Central Bureau of Inverstigation Vs Surendra Patwa
2025 Latest Caselaw 399 SC

M. M. Sundresh, J.

1. Leave granted.

2. The Reserve Bank of India (hereinafter referred to as the “RBI”) issued the Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs, dated 01.07.2016 (hereinafter referred to as “Master Directions”). The Master Directions had been formulated with the objective of providing a framework for banks, to enable early detection and reporting of frauds, and consequently taking actions in a timely manner. In view of the same, the Appellant-Banks initiated administrative actions that affected the respondents, by declaring the companies’ bank accounts as fraudulent - an action which had significant civil consequences delineated in the Master Directions. The Appellant-Banks also initiated criminal proceedings against the respondents, with respect to fraudulent activity that was detected, as the Master Directions require the Banks to refer certain categories of cases to the State Police or the Central Bureau of Investigation (hereinafter referred to as “CBI”), as a general rule. Aggrieved by the same, the respondents approached different jurisdictional High Courts, challenging the validity of the Master Directions, and the actions taken consequently.

3. The High Courts, vide the impugned orders, have quashed not only the administrative actions initiated in pursuance of the Master Directions, but also the First Information Reports (FIRs) registered and the subsequent criminal proceedings initiated against the respondents. Placing reliance upon the ratio of the judgment of this Court in State Bank of India and Others v. Rajesh Agarwal and Others, (2023) 6 SCC 1 (hereinafter referred to as “Rajesh Agarwal’s case”), the administrative actions were quashed primarily on the ground of non-adherence to the principles of natural justice, more specifically the principle of Audi Altarem Partem, as the concerned respondents were not given an opportunity of being heard before the companies’ bank accounts were declared as fraudulent/blacklisted. The High Courts consequently quashed the criminal proceedings initiated against the respondents, holding that they are a natural corollary to the administrative action of declaring the aforementioned bank accounts as fraudulent. 

SUBMISSIONS 

4. The learned Solicitor General (SG) & Additional Solicitor Generals (ASGs) for the Appellant-CBI submitted that the High Courts ought not to have equated the administrative actions initiated in pursuance of the Master Directions with the criminal proceedings. A civil or an administrative action stands on a different footing in comparison to a criminal proceeding. In some cases, the High Courts have erroneously quashed the FIRs and the subsequent criminal proceedings, despite no prayer being made for the same. In certain other cases, the Appellant-CBI, despite being a necessary party, has not been heard. In few others, the Appellant-CBI has not even been impleaded as a respondent before the High Courts. Finally, it is submitted that the High Courts have misinterpreted the judgment delivered by this Court in Rajesh Agarwal’s case (supra) while passing the impugned judgments. The learned SG and ASGs placed reliance upon paras 37 to 40 and 98 of Rajesh Agarwal’s case (supra) to reinforce their submissions. 

5. The learned senior counsel and learned counsel appearing for the respondents submitted that the High Courts have rightly appreciated the ratio of the judgment of this Court in Rajesh Agarwal’s case (supra). The criminal proceedings are a consequence of the administrative actions initiated in pursuance of the Master Directions issued by the RBI. Hence, the High Courts were right in quashing the FIRs and the subsequent criminal proceedings. It is an admitted position that the administrative actions initiated in pursuance of the Master Directions, were taken without adhering to the principle of Audi Altarem Partem. Hence, no interference is warranted with the impugned judgments. 

DISCUSSION

6. Having heard the respective contentions of the parties, the question before us pertains to the nature and scope of administrative actions initiated in pursuance of the Master Directions vis-à-vis criminal proceedings initiated, against the respondents. We clarify that there is an apparent distinction between the two. The former is within the domain of the RBI and the Complainant-Banks, while the latter is within the domain of the Appellant-CBI. We would like to reiterate that an administrative action and a criminal proceeding stand on different footings, as clarified in para 39 of Rajesh Agarwal’s case (supra). 

7. An FIR, by taking cognizance of an offence, merely sets the law into motion. This has nothing to do with a decision on the administrative side, made by a different authority. Merely because the facts are same or similar, one cannot say that in the absence of a valid administrative action, no offence which is otherwise cognizable, can be registered. At that stage, one only has to see the existence of a cognizable offence, based on the FIR registered. Therefore, even assuming that there is no action forthcoming on the administrative side, an FIR can be held to be maintainable. The scope and role of both the actions are totally different and distinct, more so when undertaken by different statutory/public authorities.

8. The foundational facts may well be the same. Even in a case where an FIR is registered based on an administrative action, setting aside the latter on a technical or a legal premise would not ipso facto nullify the former. It is ultimately a matter for investigation by the appropriate authority. When an administrative order is set aside on the ground of non-compliance of a legal necessity or mandate, the facts mentioned thereunder could still be the basis for the registration of an FIR. Hence, the High Courts have clearly failed to take note of the same.

9. The High Courts have quashed the FIRs and the subsequent criminal proceedings on an erroneous interpretation of Rajesh Agarwal’s case (supra). SBI v. Rajesh Agarwal, (2023) 6 SCC 1 

“37. While the borrowers argue that the actions of banks in classifying borrower accounts as fraud according to the procedure laid down under the Master Directions on Frauds is in violation of the principles of natural justice, RBI and lender banks argue that these principles cannot be applied at the stage of reporting a criminal offence to investigating agencies. At the outset, we clarify that principles of natural justice are not applicable at the stage of reporting a criminal offence, which is a consistent position of law adopted by this Court.

38. In Union of India v. W.N. Chadha [1993 Supp (4) SCC 260 : 1993 SCC (Cri) 1171], a two-Judge Bench of this Court held that that providing an opportunity of hearing to the accused in every criminal case before taking any action against them would “frustrate the proceedings, obstruct the taking of prompt action as law demands, defeat the ends of justice and make the provisions of law relating to the investigation lifeless, absurd, and selfdefeating” [Id, SCC p. 293, para 98.] . Again, a two-Judge Bench of this Court in Anju Chaudhary v. State of U.P. [(2013) 6 SCC 384 : (2013) 4 SCC (Cri) 503] has reiterated that the Code of Criminal Procedure, 1973 does not provide for right of hearing before the registration of an FIR.

39. Chapter VIII of the Master Directions on Fraud provides detailed procedures to be followed by the banks before forming an opinion to proceed with a criminal complaint against the borrowers. Under the said chapter, the lender banks have to report a borrower to the CBI after classifying the borrower's account as fraudulent. However, the classification of the borrower's account does not simpliciter lead to reporting of criminal complaint with the enforcement authorities; it also entails penal consequences for the borrowers as laid down under Clause 8.12.

40. The process of forming an informed opinion under the Master Directions on Frauds is administrative in nature. This has also been acceded to by RBI and lender banks in their written submissions. It is now a settled principle of law that the rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions. [A.K. Kraipak v. Union of India, (1969) 2 SCC 262; St. Anthony's College v. Rev. Fr. Paul Petta, 1988 Supp SCC 676 : 1989 SCC (L&S) 44; Uma Nath Pandey v. State of U.P., (2009) 12 SCC 40 : (2010) 1 SCC (Cri) 501.] It is also a settled position in administrative law that it is mandatory to provide for an opportunity of being heard when an administrative action results in civil consequences to a person or entity. 

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 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 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.

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.”

10. From a perusal of the above paragraphs, it is clear that the principles of natural justice are not applicable at the stage of reporting a criminal offence. It has further been clarified that providing an opportunity of being heard prior to the commencement of a criminal action (i.e. registration of an FIR), would frustrate the very purpose of initiating a criminal proceeding, which is to meet the ends of justice. More specifically, para 98.1 of Rajesh Agarwal’s case (supra) explicitly states that no opportunity of being heard is required before an FIR is lodged or registered.