an amount of Rs.53,19,81,574.94 as on 01.02.2020. During the
pendency of the O.A., the private limited company, Tip Top
Furniture Pvt. Ltd., went into liquidation. The 1st petitioner
approached the Bank for a one-time settlement. To consider the
same, the Bank appointed M/s. T.G.Sukumaran & Co., Chartered
Accountants, to conduct the forensic audit of the accounts of the
Group, including that of the 1st petitioner, for the period from April
2021 to October 2023. In the forensic audit report, it was
revealed that the petitioners had (i) overstated/understated their
assets/liabilities and profits in financial statements, (ii) drawn
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from cash credit account by submitting wrongful stock
statements, (iii) disposed of/removed assets hypothecated
without knowledge of the bank, (iv) non-routed purchase/sales
transactions in Bank CC account, (v) indulged in large cash
transactions in receipts/payments, (vi) diverted funds etc. In the
said circumstances, Ext.P5 show cause notice was issued to the
petitioners to submit their response on why they should not be
classified as fraud. In response to the same, Ext.P7 reply was
issued by the 1st petitioner, wherein they had shifted the blame
onto the Bank for not considering OTS proposals rather than
providing a substantial explanation regarding the fraudulent
transactions. The 3rd respondent, after careful consideration of
the documents available on record and analysing the conduct of
the petitioners, concluded that the incidence of fraud had
occurred and classified the petitioners as fraud. At the time of
issuance of Ext.P5 show cause notice, Ext.P6 Master Directions
were in force. The contention that the show cause notice was not
issued based on Ext.P9 Master Directions does not assume
significance. Hence, the writ petition may be dismissed.
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3. Heard: Sri. Zakeer Hussain, the learned Counsel for
the petitioner and Sri. C. Ajith Kumar, the learned Counsel for
respondents 2 and 3.
4. The Bank issued Ext.P5 show cause notice to the
petitioners asking them why they should not be classified as
fraud as per the Ext.P6 Master Directions issued by the RBI. In
response, the 1st petitioner submitted Ext.P.7 reply letter
asserting that they are not wilful defaulters and requesting a copy
of the audit report of the competent authority to enable them to
submit a comprehensive reply. Nevertheless, the 3 respondent,
rd
via Ext.P8 order, classified the 1 petitioner and its partners as
st
fraud.
5. It is pertinent to highlight that Ext.P5 show cause notice
was issued on 30.05.2024 as per Ext.P.6 Master Directions.
During the interval between the submission of Ext.P7 reply letter
dated 18.06.2024 and the passing of Ext.P8 order dated
04.01.2025, Ext.P6 Master Directions were repealed and
superseded by Ext.P.9 Master Directions, which came into force
on 15.07.2024.
6. Notably, the procedure for declaring a borrower as a
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fraud was not provided in Ext. P6 master directions.
7. In a challenge against a judgment of the High Court of
Telangana, which held that the principles of natural justice
should be read into the provisions of the Master Directions on
Frauds, the Hon'ble Supreme Court in State Bank of India and
others v. Rajesh Agarwal and others [(2023) 6 SCC 1] held
that the principles of natural justice are not mere legal
formalities. They constitute substantive obligations that the
decision-making and adjudicating authorities must follow. The
principles of natural justice guarantee protection against arbitrary
action, in terms of procedure and substance, by judicial, quasi-
judicial, and administrative authorities. The two fundamental
principles of natural justice entrenched in Indian jurisprudence
are (i) Nemo judex in causa sua ― no person should be a Judge
in their own cause and (ii) Audi alteram partem ― a person
affected by administrative, judicial or quasi-judicial action must
be heard before a decision is taken. The classification of a
borrower's account as fraud under the Master Directions virtually
leads to a credit freeze for the borrower, who is debarred from
raising finance from financial markets and capital markets. The
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bar from raising finances could be fatal for the borrower, leading
to "civil death" in addition to the infraction of his rights under
Article 19 (1) (g) of the Constitution of India. Since debarring
disentitles a person or entity from exercising their rights and/or
privileges, it is elementary that the principles of natural justice
should be made applicable, and the person against whom an
action or debarment is sought should be given an opportunity of
being heard. The Master Directions do not expressly exclude a
right of hearing to the borrowers before initiating action to
classify their account as fraud. Therefore, the principles of
natural justice have to be read into a statute or a notification that
is silent on granting an opportunity of hearing to a party whose
rights and interests are likely to be affected by the orders that
may be passed. Accordingly, the Hon'ble Supreme Court upheld
the impugned judgment in the following manner:
"E. Conclusion
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.
98.3. Debarring the borrowers from accessing institutional finance under
Clause 8.12.1 of the Master Directions on Frauds results in serious civil
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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
timeframe 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.
99. In the result, the judgment of the Division Bench of the High
Court of Telangana dated 10-12-2020 is upheld. The judgments of the
High Court of Telangana dated 22-12-2021 and 31-12-2021, and of
the High Court of Gujarat dated 23-12-2021 are accordingly set aside.
The civil appeals are disposed of. Writ Petition (C) No. 138 of 2022 is
also disposed of in the above terms. There shall be no order as to
costs".
(emphasis supplied)
8. Subsequently, the State Bank of India filed a review
petition seeking clarification that the directions in Rajesh
Agarwal's case were only prospective. However, the review
petition was dismissed.
9. After the elucidation of the law in Rajesh Agarwal's
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case, the RBI promulgated Ext.P9 Master Directions of Frauds
and repealed all the earlier Master Directions of Frauds,
including Ext.P.6 Master Directions.
10. Chapter II of Ext.P9 Master Directions delineates the
procedure to be followed before declaring a borrower as a
fraud. The relevant portion related to the present case reads as
follows:
"2.1 Governance Structure in banks for Fraud Risk
Management
2.1.1. There shall be a Board approved Policy on fraud risk
management delineating roles and responsibilities of Board / Board
Committees and Senior Management of the bank. The Policy shall
also incorporate measures for ensuring compliance with principles of
natural justice in a time-bound manner which at a minimum shall
include:
2.1.1.1 Issuance of a detailed Show Cause Notice (SCN) to
the Persons, Entities and its Promoters / Whole-time and Executive
Directors against whom allegation of fraud is being examined. The
SCN shall provide complete details of transactions / actions / events
basis which declaration and reporting of a fraud is being
contemplated under these Directions.
2.1.1.2 A reasonable time of not less than 21 days shall be
provided to the Persons / Entities on whom the SCN was served to
respond to the said SCN.
2.1.1.3. Banks shall have a well laid out system for issuance of
SCN and examination of the responses/submissions made by the
Persons / Entities prior to declaring such Persons / Entities as
fraudulent.
2.1.1.4 A reasoned Order shall be served on the
Persons / Entities conveying the decision of the bank regarding
declaration/classification of the account as fraud or otherwise. Such
Order(s) must contain relevant facts/circumstances relied upon, the
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submission made against the SCN and the reasons for classification
as fraud or otherwise".
11. The above clauses unequivocally illustrate that the RBI,
through Ext.P9 Master Directions, has laid down a
comprehensive procedure for financial institutions to follow
before declaring a borrower as a fraud, ensuring compliance with
the principles of natural justice as mandated in Rajesh
Agarwal's case.
12. It is undisputed that, Ext.P5 show cause notice was
issued on 30.5.2024, i.e., after the judgment in Rajesh
Agarwal's case, which was pronounced on 27.3.2023. The 1st
petitioner submitted the reply on 18.06.2024 requesting the 3rd
respondent to furnish them with a copy of the audit report of the
competent authority to enable them to submit a detailed reply.
Meanwhile, Ext.P9 Master Directions came into force on
15.7.2024, requiring a detailed show cause notice to be furnished
to the borrower, including the details of the transactions based on
which declaration and reporting of fraud is being contemplated.
13. Despite the directions in Rajesh Agarwal's case, the
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petitioners' request in Ext.P7 reply and the coming into force of
Ext.P9 Master Directions, the 3rd respondent passed the
impugned Ext.P8 order without furnishing the petitioners a copy
of the audit report and without following the directions in Rajesh
Agarwal's case or Ext.P9 Master Directions.
14. It is crucial to note that the plea of the review petitioner
in Rajesh Agarwal's case to clarify that the judgment was only
prospective was declined by the Hon'ble Supreme Court. It was
after the dismissal of the review petition that the RBI formulated
Ext.P9 Master Directions, specifically embedding the procedural
formalities that have to be observed before classifying a defaulter
as a fraud. It is well-settled that procedural law and guidelines
are generally retrospective. Even otherwise, in view of the
specific directions in Rajesh Agarwal's case, it was obligatory
on the part of respondents 2 and 3 to have furnished the report of
the competent authority to the petitioners and have adhered to
the directions in paragraphs 98 of Rajesh Agarwal's case and
also the procedure laid down in Chapter II of Ext.P9 Master
Directions. The mere fact that Ext.P5 show cause was issued
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before Ext.P9 Master Directions does not negate the obligation to
comply with the directions in the judgment and the Ext.P9 Master
Directions. As there is an infraction of both the directions in
Rajesh Agarwal's case and Ext.P9 Master Directions by
respondents 2 and 3, I am satisfied that the writ petition is to be
allowed.
In light of the above considerations, this writ petition is
hereby allowed in the following manner:
(i) Ext.P8 order is quashed.x
(ii) The 2nd respondent is directed to furnish the petitioners a
copy of the audit report of the competent authority and finalise
the proceedings as per the procedure laid down in Chapter II of
Ext.P9 and in Rajesh Agarwal's case.
The writ petition is ordered accordingly.
Sd/-C.S.DIAS,JUDGE
ma/14.3.2025
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APPENDIX OF WP(C) 3719/2025
PETITIONER EXHIBITS
Exhibit P1 TRUE COPY OF THE REPRESENTATION SUBMITTED
BY THE 2ND PETITIONER DATED 30/10/2024.
Exhibit P2 TRUE COPY OF THE JUDGMENT IN WRIT
PETITION NO.40370/2024 DATED 15/11/2024.
Exhibit P3 TRUE COPY OF THE REPRESENTATION DATED
22/11/2024 SUBMITTED BY THE 2ND
PETITIONER.
Exhibit P4 TRUE COPY OF THE REPLY DATED 27/11/2024
ISSUED BY THE 2ND RESPONDENT BANK.
Exhibit P5 TRUE COPY OF THE SHOW CAUSE NOTICE DATED
30/05/2024 ISSUED BY THE BRANCH HEAD OF
THE 2ND RESPONDENT BANK.
Exhibit P6 TRUE COPY OF THE MASTER DIRECTION ON
FRAUDS DATED 01/07/2016 ISSUED BY THE
RESERVE BANK OF INDIA.
Exhibit P7 TRUE COPY OF THE REPLY DATED 18/06/2024
SUBMITTED BY THE 1ST PETITIONER.
Exhibit P8 TRUE COPY OF THE ORDER DATED 04/01/2025
OF THE 3RD RESPONDENT.
Exhibit P9 TRUE COPY OF THE RBI MASTER DIRECTIONS
DATED 15/07/2024 FOR FRAUD DECLARATION.
RESPONDENT EXHIBITS
Exhibit-R2 (a) True copy of the reasoned order passed by
the 3rd respondent
