State Bank of India & Ors v. Rajesh Agarwal & Ors

STATE BANK OF INDIA & ORS v. RAJESH AGARWAL & ORS (Civil Appeal No. 7300 of 2022) MARCH 27, 2023 [DR. DHANANJAYA Y CHANDRACHUD, CJI AND HIMA KOHLI, J.] Reserve Bank of India Act, 1934 – Banking Regulation Act, 1949 – Reserve Bank of India (Frauds Classification and Report ing by Commercial Banks and Select FIs) Directions 2016 – Master Directions on Frauds – Principle of Natural Justice – Ru le of Audi Alteram Partem – The civil appeals arise out of a challenge to the Reserve Bank of India (Frauds Classification and Re porting by Commercial Banks and Select FIs) Directions 2016 – These directions were challenged before different High Court s primarily on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent – Wh ether the principles of natural justice should be read into the prov isions of the Master Directions on Frauds – Held : The principles o f natural justice demand that the borrowers must be served a no tice, given an opportunity to explain the conclusions of the fo rensic audit report, and be allowed to represent by the banks/ JLF befor e their account is classified as fraud under the Master Directions on Frauds – In addition, the decision classifying the borrowe r’s account as fraudulent must be made by a reasoned order; and since the Mast er Directions on Frauds do not expressly provide an op portunity of hearing to the borrowers before classifying their accoun t as fraud, audi alteram partem has to be read into the provisi ons of the directions to save them from the vice of arbitrariness. Reserve Bank of India Act, 1934 – Banking Regulation Act, 1949 – Reserve Bank of India (Frauds Classification and Report ing by Commercial Banks and Select FIs) Directions 2016 – P rinciple of Natural Justice – Civil consequences to borrower s – Whether the classification of a borrower’s account as fraudulen t under the Master Directions on Frauds entails civil consequen ces to borrowers – Held: Clause 8.12 of the Master Directions on Fr auds deals with the penal measures for borrowers – Claus e 8.12.1 provides that penal provisions as applicable to wil ful defaulters would apply to fraudulent borrowers, including the promot ers and directors of the borrower company – In addition, bo rrowers are also liable to suffer the following consequences under the Master Directions on Frauds : a) No restructuring may be made in the case of an RF A or fraud accounts (clause 8.12.2); b) No compromise on settlement involving a fraudulent borrower is allow ed unless the conditions stipulate that the criminal complaint wi ll be continued (clause 8.12.3) – The classification of a borrower’ s account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower – Classification of the borrower’s account as fraud under the Master Directions on Frauds vi rtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets – The bar f rom raising finances could be fatal for the borrower leading to its ‘civil death’ in addition to the infraction of their right s under Article 19(1)(g) of the Constitution – 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 ma de applicable and the person against whom an action of debarment is sought should be given an opportunity of being heard. Reserve Bank of India Act, 1934 – Banking Regulation Act, 1949 – Reserve Bank of India (Frauds Classification and Report ing by Commercial Banks and Select FIs) Directions 2016 – No impl ied exclusion of audi alteram partem – The RBI and the lend er banks have contended that the Master Directions on Frauds impliedly exclude the right to be heard – Held: The Master Di rections on Frauds do not expressly exclude a right of hearing to the borrowe rs before action to class their account as frauds is i nitiated – The principles of natural justice can be read into a st atute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be a ffected by the orders that may be passed. Principles/Doctrines – Principles of natural justic e – Two fundamental principles of natural justice are entrench ed in Indian jurisprudence: (i) nemo judex in causa sua , which means that no person should be a judge in their own cause; and (ii) audi alteram partem , which means that a person affected by administrat ive, judicial or quasi-judicial action must be heard before a decision is taken – The courts generally favor interpretation o f a statutory provision consistent with the principles of natural justice because it is presumed that the statutory authorities do no t intend to contravene fundamental rights. Disposing of the appeals, the Court HELD: Audi Alteram Partem

¶1The principles of natural justice are not mere l egal formalities. They constitute substantive obligations that need to be followed by decision-making and adjudicating authorities. The principles of natural justice act as a guarantee against arbi trary action, both in terms of procedure and substance, by judicial, quasi-judicial, and administrative authorities. Two fundamen tal principles of natural justice are entrenched in Ind ian jurisprudence: (i) nemo judex in causa sua, which means that no person should be a judge in their own cause; and (ii) audi alteram partem, which means that a person affected by administrati ve, judicial or quasi-judicial action must be heard before a decision is taken. The courts generally favor interpretation of a stat utory provision consistent with the principles of natural justice because it is presumed that the statutory authorities do no t intend to contravene fundamental rights. Application of the said p rinciples depends on the facts and circumstances of the case, express language and basic scheme of the statute under whic h the administrative power is exercised, the nature and purp ose for which the power is conferred, and the final effect of the exercise of that power. [Para 29][502-E-G]

¶2Chapter VIII of the Master Directions on Fraud provides detailed procedures to be followed by the banks before form ing an opinion to proceed with a criminal complaint aga inst 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 rep orting of criminal complaint with the enforcement authorities; it also entails penal consequences for the borrowers as laid down under C lause

8.12. The process of forming an informed opinion un der the Master Directions on Frauds is administrative in nat ure. 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. 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 re sults in civil consequences to a person or entity. [Paras 31, 32][ 503-D-G]

¶3The RBI and lender banks have argued that the ci vil consequences contemplated in Clause 8.12.1 of the M aster Directions on Frauds are reasonable. Under the said claus e, the borrower, including the promoters and directors of the comp any, are barred from availing credit from financial markets and credit markets for a period of five years, and possibly eve n beyond. According to RBI and lender banks, such a restriction has to be perceived from the perspective of public interest. While acknowledging that the procedure which has been laid down in the Master Directions on Frauds is conceived in public i nterest, to protect the banking system, it cannot be ignore t he serious civil consequences which emanate to the borrowers. [Para 38][505-G; 506-A-B]

¶4Classification of the borrower’s account as fraud und er the Master Directions on Frauds virtually leads to a cre dit freeze for the borrower, who is debarred from raising fina nce from financial markets and capital markets. The bar from raising finances could be fatal for the borrower leading to its ‘civil death’ in addition to the infraction of their rights under Arti cle 19(1)(g) of the Constitution. Since debarring disentitles a person or entity from exercising their rights and/or privileges, it i s elementary that the principles of natural justice should be made applicable and the person against whom an action of debarment is sough t should be given an opportunity of being heard. Indeed, debarment is akin to blacklisting a borrower from availing cr edit. [Para 42][509-A-C] No implied exclusion of audi alteram partem

¶5The Master Directions on Frauds do not expressly exclude a right of hearing to the borrowers before action to class their account as frauds is initiated. The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed. [Para 53][513-E]

¶6Audi alteram partem, therefore, entails that an entity against whom evidence is collected must: (i) be pro vided an opportunity to explain the evidence against it; (ii) be in formed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mer e participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requi rements of natural justice. The decision to classify an accoun t as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or throu gh a JLF, have to decide whether a borrower has breached the term s and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. The refore, principles of natural justice demand that the borrowers mu st be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the acc ount is classified as fraud under the Master Directions on Frau ds. [Para 65][520-F-H]

¶7The conclusions are summarized as follows: i. No opportunity of being heard is required before an FIR is lodged and registered; ii. Classification of an account as fraud n ot only results in reporting the crime to investigating agencies, b ut also has other penal and civil consequences against the b orrowers; iii. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds resu lts in serious civil consequences for the borrower; iv. Such a debarment under Clause 8.12.1 of the Master Directi ons on Frauds is akin to blacklisting the borrowers for be ing untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ou ght 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 contemp lated under the Master Directions on Frauds as well as the nat ure of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borr owers before classifying their account as fraud; vi. The pri nciples of natural justice demand that the borrowers must be s erved a notice, given an opportunity to explain the conclusio ns of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under th e Master Directions on Frauds. In addition, the decision class ifying the borrower’s account as fraudulent must be made by a reas oned order; and vii. Since the Master Directions on Frau ds do not expressly provide an opportunity of hearing to the bo rrowers 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. [Para 81][528-A-H] Maneka Gandhi v. Union of India (1978) 1 SCC 248 : [1978] 2 SCR 621; Union of India v. Tulsiram Patel

(1985) 3 SCC 398 : [1985] 2 Suppl. SCR 131; Olga Tellis v. Bombay Municipal Corporation (1985) 3 SCC 545 : [1985] 2 Suppl. SCR 51; C B Gautam v. Union of India (1993) 1 SCC 78 : [1992] 3 Suppl. SCR 12 – followed. State of Orissa v. Dr (Miss) Binapani Dei AIR 1967 SC 1269 : [1967] SCR 625; Canara Bank v. V K Awasthy

(2005) 6 SCC 321 : [2005] 3 SCR 81; Erusian Equipment & Chemicals Ltd v. State of West Bengal

(1975) 1 SCC 70 : [1975] 2 SCR 674; Joseph Vilangandan v. Executive Engineer (1978) 3 SCC 36 : [1978] 3 SCR 514; Raghunath Thakur v. State of Bihar

(1989) 1 SCC 229 : [1988] 3 Suppl. SCR 867; Gorkha Security Services v. Govt (NCT of Delhi) (2014) 9 SCC 105: [2014] 13 SCR 617; State of Maharashtra v. Public Concern for Governance Trust (2007) 3 SCC 587 : [2007] 1 SCR 87; Swadeshi Cotton Mills v. Union of India(1981) 1 SCC 664 : [1981] 2 SCR 533; Mangilal v. State of Madhya Pradesh (2004) 2 SCC 447 : [2004] 1 SCR 1; K I Shephard v. Union of India (1987) 4 SCC 431 : [1988] 1 SCR 188 ; Union of India v. Col. J N Sinha (1970) 2 SCC 458 : [1971] 1 SCR 791; Kesar Enterprises Ltd v. State of Uttar Pradesh (2011) 13 SCC 733 : [2011] 9 SCR 19 – relied on. State Bank of India v. Jah Developers (2019) 6 SCC 787: [2019] 7 SCR 701; Union of India v. Col. J N Sinha (1970) 2 SCC 458 : [1971] 1 SCR 791; Anju Chaudhary v. State of UP (2013) 6 SCC 384 : [2012] 13 SCR 901; A K Kraipak v. Union of India (1969) 2 SCC 262 : [1970] 1 SCR 457; Governing Body, St Anthony’s College, Shillong and Ors v. Rev. Fr. Pau l Petta of Shillong (1988) Supp SCC 676 : [1988] Suppl. SCR 507; Uma Nath Pandey and Ors v. State of Uttar Pradesh (2009) 12 SCC 40 : [2009] 4 SCR 374; Mohinder Singh Gill v. Chief Election Commissioner, New Delhi (1978) 1 SCC 405 : [1978] 2 SCR 272; D K Yadav v. J M A Industries (1993) 3 SCC 259 : [1993] 3 SCR 930; Peerless General Finance and Investment Co. Ltd v. Reserve Bank of India (1992) 2 SCC 343 : [1992] 1 SCR 406; Joseph Kuruvilla Vellukunnel v. Reserve Bank of India AIR 1962 SC 1371 : [1962] Suppl. SCR 632; Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274 : [2020] 2 SCR 297; Ajit Kumar Nag v. General Manager

(PJ), Indian Oil Corp. Ltd. (2005) 7 SCC 764 : [2005] 3 Suppl. SCR 314; Keshav Mills Co. Ltd. v. Union of India (1973) 1 SCC 380 : [1973] 3 SCR 22; Delhi Cloth Mills & General Mills v. Union of India (1983) 4 SCC 166 : [1983] 3 SCR 438; E P Royappa v. State of Tamil Nadu(1974) 4 SCC 3 : [1974] 2 SCR 348; State of AP v. McDowell (1996) 3 SCC 709 : [1996] 3 SCR 721; Om Kumar v. Union of India (2001) 2 SCC 386 : [2000] 4 Suppl. SCR 693; Chairman and Managing Director, United Commercial Bank v. P C Kakkar (2003) 4 SCC 364 : [2003] 1 SCR 1034; Cantonment Board v. Taramani Devi 1992 Supp (2) SCC 501; Delhi Transport Corporation v. DTC Mazdoor Congress 1991 Supp (1) SCC 600 : [1990] 1 Suppl. SCR 142; Sahara India

(Firm), Lucknow v. Commissioner of Income Tax, Central-I (2008) 14 SCC 151 : [2008] 6 SCR 427; Kranti Associates (P) Ltd. v. Masood Ahmed Khan

(2010) 9 SCC 496 : [2010] 10 SCR 1070 – referred to. Black’s Law Dictionary, 5th edn (1979); P Ramanatha Aiyar, ‘The Law Lexicon : The Encyclopedic Law Dictionary’ (1997 edn) – referred to. Case Law Reference [2019] 7 SCR 701 referred to Para 10 [1971] 1 SCR 791 relied on Para 29 [2012] 13 SCR 901 referred to Para 30 [1970] 1 SCR 457 referred to Para 32 [1988] Suppl. SCR 507 referred to Para 32 [2009] 4 SCR 374 referred to Para 32 [1967] SCR 625 relied on Para 33 [1978] 2 SCR 621 followed Para 34 [1978] 2 SCR 272 referred to Para 35 [1993] 3 SCR 930 referred to Para 35 [2005] 3 SCR 81 relied on Para 36 [1975] 2 SCR 674 relied on Para 44 [1978] 3 SCR 514 relied on Para 45 [1988] 3 Suppl. SCR 867 relied on Para 46 [2014] 13 SCR 617 relied on Para 47 [2007] 1 SCR 87 relied on Para 49 [1992] 1 SCR 406 referred to Para 50 [1962] Suppl. SCR 632 referred to Para 50 [2020] 2 SCR 297 referred to Para 50 [1981] 2 SCR 533 relied on Para 54 [2004] 1 SCR 1 relied on Para 56 [2005] 3 Suppl. SCR 314 referred to Para 57 [1985] 2 Suppl. SCR 131 followed Para 57 [1988] 1 SCR 188 relied on Para 59 [1973] 3 SCR 22 referred to Para 62 [1983] 3 SCR 438 referred to Para 66 [1974] 2 SCR 348 referred to Para 68 [1996] 3 SCR 721 referred to Para 68 [2000] 4 Suppl. SCR 693 referred to Para 68 [2003] 1 SCR 1034 referred to Para 68 1992 Supp (2) SCC 501 referred to Para 70 [1990] 1 Suppl. SCR 142 referred to Para 70 [1985] 2 Suppl. SCR 51 followed Para 72 [1971] 1 SCR 791 referred to Para 73 [1992] 3 Suppl. SCR 12 followed Para 74 [2008] 6 SCR 427 referred to Para 75 [2011] 9 SCR 19 relied on Para 76 [2010] 10 SCR 1070 referred to Para 78 CIVIL APPELLA TE/ORIGINAL JURISDICTION: Civil Appeal No. 7300 of 2022. From the Judgment and Order dated 10.12.2020 of the High Court for the State of Telangana at Hyderabad in WP No. 19102 of 2019. With Civil Appeal Nos. 7301, 7302, 7303, 7304, 7305, 7306, 7307 of 2022 and Writ Petition no. 138 of 2022. Tushar Mehta, SG , Gopal Jain, Ranjit Kumar, Dhruv Mehta, Dr. Abhishek Manu Singhvi, Navin Pahwa, Arunabh Chowdhury, Gopal Jain, Sr. Advs., Sanjay Kapur, Ms. Megha Karnwal, Arjun Bhatia, Ms. Akshata Joshi, Ms. Shubhra Kapur, Ms. Pragya Baghel, Ramesh Babu M.R., Ms. Manisha Singh, Ms. Nisha Sharma, Ms. Jagrati Bharti, Mahe sh Agarwal, Sumesh Dhawan, Rishi Agrawala, Vastala Kak, Hima nshu Satija, Pranjit Bhattacharya, Kailashnath, V. Murali Manohar, Nishant Rao, E.C. Agrawala, Suraj Prakash, Mrinal Litoriya, Ms. Priyanka Solanki, Ms. Nidhi Mohan Parashar, Ravi Pahwa, Ms. Monisha Handa, Rajul Shrivastav, Mohit D. Ram, Anubhav Sharma, Kanu Agrawal, Ms. Neela Kedar Gokhale, Ms. Akanksha Kaul, Ms. Praveena Gautam, Arvind Kumar Sharma, M.K. Maroria, Mayank Pandey, A nnam Venkatesh, Ms. Sairica Raju, Ms. Swati Ghildiyal, Jasme et Singh, Mahinder Singh Hura, Saif Ali, Divjot Singh Bhatia, Pushpendra Singh Bhadoriya, Ms. Rusheet Saluja, Ms. Mandeep Kaur, Siddharth Handa, Karma Dorjee, Dechen W. Lachungpa, Anirudh M. Sethi, Siddharth Seem, Sourabh Tandon, Ms. Richa Kapoor, Kunal Anand, Ms. Shivani Sharma, Ms. Jyoti Zongluju, M/s. Coac, Ms. Suvarna Kashyup, Pankaj Vivek, Krishan Kumar, Nitin Pal, Swikirtimala Dubey, Anand Shankar Jha, Arpit Gupta, Ms. Meenakshi S. Devgan, Girish Bhardwaj, Abhilekh Tiwari, Alok Kumar, G.N. Reddy, Manan Gambhir, Ms. Garima Soni, Ms. Neetu Rahi, Rohil Pandit, A. Radhakrishnan, Ms. Astha Deep, Ms. Ruma Sarasani, PBA Srinivasan, Parth Tandon, Ms. Prerana Sabharwal, Ms. Srishti Bansal, Parth Kumar, V. Aravind, Amit K. Nain, Bri jesh Kumar Tamber, Yashu Rustagi, Advs. for the appearing parties. The Judgment of the Court was delivered by DR. DHANANJAYA Y CHANDRACHUD, CJI A. Background .................................................................4* B. Facts.............................................................................5* C. Submissions................................................................10* D. Analysis......................................................................15* D.1 Regulatory Framework ...........................................15* D.2 Audi Alteram Partem ...............................................25* D.3 No implied exclusion of audi alteram partem ......39* D.4 Challenge to constitutional validity.......................48* E. Conclusion..................................................................57* *Ed. Note: Pagination is as per the original judgment. A. Background

¶1The civil appeals arise out of a challenge to the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. 1 Issued by the Reserve Bank of India 2, these directions were challenged before different High Courts primarily on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent. The High Court of Telangana has heldin the impugned judgment3 that the principles of natural justice must be read into the provisions of the Master Di rections on Frauds. The decision has been assailed by the RBI and lender b anks through these civil appeals.

¶2In this background the court has to consider whethe r the principles of natural justice should be read into the provisio ns of the Master Directions on Frauds. For the reasons to follow, we hold that the principles of natural justice, particularly the rule of audi alteram partem, has to be necessarily read into the Master Directions on Frauds to save it from the vice of arbitrariness. Since the classification of an account as fraud entails serious civil consequences for the borrower, the directions must be construed reasonably by reading into them the require ment of observing the principles of natural justice. B. Facts I. SLP (C) No. 3931 of 2021; SLP (C) No. 4922 of 20 21; SLP (C) No. 5056 of 2021

¶3B S Limited is a company engaged in the business of power transmission and distribution, passive telecom infrastructure, renewable energy, and mineral resources. It availed loans amounting to Rs . 1406 crores from various banks. The company failed to meet its pay ment obligations to lender banks, thereby defaulting in repay ment of credit facilities. In accordance with the Master Directions on Frauds, all the lender banks formed a Joint Lenders Forum 4 with State Bank of India as the lead bank.

¶4The JLF declared the company’s assets as Non-Performing Assets5 on 29 August 2016. The lender banks decided to adopt the 1 “Master Directions on Frauds” 2 “RBI” 3 Writ Petition No. 19102 of 2019 4 “JLF” 5 “NPA” Sustainable Structuring of Stressed Assets Scheme 6 and suggested a forensic audit report and Techno Economic Viability7 study in its meeting held on 11 July 2016. Based on the conclusions of the forensic audit report, the JLF closed the issue stating that there were no irregularities. However, based on the TEV study it was concluded that the compan y was not eligible for the S4A scheme and requested it to submit an alternative plan for regularization of its account. In the meanwhile, IDBI Bank - one of the lender banks - red-flagged the account of the company. Additionally, proceedings under the Insolvency and Bankruptcy Code, 2016 were also initiated against the company. On 15 February 2019, the JLF declared the account of the company as fraud by invoking Clause

2.2.1(g) of the Master Directions on Frauds. Subsequently, t he Fraud Identification Committee8 passed a resolution on 31 July 2019 identifying the company’s account as fraud. The company filed a writ pet ition challenging both the decision of the JLF dated 15 February 2019 and the resolution of the FIC dated 31 July 2019 before the High Court of Telangana.

¶5By a judgment dated 10 December 2020, a Division Bench of the High Court allowed the writ petition by holding that the principle of audi alteram partem ought to be read into Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds. The High Court further directed the lender banks: (i) to give an opportunity of a hearing to the borr owers after furnishing a copy of the forensic auditreport; and (ii) to provide an opportunity of a personal hearing to the borrower before classifying their account as fraud. The judgment of the High Court was challen ged in SLP (C) No. 3931 of 2021. On 15 April 2021, this Court, while issuing notice, partially stayed the directions issued by the Telangana High Court in the following terms: “Meanwhile, the Minutes/Order dated 15.02.2019 passed by the Joint Lenders Meeting is not to be acted upon. The High Court insofar as it observed that a personal hearing be given is stayed.” II. SLP (C) No. 762 of 2022; SLP (C) No. 873 of 2022; and SLP (C) No. 1514 of 2022

¶6The appellant is a company involved in the manufacture of edible oils, fats, rice and semolina products in the Sta te of Telangana. 6 “S4A Scheme” 7 “TEV” 8 “FIC” [DR. DHANANJAYA Y CHANDRACHUD, CJI] From 2003 to 2015, the appellant availed of credit facilities to the tune of Rs. 675 crores from a consortium of banks led by the Andhra Bank (now merged with the Union Bank of India). The appellant was declared as an NPA on 14 May 2018 with effect from 31 March 2018. Thereafter, the consortium of lenders in a meeting of the JLF decided to conduct a forensic audit of the appellant for the period till 31 Mar ch 2019. The appellant participated in the audit process and submitted all the information required by the auditor from time to time. In September 2019, the appellant learnt that its account has been declared as fraud by the Union Bank of India (erstwhile Andhra Bank). Aggrieved by that classificati on, the appellant filed a writ petition before the High Court of Telangana. The High Court declined to deal with the issues pertaining to the principles of natural justice and fair play considering the fact that they were pending before this Court in SLP (C) No. 3931 of 2021. By its judgment dated 22 December 2021, the High court dismissed the writ petitions. The court held that the appellant’s account was rightly classified as fraud because the forensic audit report contained adverse findings against the appellant.

¶7On 24 January 2022, this Court, while issuing notice in SLP(C) No. 762 of 2022, directed that the matter may not be reported t o the Central Bureau of Investigation9 for the time being. On 28 March 2022, this Court passed a similar ad-interim order in SLP(C) No. 873 of 2022 and SLP(C) No. 1514 of 2022. III. SLP (C) No. 2980 of 2022

¶8The appellant is a promoter and director of Golden Jubilee Hotels Pvt Ltd.10 GJHPL availed financial assistance from the respondent banks for the construction and development of a hotel in Hyderabad. GJHPL’s account was declared as NPA from 31 December 2015 because of i ts inability to service its debts to the respondent banks. At its meeting on 21 April 2016, the JLF decided to carry out a special audit of the appellant’s company. Thereafter, the appellant participated in a series of meetings between the JLF and was consulted by the forensic auditor during t he preparation of the audit report. Bank of Baroda red-flagged the appellant’s account on 03 May 2019 based on the observations in the forensic audit report. The appellant’s account was classified as fraud on 14 A ugust 2019. A criminal complaint was also lodged with the CBI. The appellant came to know about the classification of their account as fraud in 2021, 9 “CBI” 10 “GJHPL” when they received a copy of the FIR. The appellant filed a writ petition before the High Court of Telangana challenging the validity of the Master Directions on Frauds. The High Court by its judgment dated 31 December 2021 held that no relief could be granted to the appellant on the issue of personal hearing since SLP (C) No. 3931 of 2021 was pending bef ore this Court. The High Court also held that the appellant’s acc ount was rightly classified as fraudulent in view of the adverse fi ndings in the forensic audit report. IV. Writ Petition (C) No. 138 of 2022 and SLP (C) No. 3388 of 2022

¶9The appellant is one of the directors of a company called M/s Vimal Oil & Foods Limited. The said company availed of loan facilities from various financial institutions over a period of time. In 2015, the auditor of the respondent bank flagged certain irregularities in the accounts of the company. Based on a special audit, the respondent bank declared the account of the company as NPA on 30 September 2015. Thereafter, on 05 July 2016, the company’s account was red-flag ged by the respondent bank. In the meantime, the Corporate Insolvency Resolution Process11 was initiated against the company on 19 December 2017 and the appellant was suspended as Managing Director of the co mpany. Upon suspension, the appellant was not invited to attend the meetings of the JLF. The appellant allegedly learnt that the respondent bank had classified their account as fraud on 21 February 2018 though wi thout any intimation. Further, based on a letter addressed by th e respondent bank to the CBI, an FIR came to be registered against t he appellant. The appellant alleges that they acquired knowledge about their account being classified as fraud and registration of the FIR only when a search was carried out at their residential premises in pursuance of the FIR. The appellant filed a Special Civil Application challenging the actions of the respondent bank, which was dismissed by the Single Judge of the High Court of Gujarat. The Division Bench partly allowed a L etters Patent Appeal by its judgment dated 23 December 2021 by permi tting the appellant to address a representation tothe respondent bank but declined to allowa personal hearing. The appellant/ petitio ner has also invoked the writ jurisdiction of this Court by challenging the validity of the Master Directions on Frauds. 11 “CIRP” [DR. DHANANJAYA Y CHANDRACHUD, CJI] C. Submissions

¶10On behalf of the borrowers, we have heard Dr Abhishek Manu Singhvi, Mr Ranjit Kumar, Mr Dhruv Mehta, Mr Arunabh Chowdhury, Mr Navin Pahwa, Senior Advocates and Mr Suraj Prakash, lea rned counsel. The counsel submit that the procedure for classification of an account as fraud under the Master Directions on Frauds suffers from illegalities because: a. Under Clauses 8.9.4 and 8.9.5 of the Master Directions on Frauds, no notice is given to the borrowing company or its promoters, and directors including whole-time directors. They are not given an opportunity to present a defense and even a copy of the final decision is not provided to them. b. The classification of the borrower’s bank accounts as fra ud under the Master Directions on Frauds carries serious civil consequences. The penal provisions under Clause 8.12 of the Master Directions on Frauds are also applicable to the promoters, directors, and other whole-time directors. Once a bank account is classified as fraudulent, it carr ies significant consequences according to the Master Directions on Frauds such as filing of a complaint with the CBI and debarment of the promoters and directors from accessing institutional finance. Further, the action of the banks of classifying an account as ‘fraud’ is stigmatic, akin to blacklisting the borrower, which affects their righ t to reputation. Thus, there is a direct impact on the fundamental rights of the individuals concerned, as a consequence of the classification of an account as fraud. c. The Master Directions on Frauds are violative of Articles 14, 19, and 21 of the Constitution of India as they debar a company and its promoters and directors from accessing financial and credit markets for a period of five years without even providing a show cause notice or opportunity of being heard. d. There are other facets to the principle of audi a lteram partem apart from a personal hearing. The Master Directions on Frauds does not stand good on other facets of audi alteram partem such as notice of allegations levelled and evidence collected,notice of the penalty proposed, among others. According to the procedure laid down under the Master Directions on Frauds, a company or its promoters and directors are not even informed that they have been classified as fraud and that a penalty has been imposed upon them. e. The Master Directions on Frauds are silent on whether or not the borrower is entitled to an opportunity of being heard after the receipt of forensic audit report and before deciding whether the borrower’s account should be classified as fraud. Since the decision to classify the account as fraud entails significant civil consequences, principles of natural justice ought to be read into the Master Directions on Frauds. f. Clause 8.12.5 of the Master Directions on Frauds expressly stipulates that an opportunity of hearing be provided to third parties. The directionsare manifestly arbitrary since on the one hand they provide an opportunity of hearing to third parties, but such an opportunity is denied to borrowers. g. Although the purpose and object of the Master Directions on Frauds is speedy detection and reporting of fraud to law enforcement agencies, such exigencies cannot be a valid ground to exclude the applicability of the principles of natural justice. h. The decision of this Court in State Bank of India v. Jah Developers12 read in the requirement of natural justice for the purposes of declaring a borrower as a willfu l defaulter. The principles laid down in Jah Developers (supra) would be squarely applicable to the present matters. i. The participation of the borrower during the preparation of the forensic audit report does not in itself fulfil the requirement of the principles of natural justice under the Master Directions on Frauds. Those directions do not expressly provide for the participation or inputs from a borrower during the preparation of the forensic audit report, giving rise to the possibility that in some cases, the borrower is completely excluded from the forensic audit process. 12 (2019) 6 SCC 787 [DR. DHANANJAYA Y CHANDRACHUD, CJI]

¶11On behalf of the RBI and lender banks, we have heard Mr Tushar Mehta, Solicitor General of India, Mr Gopal Jain, Senior Counsel and Mr Ramesh Babu M R and Mr G N Reddy, learned counsel. Counsel submitted that the challenge to the classification of a loan account as fraudulent on the ground of a violation of the principles of natural justice is devoid of merit for the following reasons: a. The Master Directions on Frauds were necessitated to protect the interests of depositors and banks from t he growing instances of frauds. RBI is duly empowered to take pre-emptive measures in public interest to ensure that fraudulent borrowers are brought to justice and loss caused to the banks is mitigated. The clauses of the Maste r Directions on Frauds, therefore, must be interpreted in light of their purpose and objective, that is, timely detection and dissemination of information and reporting about the fraud. b. The provisions of the Master Directions on Frauds must be construed keeping in mind the following thresholds: (i) justness; (ii) fairness towards the parties aggrieved; (ii i) reasonability; and (iv) proportionality between the mischief and the corrective measure. Considering that the Master Directions on Frauds is an economicpolicy decision, this Court must exercise greater latitude while construing its provisions. c. The procedure for classifying an account as fraud under the Master Directions on Frauds is not arbitrary. T he classification is done only for reporting the matter to law enforcement agencies. The banks already have in place a structured organizational setup to identify and investigate fraudulent activities in bank accounts. Banks file complaints before law enforcement agencies, who conduct an investigation. The ultimate decision on fraud is rendered by a competent court of law. d. Principles of natural justice are not applicable at the stage of setting the process of criminal law in motion. Since the lender bank is an injured party in case of fraudulent accounts, it has the right to report the crime to the law enforcement agencies without giving an opportunity of being heard to the fraudulent borrower. Issuing of a show cause notice to fraudulent borrowers may forewarn them and hamper the investigation by law enforcement agencies. e. Debarring fraudulent borrowers from availing bank finances is a preventive measure without which the Master Directions on Frauds will be rendered toothless. Such a measure is necessary to prevent a fraudulent borrower from committing frauds in other banks. f. The requirement of notice or prior hearing could be excluded if it impedes the taking of prompt action. Further, it is not an inviolable rule that personal hearing ought to be given in all cases. g. The process for classification of a borrower as a wi llful defaulter under the Master Circular on Willful Defaulters13 significantly differs from the process of classification of an account as fraud under the Master Directions on Frauds. Therefore, the decision of this Court in Jah Developers (supra) will not be applicable to the facts of the pres ent appeal. D. Analysis D.1 Regulatory Framework

¶12RBI is a statutory body constituted under Section 3 of the Reserve Bank of India Act, 1934. The RBI has been constituted for the purpose of taking over the management of currency from the Central Government, regulating the issue of bank notes, keeping of reserves with a view to securing monetary stability, and operating the cu rrency and credit system of India.RBI is entrusted with the statutory obligation of administering the provisions of the Banking Regulation Act, 194914. The BR Act vests RBI with various powers with respect to banking companies such as granting licenses, conducting inspections and giving directions.

¶13Section 35A of the BR Act empowers RBI to issue directions to banking companies. Such directions are statutory in nature . Section 35A is extracted below: 13 Master Circular on Wilful Defaulters, 2015 14 “BR Act” [DR. DHANANJAYA Y CHANDRACHUD, CJI] “35A. Power of the Reserve Bank to give directions – (1) Where the Reserve Bank is satisfied that –

(a) in the public interest; or

(aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company bein g conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which modifications or cancellation shall have effect.”

¶14RBI has been issuing ‘master directions’ on diverse issue s since 2016. These directions encompass the instructions on that particular subject. The master directions are updated whenever there is a c hange in policy, and such changes get reflected on RBI’s website. In exercise of the power conferred by Section 35A, RBI issued the Master Directions on Frauds on 01 July 2016 to consolidate and update seven earlier circulars on classification of fraud, reporting and monitoring i ssued between June 2009 and January 2016. The Master Directionson Frauds were updated on 03 July 2017. The purpose of the Master Directions is extracted below: “1.3 Purpose These directions are issued with a view to providing a framework to banks to enable them to detect and report frauds early and taking timely consequent actions like reporting to the Investigative agencies so that fraudsters are brought to book early, examining staff accountability and do effective fraud risk management. These directions also aim to enable faster dissemination of information by the Reserve Bank of India (RBI) to banks on the details of frauds, unscrupulous borrowers and related parties, based on the banks’ reporting so that necessary safeguards / pre ventive measures by way of appropriate procedures and internal chec ks may be introduced and caution exercised while dealing with such parties by banks.”

¶15The above directions were issued to achieve specific purposes:

(i) early and timely detection and reporting of fraud; (ii) early and timely reporting of fraud to investigative agencies; (iii) quicker dissemination of information pertaining to details of fraud and fraudulent borrowe rs to banks; and (iv) to facilitate the adoption of preventive measures by banks. These purposesare reflected in Clause 2.1.1 of the Master Dir ections on Frauds: “Clause 2.1.1 The Chairmen and Managing Directors/Ch ief Executive Officers (CMD/CEOs) of banks must provide focus on the “Fraud Prevention and Management Function” to enable, among others, effective investigation of fraud case s and prompt as well as accurate reporting to appropriate regulatory and law enforcement authorities includin g Reserve Bank of India .” (emphasis supplied)

¶16Clause 2.2.1 classifies frauds based on the provisions of the Indian Penal Code, 1860: “Clause 2.2.1 In order to have uniformity in reporting, frauds have been classified as under, based mainly on the provisions of the Indian Penal Code: a. Misappropriation and criminal breach of trust b. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property. c. Unauthorised credit facilities extended for reward or for illegal gratification d. Cash shortages. [DR. DHANANJAYA Y CHANDRACHUD, CJI] e. Cheating and forgery f. Fraudulent transactions involving foreign exchange g. Any other type of fraud not coming under the specific heads as above.”

¶17Clause 3 advises banks to make full use of the Central Fraud Registry 15 (a database created by RBI to enable banks to shar e information on fraudulent accounts) for timely identification , control, reporting, and mitigation of risks associated with fraud. Cl ause 3.3 of the said directions emphasizes theneed to provide timely information on frauds and penalizes banks for non-adherence to timelines: “3.3.1 Banks should ensure that the reporting system is suitably streamlines so that delays in reporting of frauds, submis sion of delayed and incomplete fraud reports are avoided. Banks must fix staff accountability in respect of delays in reporting fraud cases to RBI.

3.3.2. Delay in reporting of frauds and the consequent delay in alerting other banks about the modus operandi an d dissemination of information through Caution Advice/ CFR against unscrupulous borrowers could result in simi lar frauds being perpetrated elsewhere . Banks should therefore, strictly adhere to the timeframe fixed in this circular for reporting of fraud cases to RBI failing which they would be liable for penal action prescribed under Section 47(A) of the Banking Regulation Act, 1949.” (emphasis supplied)

¶18The Master Directions on Frauds provides a regula tory framework for four types of frauds: (i) Chapter IV deals with attempted fraud; (ii) Chapter VII deals with cheque related frauds; (iii) Chapter VIII deals with loan frauds; and (iv) Chapter X deals with cases relating to theft, burglary, dacoity, and bank robberies. The dispute in the present batch of cases is concerned with Chapter VIII dealing with loan frauds.

¶19Chapter VI states that as a general rule, cases involving fraud/ embezzlement should invariably be referred to the state police or CBI. Chapter VIII provides for more robust safeguards which en sure that 15 “CFR” banks report frauds to investigating agencies after forming an informed opinion. The framework for dealing with loan frauds was put in place by a circular dated 07 May 2015. The objective of the framework has been enumerated in Clause 8.2: “8.2 Objective of the framework The objective of the framework is to direct the focus of banks on the aspects relating to prevention, early detection, prompt reporting to the RBI (for system level aggregation, monitorin g & dissemination) and the investigative agencies (for inst ituting criminal proceedings against fraudulent borrowers) and timel y initiation of the staff accountability proceedings (for determining negligence or connivance, if any) while ensuring that the normal conduct of business of the banks and their risk taking ability is not adversely impacted and no new and onerous responsibilities are placed on the banks. In order to achieve this objec tive, the framework has stipulated time lines with the action incumbent on a bank. The time lines / stage wise actions in the loan life-cycle are expected to compress the total time taken by a bank to identify a fraud and aid more effective action by the law enforceme nt agencies. The early detection of Fraud and the nece ssary corrective action are important to reduce the quantum of loss which the continuance of the Fraud may entail.”

¶20Clause 8.3 deals with Early Warning Signals16 and Red Flagged Accounts.17 Under Clause 8.3.1, a RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more E WS. EWS which should alert bank officials about wrong doings in a loan account are set out in Annexure II. Some of those enumerated are set out below: i. a. Default in undisputed payment to statutory bodies as declared in the annual report; b. Dishonour of high value cheques; ii. Delay in payment of outstanding dues; iii. Funds coming from other banks to liquidate the outstanding loan amount except in the normal course; 16 “EWS” 17 “RFA” [DR. DHANANJAYA Y CHANDRACHUD, CJI] iv. Exclusive collateral charged to a number of lenders without NOCs of existing charge holders; v. Dispute on title to collateral securities; and vi. Critical issues in the stock audit report.

¶21EWS provide indications of wrongdoing which may later turn out to be frauds. A bank is put on alert by the presence o f EWS and must use them to trigger a detailed investigation into the concerned bank account. According to Clause 8.3.5, the officer responsible for operations in the account should promptly report any manifestation of EWS to the Fraud Monitoring Group18 constituted by the bank. The clause directs banks to take cognizance of EWS and launch a detailed investigat ion into an RFA.

¶22Clause 8.8 deals with situations where a bank is the sole lender. In such situations, the FMG is entrusted with the responsibility to take a call on whether a bank account in which EWS are observed should b e classified as RFA. The bankis permitted to use external auditors before taking a final call on RFA status. However, within six months the bank is required to either lift the RFA status or classify the account as fraud in accordance with the investigation or forensic audits.

¶23Clause 8.9 deals with lending under consortium or multiple banking arrangements19. Clause 8.9.2 provides that all banks which have financed a borrower under an MBA should take coordinated action based on a commonly agreed strategy for subsequent legal actions, follow-ups, exchange of details and information on a consistent basis. Clauses 8.9.4 and 8.9.5 provide the procedure for classification of a borrower’s account as fraud: “8.9.4 The initial decision to classify any standard a ccount or NPA account as RFA or Fraud will be at the individual level and it would be the responsibility of this bank to report the RFA or Fraud status of the account on the CRILC platform so that other banks are alerted. In case it is decided at the indivi dual bank level to classify the account as fraud straightaway at this stage itself, the bank shall then report the fraud to RBI within 21 days of detection and also report the case to CBI/Police, as it is being 18 “FMG” 19 “MBA” done hitherto. Further, within 15 days of RFA/Fraud classification, the bank which has red flagged the account or detecte d the fraud would ask the consortium leader or the largest lender under MBA to convene a meeting of the JLF to discuss the issue. The meeting of the JLF so requisitioned must be convene d within 15 days of such a request being received. In case there is a broad agreement, the account should be classified as fraud; else based on the majority rul e of agreement amongst bank with at least 60% share in the total lending, the account should be red flagged by all the banks and subjected to a forensic audit commissione d or initiated by the consortium leader or the largest l ender under MBA. All banks, as part of the consortium of multiple-banking arrangement, shall share the costs and provi de the necessary support for such an investigation.

8.9.5 The forensic audit must be completed within a maximum period of three months from the date of the JLF mee ting authorizing the audit. Within 15 days of the completion of the forensic audit, the JLF shall reconvene and decide on the status of the account, either by consensus or the majority rule as specified above. In case the decision is to classify the account as a fraud, the RFA status shall be changed to Fraud in all banks and reported to RBI and on the CRILC platform within a week of the said decision. Besides, within 30 days of the RBI reporting, the bank commissioning/ initiating t he forensic audit should lodge a complaint with the CBI o n behalf of all banks in the consortium/MBA. For this purpose, if the bank initiating the forensic audit is a privat e sector bank, the complaint shall be lodged with the CBI by the PSU bank with the largest exposure to the account in the consortium/MBA. If there is no PSU bank in the consortium/MBA or it is a solo bank lending by a private sector bank/ foreign bank, the private bank/foreign ba nk shall report to the Police as per extant instructions. This would be in addition to the complaint already lodged by the first bank which had detected the fraud and informed the consortium/ MBA.” (emphasis supplied) [DR. DHANANJAYA Y CHANDRACHUD, CJI]

¶24Clause 8.9.4 stipulates that the initial decision to classify an account as RFA or fraud vests with the individual bank. Once the bank classifies the account as fraud, it is the responsibilit y of that bank to report the RFA or fraud status on the account on the Central Repository of Information on Large Credits20 platform to alertother banks. In case the individual bank decides to straightaway classify the account as fraud, it is obligated to report the fraud to RBI within 21 days of detection and also report the case to CBI/Police. Further, within 15 days the individual bank could ask the consortium leader or the largest lender under the MBA to convene a meeting ofthe JLF to discuss the issue. The meeting of the JLF has to be convened within 15 days of the reque st being received. The JLF can classify an account as fraud in case there is a broad consensus. Otherwise, the clause indicates th at based on an agreement amongst banks with at least a 60 percent share in total lending, the account should be red-flagged by all banks and subjected to forensic audit commissioned or initiated by the consortium leader or the largest lender under MBA.

¶25Clause 8.9.5 states that the forensic audit has to be completed within 3 months from the date of the JLF meeting authorizing the audit. Within 15 days of the completion of the audit, the JLF has to decide to classify the account as fraud and report it to the RBI . The clause also requires the bank commissioning the audit to lodge a complaint with CBI on behalf of all banks in the consortium within 30 days of reporting to RBI.

¶26Clause 8.11 deals with the filing of complaints to law enforcement agencies. Clause 8.11.1 requires banks to lodge complaints with law enforcement agencies immediately on detecting fraud. T he clause enjoins banks to avoid delay in filing a complaint as it may result in loss of documents, unavailability of witnesses, absconding borrowers, loss of money trail and asset tripping by fraudulent borrowers.

¶27The penal measures for fraudulent borrowers are set out i n Clause 8.12 which reads as follows:

8.12 Penal measures for fraudulent borrowers

8.12.1 In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent borrowers including the promoter director(s) and other whole time director s of the company insofar as raising of funds from the banking 20 “CRILC” system or from capital markets by companies with which they are associated is concerned, etc. In particula r, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from Scheduled Commercial Banks, Development Financial Institutions, Government owned NBFCs, Investment Institutions, etc., for a period of five ye ars from the date of full payment of the defrauded amount . After this period, it is for individual institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non-wholetime directors (like nominee directors and indepen dent directors) only in rarest of cases based on conclusive pr oof of their complicity.

8.12.2 No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts . However, in cases of fraud/malfeasance where the existing promot ers are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, banks and JLF may take a view on restructuring of such accounts based on their viability, without prejudice to the continuance of the criminal actions against the erstwhile promoters/management.

8.12.3 No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued.

8.12.4 In addition to above borrower – fraudsters, third parties such as builders, warehouse/ cold storage owners, motor vehicle/ tractor dealers, travel agents, etc. and professiona ls such as architects, valuers, chartered accountants, advocates, etc. are also held accountable if they play a vital role in credit s anction/ disbursement or facilitated the perpetration of frauds. Banks are advisable to report to Indian Banks Association (IBA) the details of such parties involved in frauds.

8.12.5 Before reporting to IBA, banks have to satisfy themselves of the involvement of third parties concerned and also prov ide them with an opportunity of being heard. In this regard the banks should follow normal procedures and the processes followed should be suitably recorded. On the basis of such information, IBA would, [DR. DHANANJAYA Y CHANDRACHUD, CJI] in turn, prepare caution lists of such third parties for circula tion among the banks.” (emphasis supplied)

¶28Clause 8.12.1 provides that the penal provisions as applicable to willful defaulters would apply to fraudulent borrowers as regards the raising of funds from the banking system and financial insti tutions. Importantly, under the clause, fraudulent borrowers include promoters, directors, and other whole-time directors of the borrowing company. It debars fraudulent borrowers from availing banking f inance from scheduled commercial banks, development financial i nstitutions, government owned NBFCs, investment institutions, etc. for a period of five years from the date of full payment of the defrauded amount. Even after the completion of the five-year period, it is for the individual financial institutions to decide whether to lend to fraudulent borrowers, including directors and promoters of the borrowing company. Additionally, under Clause 8.12.2, fraudulent borrowers are denied restructuring or grant of additional facilities by banks and other such financial institutions. D.2 Audi Alteram Partem

¶29We need to bear in mind that the principles of natural justice are not mere legal formalities. They constitute substantive obligations that need to be followed by decision-making and adjudicating authorities. The principles of natural justice act as a guarantee a gainst arbitrary action, both in terms of procedure and substance, by judicial, quasi-judicial, and administrative authorities. Two fundamental principles of natural justice are entrenched in Indian jurisprudence: (i) nemo judex in causa sua, which means that no person should be a judge in their own cause; and (ii) audi alteram partem, which means that a person a ffected by administrative, judicial or quasi-judicial action must be heard before a decision is taken.The courts generally favor interpretation of a statutory provision consistent with the principles of natural justice be cause it is presumed that the statutory authorities do not intend to contravene fundamental rights. Application of the said principles depends on the facts and circumstances of the case, express language and basic scheme of the statute under which the administrative power is exerc ised, the nature and purpose for which the power is conferred, and the final effect of the exercise of that power. 21 21 Union of India v. Col. J N Sinha, (1970) 2 SCC 458

¶30While the borrowers argue that the actions of b anks 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, the RBI and lender banks argue that these principles cannot be applied at the stage of reporting a crimin al offence to investigating agencies. At the outset, we clarify that principles of natural justice are not applicable at the stage of reporting a cr iminal offence, which is a consistent position of law adopted by this Court. In Union of India v. W N Chadha, a two-judge bench of this Court held that that providing an opportunity of hearing to the accused in every c riminal case before taking any action against them would “f rustrate the proceedings, obstruct the taking of prompt action as law demands, defeat the ends of justice and make the provisions of law rel ating to the investigation lifeless, absurd, and self-defeating.”22 Again, a two-judge bench of this Court in Anju Chaudhary v. State of UP23 has reiterated that the Code of Criminal Procedure, 1973 does not provide for right of hearing before the registration of an FIR.

¶31Chapter VIII of the Master Directions on Fraud provi des detailed procedures to be followed by the banks befo re forming an opinion to proceed with a criminal complaint against the borrowers. Under the said chapter, the lender banks have to report a bor rower to the CBI after classifying the borrower’s account as fraudulent. However, the classification of the borrower’s accou nt 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.

¶32The 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 par tem applies to administrative actions, apart from judicial and quasi-judicial functions.24 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. 22 1993 Supp (4) SCC 260 23 (2013) 6 SCC 384 24 A K Kraipak v. Union of India, (1969) 2 SCC 262; G overning Body, St Anthony’s College, Shillong and Ors v. Rev. Fr. Paul Petta of Shillong, (1988) Supp SCC 676; Uma Nath Pandey and Ors v. State of Uttar Pradesh, (200 9) 12 SCC 40. [DR. DHANANJAYA Y CHANDRACHUD, CJI]

¶33In State of Orissa v. Dr (Miss) Binapani Dei 25, a two-judge bench of this Court held that every authority which has the power to take punitive or damaging action has a duty to give a reas onable opportunity to be heard. This Court further held that an administrative action which involves civil consequences must be made consistent with the rules of natural justice: “9. […] The rule that a party to whose prejudice an orde r is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set-up that every citizen is protected against exercise of arbitrary authority by the State or its officers. Duty to act judicially would therefore arise from the very nature of the function intended to be performed: it need not be shown to be super-added. If there is power to decide a nd determine to the prejudice of a person, duty to act judiciall y is implicit in the exercise of such power. If the essentials of justice be ignored and an order to the prejudice of a person is made, the order is a nullity. That is a basic concept of the rule of law and importance thereof transcends the significance of a decisi on in any particular case.”

¶34In Maneka Gandhi v. Union of India26, a seven-judge bench of this court held that any person prejudicially affected by a decision of the authority entailing civil consequences must be given an opportunity of being heard. This has been reiterated in a catena of decisions of this Court. In view of the settled position of law, the next question that arises before us is the scope and definition of the phrase ‘civil consequences’.

¶35In Mohinder Singh Gill v. Chief Election Commissioner, New Delhi 27, a Constitution Bench of this Court held that ‘civ il consequences’ cover infraction of not merely property or personal rights but of civil liberties, material deprivations, and non-pecuniary damages. In that case, the Court held that denial of a democratic r ight to cast a vote inflicts civil consequences. In D K Yadav v. J M A Industries28, 25 AIR 1967 SC 1269 26 (1978) 1 SCC 248 27 (1978) 1 SCC 405 28 (1993) 3 SCC 259 a three-judge bench of this Court observed that “everything that affects a citizen in his civil life inflicts a civil consequence.”

¶36In Canara Bank v. V K Awasthy29, a two-judge bench of this Court succinctly summarized the history, scope, and application of the principles of natural justice to administrative actions involving civil consequences in the following terms:

¶14Concept of natural justice has undergone a great deal of change in recent years. Rules of natural justice are not rules emb odied always expressly in a statute or in rules framed thereunder. They may be implied from the nature of the duty to be performed under a statute. What particular rule of natural justice should be implied and what its context should be in a given case must depend to a great extent on the fact and circumstances of that ca se, the framework of the statute under which the enquiry is held. The old distinction between a judicial act and an administrative a ct has withered away. Even an administrative order which involves civil consequences must be consistent with the rule s of natural justice. The expression “civil consequences ” encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and no n-pecuniary damages. In its wide umbrella comes everything that affects a citizen in his civil life. (emphasis supplied) There is a consistent pattern of judicial thought t hat civil consequences entail infractions not merely of property or personal rights, but also of civil liberties, material deprivations, an d non-pecuniary damages. Every order or proceeding which involves civil consequences or adversely affects a citizen should be in accordance with the principles of natural justice.

¶37The next question that requires our consideration is whether the classification of a borrower’s account as fraudulent under the Master Directions on Frauds entails civil consequences to borrowers.

¶38The RBI and lender banks have argued that the c ivil consequences contemplated in Clause 8.12.1 of the Master Directions on Frauds are reasonable. Under the said clause, the borrower, including 29 (2005) 6 SCC 321 [DR. DHANANJAYA Y CHANDRACHUD, CJI] the promoters and directors of the company, are barred fr om availing credit from financial markets and credit markets for a per iod of five years, and possibly even beyond. According to RBI and lender b anks, such a restriction has to be perceived from the perspect ive of public interest. While acknowledging that the procedure which ha s been laid down in the Master Directions on Frauds is conceived in public interest, to protect the banking system, we cannot ignore the se rious civil consequences which emanate to the borrowers.

¶39Clause 8.12 of the Master Directions on Frauds deals wi th the penal measures for borrowers. Clause 8.12.1 provides that penal provisions as applicable to wilful defaulters would apply to fraudulent borrowers, including the promoters and directors of the borrower company. The consequences that apply to a wilful defaulter under the Master Circular on Wilful Defaulters have been culle d out in Jah Developers (supra): “9. […] serious consequences follow after a person has been classified as a wilful defaulter. These consequences are as follows:

(a) No additional facilities to be granted by any bank/financi al institution [para 2.5(a)].

(b) Entrepreneurs/Promoters would be barred from institutional finance for a period of 5 years [para 2.5( a)].

(c) Any legal proceedings can be initiated, including crimina l complaints [para 2.5(b)].

(d) Banks and financial institutions to adopt proactive approach in changing the management of the wilful defaulter [para 2.5(c)].

(e) Promoter/Director of wilful defaulter shall not be inducted by another borrowing company [para 2.5(d)].

(f) As per Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot be a resolution applicant.”

¶40In addition to the above consequences, borrowers are also liable to suffer the following consequences under the Master Directions on Frauds: a) No restructuring may be made in the case of an RFA or fraud accounts (clause 8.12.2) b) No compromise on settlement involving a fraudulen t borrower is allowed unless the conditions stipulate that the criminal complaint will be continued (clause 8.12.3) The above consequences show that the classification of a borrower’s account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower. The classifica tion of an account as fraud not only results in reporting the fact to investigating agencies, but has other penal and civil consequences as specif ied in Clauses 8.12.1 and 8.12.3. The borrowers have placed reliance on Jah Developers (supra) to submit that debarring them from accessi ng institutional finance under Clause 8.12.1 of the Master Directions affects the fundamental right of the borrower to carry on business. On the other hand, the RBI and lender banks have argued that reli ance on the observations in Jah Developers (supra) is misplaced because the decision dealt with the classification of a borrower as wilful defaulter, whereas the present batch of appeals deal with the class ification of a borrower’s account as fraud.

¶41The question in Jah Developers (supra) was whether a person who is declared to be a wilful defaulter according to the procedure laid down in the Master Circular on Wilful Defaulters is entitled to be represented by a lawyer of their choice before sucha declaration is made. The Court held that a borrower does not have the right to be represented by a lawyer in the course of in-house proceedings envisaged in Paragraph 3 of the Master Circular on Wilful Defaulters. Paragraph 3 of the Master Circular on Wilful Defaulters provides a two-tier process for identification of a wilful defaulter. At the first stage, a First Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the bank must, after examining the evidence of wilful default and concluding that wilful default has occurred, issue a show-cause notice to the concerned borrowers and promoters/ whole-time directors calling for their submissions. The First Committee has to c onsider the submissions before recording the fact of wilful default with reasons. If the Committee deems it necessary, it could also provide a personal hearing to the borrower and the promoter/ whole-time director of the borrowing company. The second stage is that the order of the First Com mittee is reviewed by another Committee, known as the Review Committee. Thus, it is clear that the procedure for declaration of a borrow er as a wilful defaulter is different from the procedure envisaged under t he Master [DR. DHANANJAYA Y CHANDRACHUD, CJI] Directions on Frauds for classifying a borrower’s ac count as fraud. However, by virtue of Clause 8.12.1 of the Master Directions on Frauds, the penal provisions applicable to wilful defaulter s also apply to fraudulent borrowers. Thus, although the procedure adopted for declaration of a wilful defaulter is different from that envisaged for classifying the borrower’s account as fraud, they will f ace similar consequences. In fact, as mentioned above, the borrowe rs’ accounts classified as fraud under the Master Directions on Frauds will face certain additional consequences which have been laid down in Clauses

8.12.2 and 8.12.3. Since the consequences flowing f rom the two circulars are similar, the observations in Jah Developers (supra) on the effect of declaring a borrower as wilful defaulter will be squarely applicable to the present case. The observations of the Court are extracted below:

¶24However, we are of the view that Article 19(1)( g) is attracted in the facts of the present case as the mome nt a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct an d immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can e ven change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be m ade promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably . (emphasis supplied) In Jah Developers (supra), this Court construed the Master Circular on Wilful Defaulters by harmonizing it with the principles of natural justice. Particularly, it was directed that: (i) the First Committee must give its order to the borrower as soon as possible; (ii) the Borrower, thereafter, can file a written representation against the order of First Committee to the Review Committee; and (iii) the Review Committee must pass a reasoned order which must be provided to the borrower.

¶42Classification of the borrower’s account as fraud under the Master Directions on Frauds virtually leads to a credit f reeze for the borrower, who is debarred from raising finance from financial markets and capital markets. The bar from raising finances could be fatal for the borrower leading to its ‘civil death’ in addition to the infraction of their rights under Article 19(1)(g) of the Constitution. Since debarring disentitles a person or entity from exercising their rights and/or privile ges, it is elementary that the principles of natural justice should be made applicable and the person against whom an action of debarment is sought should be given an opportunity of being heard.Indeed, debarment is akin to blacklisting a borrower from availing credit. Black’s Law Dictionary30 explains the term ‘blacklist’ has been defined in the following terms: “A list of persons marked out for special avoidance, antagonism, or enmity on the part of those who prepare the list or those among whom it is intended to circulate; as where a trades -union “blacklists” workmen who refuse to conform to its rules, or where a list of insolvent or untrustworthy persons is publish ed by a commercial agency or mercantile association .” (emphasis supplied) Similarly, P Ramanatha Aiyar’s Law Lexicon31 defines the term “blacklist” as follows: “Black List is a list of persons or firms against whom its compiler would warn the public, or some section of the public; a list of persons unworthy of credit, or with whom it is not advisable to make contracts . Thus the official list of defaulters on the Stock Exchange is a black list. To put a man’s name on such a black list without lawful cause is actionable; and th e further publication of such a list will be restrained by injunction.” (emphasis supplied)

¶43A blacklist is: (i) a list of insolvent or untrustworthy persons published by a commercial agency or mercantile association; and (ii) a list of persons unworthy of credit, or with whom it is not ad visable to make contracts. Before this Court, the RBI and lender banks have 30 Black’s Law Dictionary, 5thedn (1979) 31 P Ramanatha Aiyar, ‘The Law Lexicon: The Encyclope dic Law Dictionary’ (1997 edn) [DR. DHANANJAYA Y CHANDRACHUD, CJI] submitted that debarring borrowers from accessing institutional finance is necessary to not only prevent the same persons from committing frauds in other banks, but also to proscribe banks from dealing with unscrupulous borrowers in public interest. Debarring a borrower under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrower for being untrustworthy and unworthy of credit by the banks. This Court has consistently held that an opportunity of a hearing ought to be provided before a person is put on a blacklist.

¶44In Erusian Equipment & Chemicals Ltd v. State of West Bengal32, the issue before this Court was whether a person is entit led to a notice to be heard before being blacklisted by the government. This Court held that since blacklisting affects the privileges of the blacklisted person, fundamentals of fair play require that such a person be provided an opportunity of being heard: “20. Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purposes of gains. The fact that a disability is created by the order of blacklisting indicates that the rele vant authority is to have an objective satisfaction. Fundamental s of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist.”

¶45In Joseph Vilangandan v. Executive Engineer33, the issue before the two-judge pertained to debarment of a government contractor from seeking any further contract with the government without providing an opportunity of being heard. The material sentence of the notice there read as follows: “You are therefore requested to show cause ... why the work may not be arranged otherwise at your risk and loss, through other agencies after debarring you as a defaulter ....” (emphasis original) This Court applied the position of law in Erusian Equipment & Chemicals Ltd (supra) to hold that the Executive Engineer ought to have given the contractor adequate opportunity to represent against the proposed action of debarment. 32 (1975) 1 SCC 70 33 (1978) 3 SCC 36

¶46In Raghunath Thakur v. State of Bihar34, a two-judge bench of this Court held that since blacklisting entails civil co nsequences an order of blacklisting should be issued only after following the principles of natural justice: “4. […] Insofar as the contention that there is no requirement specifically of giving any notice is concerned, the respondent is right. But it is an implied principle of the rule of law that any order having civil consequence should be passed only after following the principles of natural justice. It has to be realised that blacklisting any person in respect of business ventures has civil consequence for the future business of the person concerned in any even t. Even if the rules do not express so, it is an elementary principle of natural justice that parties affected by any order should have right of being heard and making representations against the order. […]”

¶47In Gorkha Security Services v. Govt (NCT of Delhi) 35, the issue before this Court pertained to the form and content of a show-cause notice that is required to be served before blacklisting the noticee. A two-judge bench of this Court observed that that an order blacklisting a person is stigmatic. The relevant observation is extracted below:

¶16It is a common case of the parties that the blacklisting has to be preceded by a show-cause notice. Law in this regard is firmly grounded and does not even demand much amplification. The necessity of compliance with the principles of natural justice by giving the opportunity to the person against whom action o f blacklisting is sought to be taken has a valid and solid rational e behind it. With blacklisting, many civil and/or evil consequences follow. It is described as “civil death ” of a person who is foisted with the order of blacklisting. S uch an order is stigmatic in nature and debars such a person from participating in government tenders which mean s precluding him from the award of government contracts. (emphasis supplied)

¶48Classification ofa borrower’s account as fraud has the effect of preventing the borrower from accessing institutional finance for the 34 (1989) 1 SCC 229 35 (2014) 9 SCC 105 [DR. DHANANJAYA Y CHANDRACHUD, CJI] purpose of business. It also entails significant civil conse quences as it jeopardizes the future of the business of the borrower. There fore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds. The action of classifying an account as fraud not only affects the business and goodwill of the borrower, but also the right to reputation.

¶49In State of Maharashtra v. Public Concern for Governance Trust36, a two-judge bench of this Court held that a decision take n by any authority affecting the right to reputation of an individual has civil consequences. Therefore, in such situations the principles o f natural justice would come into play. The Court held that any order or decision of the authority adversely affecting the personal reputation of an individual must be taken after following the principles of natural justice: “41. It is thus amply clear that one is entitled to have and preserve one’s reputation and one also has a right to protect it. In case any authority in discharge of its duties fastened upon it under the law, travels into the realm of personal reputation adversely aff ecting him, it must provide a chance to him to have his say in the matter. In such circumstances, right of an individual to have the safeguard of the principles of natural justice before being a dversely commented upon is statutorily recognised and violation of the same will have to bear the scrutiny of judicial review.”

¶50The RBI and lender banks have relied on Peerless General Finance and Investment Co. Ltd v. Reserve Bank of India 37, Joseph Kuruvilla Vellukunnel v. Reserve Bank of India 38, and Internet and Mobile Association of India v. Reserve Bank of India39 to submit that the Master Directions on Frauds are akin to a statutory regulation and a decision on economic policy, which must be accorded a level of deference.

¶51The competence of the RBI to issue the Master Directions on Frauds is not a bone of contention in these appeals. The RBI, in i ts estimation, has the power to determine and frame economic m easures 36 (2007) 3 SCC 587 37 (1992) 2 SCC 343 38 AIR 1962 SC 1371 39 (2020) 10 SCC 274 in the public interest to ensure the proper management o f banking companies. The point however is that the implementation of a decision to secure the health of banking companies must comport wit h the due process of law. The civil consequences which follow upon a classification of a borrower’s account as fraud are serious and prejudic ial to the interests of a borrower. Principles of fair play requir e that borrower ought to be given an opportunity of being heard before classifying the account as fraud in accordance with the procedure laid down under the Master Directions on Frauds. D.3 No implied exclusion of audi alteram partem

¶52The RBI and the lender banks have contended that the Master Directions on Frauds impliedly exclude the right to be heard. The objective of the Master Directions on Frauds is to ensure timely detec tion and reporting of cases of fraud to alert other banks and initiat e criminal proceedings. The Directions contemplate an opportunity of hearing to a third party who is involved in the commission of fraudulent activity, but do not explicitly provide for hearing to a borrower. Thus, it is urged that hearing to the borrowers is excluded by necessary implication.

¶53The Master Directions on Frauds do not expressly exclude a right of hearing to the borrowers before action to class their account as frauds is initiated. The principles of natural justice c an be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed.

¶54In a decision of a three-judge bench of this Court in Swadeshi Cotton Mills v. Union of India 40, the issue was whether the Central government was required to comply with the requirements of audi alteram partem before it took over the management of an industrial undertaking under Section 18-AA(1)(a) of the Industries (Develo pment and Regulation) Act, 1951 41. R S Sarkaria, J speaking for the majority consisting of himself and D A Desai, J laid down the following principles of law:

¶44In short, the general principle — as distinguished from an absolute rule of uniform application — seems to be that where a statute does not, in terms, exclude this rule of prior hearin g but 40 (1981) 1 SCC 664 41 “IDR Act, 1951” [DR. DHANANJAYA Y CHANDRACHUD, CJI] contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute wo uld be construed as excluding the audi alteram partem rule at the p re-decisional stage. Conversely, if the statute conferring the power is silent with regard to the giving of a pre-decisio nal hearing to the person affected and the administrati ve decision taken by the authority involves civil consequences of a grave nature, and no full review or appeal on merits against that decision is provided, courts will be extr emely reluctant to construe such a statute as excluding the d uty of affording even a minimal hearing shorn of all its form al trappings and dilatory features at the pre-decisional stage , unless, viewed pragmatically , it would paralyse the administrative progress or frustrate the need for u tmost promptitude. In short, this rule of fair play “must not be jettisoned save in very exceptional circumstances whe re compulsive necessity so demands”. The court must ma ke every effort to salvage this cardinal rule to the maximum extent possible, with situational modifications. But, to recall the words of Bhagwati, J., the core of it must, however, remain, namely, that the person affected must have reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise. (emphasis supplied)

¶55The main point for consideration before this Court in Swadeshi Cotton Mills (supra) was whether the use of the phrase “immediate action is necessary” under Section 18-AA(1)(a) of the IDR Act impliedly excluded the application of the audi alteram partem rule. Sarkaria, J held that the expression “immediate action”, construed in light of the overall context, object and reasons of the legislation,did not necessarily indicate an intention to exclude the requirement of prior hearing. The Court held that the use of the phrase does not exclude the duty to comply with the audi alteram partem rule: “77. The second reason — which is more or less a facet of the first — for holding that the mere use of the word “immediate” in the phrase “immediate action is necessary”, does not necessarily and absolutely exclude the pri or application of the audi alteram partem rule, is that immediacy or urgency requiring swift action is a situational fact having a direct nexus with the likelihood of adverse effect o n fall in production. And, such likelihood and the urgency of action to prevent it, may vary greatly in degree. The words “likely to affect. . .production” used in Section 18-AA(1)( a) are flexible enough to comprehend a wide spectrum of situations ranging from the one where the likelihood of the happening of the apprehended event is imminent to that where it may be reasonably anticipated to happen sometime in the near future. Cases of extreme urgency where action under Section 18-AA(1)(a) to prevent fall in production and consequent injury to public interest, brooks absolutely no delay, would be rare . In most cases, where the urgency is not so extreme, it is practicable to adjust and strike a balance between the competing cla ims of hurry and hearing.” (emphasis supplied) Sarkaria, J observed that that the owner of an undertaking is entitled to a fair hearing at the pre-decisional stage because the po wer of the Central government under Section 18AA-(1)(a) to take over is far-reaching and adversely affects the rights and interests of owners .

¶56In Mangilal v. State of Madhya Pradesh 42, a two-judge bench of this Court held that the principles of natural justice need to be observed even if the statute is silent in that regard. I n other words, a statutory silence should be taken to imply the need to observe the principles of natural justice where substantial rights of parties are affected:

¶10Even if a statute is silent and there are no positive words in the Act or the Rules made thereunder, there coul d be nothing wrong in spelling out the need to hear the part ies whose rights and interest are likely to be affected by the orders that may be passed, and making it a requirement t o follow a fair procedure before taking a decision, unless the statute provides otherwise. The principles of natural justice must be read into unoccupied interstices of the sta tute, unless there is a clear mandate to the contrary. No form or procedure should ever be permitted to exclude the presentation of a litigant’s defence or stand . Even in the 42 (2004) 2 SCC 447 [DR. DHANANJAYA Y CHANDRACHUD, CJI] absence of a provision in procedural laws, power inheres in every tribunal/court of a judicial or quasi-judicial character, to ado pt modalities necessary to achieve requirements of natural j ustice and fair play to ensure better and proper discharge of their duties. Procedure is mainly grounded on the principles of natural justice irrespective of the extent of its application by express provision in that regard in a given situation. It has always been a cheris hed principle. Where the statute is silent about the observance of the principles of natural justice, such statutory sil ence is taken to imply compliance with the principles of natur al justice where substantial rights of parties are consider ably affected. The application of natural justice become s presumptive, unless found excluded by express words o f statute or necessary intendment. Its aim is to secure justice or to prevent miscarriage of justice. Principles of natur al justice do not supplant the law, but supplement it. These rules operate only in areas not covered by any law validly made. They are a means to an end and not an end in themselves. […] (emphasis supplied)

¶57As a counter to the above legal position, the RBI and lender banks have contended that the principles of natural justice c ould be excluded in cases where there is a requirement of promptitude or exigent action. In support of the submission, the RBI and banks have relied upon Ajit Kumar Nag v. General Manager (PJ), Indian Oil Corp. Ltd43, which in turn relied on the Constitution Bench decision of this Court in Union of India v. Tulsiram Patel.44 In Tulsiram Patel (supra), this Court observed that a right to a prior notice and an opportu nity to be heard could be excluded if allowing for such a right would obstruct the taking of prompt action:

¶101[…] So far as the audi alteram partem rule is concerne d, both in England and in India, it is well established that where a right to a prior notice and an opportunity to be heard before an order is passed would obstruct the taking of prompt action, such a right can be excluded. This right can also be excluded where the nature of the action to be taken, its object and purpose and t he scheme of the relevant statutory provisions warrant its exclusion; 43 (2005) 7 SCC 764 44 (1985) 3 SCC 398 nor can the audi alteram partem rule be invoked if importi ng it would have the effect of paralysing the administrative process or where the need for promptitude or the urgency of taking action so demands, […]

¶58The borrowers have dwelt on Clause 8.9.6 of the Master Directions on Frauds according to which the entire exercise commencing from the detection of fraud by an individual bank upto the declaration of fraud by the JLF is to be completed within six months. Claus e 8.9.6 provides thus: “8.9.6 It may be noted that the overall time allowed for the entire exercise to be completed is six months from the date when the first member bank reported the account as RFA or Fraud on the CRILC platform.”

¶59In K I Shephard v. Union of India45, this Court was called upon to decide the validity of amalgamation schemes drawn by the RBI, whereunder three private banks were amalgamated with nati onalized banks. At the time of merger, some employees of the private banks were excluded from employment as their services were not taken over by the transferee banks in view of allegations of misconduct against them. While noting the fact that the entire process of amalgamation was statutorily required to be completed within 6 months, this Court held that the said time frame provides scope for granting an opportunity of hearing to the affected employees:

¶15[…] We do not think in the facts of the case there is any justification to hold that rules of natural justice have been ousted by necessary implication on account of the time frame. On t he other hand we are of the view that the time limited by st atute provides scope for an opportunity to be extended to the intended excluded employees before the scheme is finalised so that a hearing commensurate to the situation is afforded before a section of the employees is thrown out of employment.

¶60The decision of this Court in Swadeshi Cotton Mills (supra) and K I Shephard (supra) demonstrates that the exigency of a situation is contextual. The Court must lean in favour of reading in the principles of natural justice when faced with a regulatory silence. Any exclusion must be confined to the narrowest possible limits. The application of the 45 (1987) 4 SCC 431 [DR. DHANANJAYA Y CHANDRACHUD, CJI] requirement of a prior hearing could be excluded only in situations where importing it would have the effect of paralyzing the entire process. As mentioned above, Clause 8.9.6 of the Master Directions o n Frauds contemplates that the procedure for the classification of a n account as fraud has to be completed within six months. The procedure adopte d under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud. During this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findi ngs of the forensic audit report. Given the wide time frames contempla ted under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for banks to provid e an adequate opportunity of a hearing to the borrowers before classifying their account as fraud. The exclusion contemplated in the decision of this Co urt in Tulsiram Patel (supra) would not be applicable because giving an opportunity of a hearing to the borrowers will not obstruct the taking of prompt action under the Master Directions on Frauds.

¶61The RBI and lender banks have further submitted that the requirement of natural justice is already fulfilled und er the Master Directions on Frauds as the borrower is allowed to participate during the preparation of the forensic audit report. On the other hand, the borrowers have submitted that the Master Directions do not expressly provide for participation of the borrowers during forensic audit report. It was al so submitted that merely seeking inputs of borrowers during the preparation of the forensic audit report does not satisfy the requirements of the principles of natural justice as the borrowers should also be heard before classifying them as fraud.

¶62In Keshav Mills Co. Ltd. v. Union of India 46, this Court was dealing with the issue of a takeover of a company by the government under the IDR Act, 1951 after completion of a full investigation into the affairs of the company. The issue was whether the r eport of an investigating body appointed by an administrative authority should be made available to the person concerned before the authorit y takes a decision upon that report. While deciding to lay down a general principle, this Court observed that there may be certain situati ons where an investigation report is required to be furnished to the concerned party to make an effective representation about the proposed action: 46 (1973) 1 SCC 380

21.In our opinion it is not possible to lay down any general principle on the question as to whether the report of an investigating body or of an inspector appointed by an administrative authority should be made available to the persons concerned in any given case before the authority takes a decision upon that report. The answer to this question also must always depend on the facts and circumstances of the case. It is not at all unlikely that there may be certain cases where unless the report is given the party concerned cannot make any effective representation about the action that Government takes or proposes to take on the basis of that report. Whether the report should be furnished or not must therefore depend in every individua l case on the merits of that case. We have no doubt that in the instant case non-disclosure of the report of the Inves tigating Committee has not caused any prejudice whatsoever to t he appellants. (emphasis supplied)

¶63In Swadeshi Cotton Mills (supra), this Court held that a company is entitled to an opportunity to explain the evidence collected against it and represent why the proposed action should not be taken:

¶85The contention does not appear to be well founded. Firstly, this documentary evidence, at best, shows that the Company was in debt and the assets of some of its “units” had been hypothecated or mortgaged as security for those debts. Given an opportunity the Company might have explained that as a result o f this indebtedness there was no likelihood of fall in production, which is one of the essential conditions in regard to which the Government must be satisfied before taking action under Section 18A-A(1)(a). Secondly, what the rule of natural justice required in the circumstances of this case, was not only that the Company should have been given an opportunity to explain th e evidence against it, but also an opportunity to be informed of the proposed action of take over and to represent wh y it be not taken. (emphasis supplied)

¶64Audi alteram partem has several facets, including the service of a notice to any person against whom a prejudicial order may be passed [DR. DHANANJAYA Y CHANDRACHUD, CJI] and providing an opportunity to explain the evidence collected. In Tulsiram Patel (supra), this Court explained the wide amplitude of audi alteram partem:

¶96The rule of natural justice with which we are concerne d in these appeals and writ petitions, namely, the audi alteram partem rule, in its fullest amplitude means that a pe rson against whom an order to his prejudice may be passe d should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are rel ied upon for the purpose of being used against him, to h ave the witnesses who are to give evidence against him examined in his presence and have the right to cros s-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not, however, conform to the judicial process in a Court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing with in the meaning of audi alteram partem rule in a quasi-judi cial or administrative inquiry. […] (emphasis supplied)

¶65Audi 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 dem and 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

¶66The 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, the RBI and lender banks have relied upon the decision in Delhi Cloth Mills & General Mills v. Union of India 47 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 i s blatant perversity, arbitrariness, or mala fides.

¶67The RBI hasthe 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 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.

¶68In E P Royappa v. State of Tamil Nadu48, this Court held that an arbitrary state action is violative of Article 14 of the Constitution. Again, in Maneka Gandhi (supra) this court reiterated that the principle of non-arbitrariness pervades Article 14.An administrativ e action can be tested for constitutional infirmities under Article 14 on four grounds:

(i) unreasonableness or irrationality; (ii) illegali ty; (iii) procedural impropriety;49 and (iv) proportionality. However, the scope of such judicial review is limited to ascertaining the deficiency in the decision-making process, and not the correctness of the choice made by the administrator.50

¶69Fairness in action requires that procedures which permit impairment of fundamental right sought to be just, fair, and reasonable. The principles of natural justice have a universal application and constitute 47 (1983) 4 SCC 166 48 (1974) 4 SCC 3 49 State of AP v. McDowell, (1996) 3 SCC 709; Om Kumar v. Union of India, (2001) 2 SCC 386 50 Chairman and Managing Director, United Commercial Bank v. P C Kakkar, (2003) 4 SCC 364 [DR. DHANANJAYA Y CHANDRACHUD, CJI] an important facet of procedural propriety envisaged under Article 14. The rule of audi alteram partem is recognized as being a p art of the guarantee contained in Article 14. A Constitution Bench of this Court in Tulsiram Patel (supra) has categorically held that violation of the principles of natural justice is a violation of Article 14. The court held that any state action in breach of natural justice implicates a violation of Article 14: “95. The principles of natural justice have thus come to be recognized as being a part of the guarantee contained in Article 14 because of the new and dynamic interpretation given by thi s Court to the concept of equality which is the subject-matter o f that article. Shortly put, the syllogism runs thus: violation of a rule of natural justice results in arbitrariness which is the sam e as discrimination; where discrimination is the result of State action, it is a violation of Article 14: therefore, a violation of a principle of natural justice by a State action is a violation of Art icle

¶14Article 14, however, is not the sole repository of the principles of natural justice. What it does is to guaran tee that any law or State action violating them will be struck down. The principles of natural justice, however, apply n ot only to legislation and State action but also where any tribunal, authority or body of men, not coming within the definition of State in Article 12, is charged with the duty of deciding a matter. In such a case, the principles of natural justice require that it must decide such matter fairly and impartially.” (emphasis supplied)

¶70In Cantonment Board v. Taramani Devi 51, a two-judge bench of this Court held that the rule of audi alteram partem is a part of Article 14. Similarly, in Delhi Transport Corporation v. DTC Mazdoor Congress52, this Court observed that the rule of audi alteram parte m enforces the equality clause in Article 14. Therefore, any administrative action which violates the rule of audi alteram partem is arbitrary and violative of Article 14.

¶71Administrative proceedings which entail significant civil consequences must be read consistent with the principles of natural 51 1992 Supp (2) SCC 501 52 1991 Supp (1) SCC 600 justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory r ule to render it compliant with the principles of equality and non-arbitrariness envisaged under Article 14. The Master Directions on Frauds do not expre ssly provide the borrowers an opportunity of being heard before classifying the borrower’s account as fraud. Audi alteram partem must then be read into the provisions of the Master Directions on Frauds.

¶72In Olga Tellis v. Bombay Municipal Corporation 53, a Constitution Bench of this Court was called upon to adjudge the validity of Section 314 of the Bombay Municipal Corporation Act, 1888. T he provision enabled the Municipal Commissioner to remove, without notice, any object, structure or fixture which was set up in or upon any street. Chief Justice Y V Chandrachud delivering the judgment of the Constitution Bench held that the impugned provision must be construed t o ensure that the procedure contemplated is fair and reasonable. It w as further held:

¶44[…] What Section 314 provides is that the Commissioner may, without notice, cause an encroachment to be removed. It does not command that the Commissioner shall, without notice, cause an encroachment to be removed. Putting it differently, Section 314 confers on the Commissioner the discretion to caus e an encroachment to be removed with or without notice. That discretion has to be exercised in a reasonable manner so as to comply with the constitutional mandate that t he procedure accompanying the performance of a public act must be fair and reasonable. We must lean in favour of t his interpretation because it helps sustain the validity of the law. Reading Section 314 as containing a command not to issue notice before the removal of an encroachment w ill make the law invalid . (emphasis supplied)

¶73In Union of India v. Col.J N Sinha54, a two-judge bench of this Court held that an endeavor must be made to interpret a statutory provision consistent with the principles of natural justice: 53 (1985) 3 SCC 545 54 (1970) 2 SCC 458 [DR. DHANANJAYA Y CHANDRACHUD, CJI]

¶8[…] It is true that if a statutory provision can be read consistently with the principles of natural justice, the courts should do so because it must be presumed that the Legislatures and the statutory authorities intend to act in accordance with the principles of natural justice. But if on the other hand a statutory provision either specifical ly or by necessary implication excludes the application of any or all the principles of natural justice then the court cannot ignore the mandate of the Legislature or the statutory authority and read into the concerned provision the principles of natural justice. Whether the exercise of a power conferred should be made in accordance with any of the principles of natural justice or not depends upon the express words of the provision conferring the power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power. (emphasis supplied)

¶74In C B Gautam v. Union of India 55, the question before a Constitution Bench of this Court was whether a show cause notice must be issued to an intending purchaser and seller of property before making a compulsory purchase under Section 269-UD(1) of Chapter XX-C of the Income Tax Act, 1961. Chief Justice M H Kania speaking for the Constitution Bench held that where the validity of a provision would be open to serious challenge for want of an opportunity of being heard, Courts have read such a requirement into the provision. In C B Gautam (supra), this Court read the principles of natural justice into the provisions of Chapter XX-C to save them from the vice of arbitrar iness. The Constitution Bench held:

¶30[…] Again, there is no express provision in Chapter XX-C barring the giving of a show-cause notice or reasonable opportunity to show cause nor is there anything in the language of Chapter XX-C which could lead to such an implication. The observance of principles of natural justice is the pragmatic requirement of fair play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an ord er for purchase by the Central Government is made by an appropriat e authority under Section 269-UD must be read into the provisions 55 (1993) 1 SCC 78 of Chapter XX-C. There is nothing in the language of Section 269-UD or any other provision in the said Chapter which would negate such an opportunity being given. Moreover, if such a requirement were not read into the provisions of the said Chapter, they would be seriously open to challe nge on the ground of violations of the provisions of Article 14 on the ground of non-compliance with principles of natural justice. The provision that when an order for purchase is made under Section 269-UD — reasons must be recorded in writing is no substitute for a provision requiring a reason able opportunity of being heard before such an order is made . (emphasis supplied)

¶75In Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-I56, a two-judge bench of this Court was called upon to decide whether an opportunity of being heard has to be granted to an assesee before any direction could be issued under section 142(2-A) of the Income Tax Act, 1961 for special audit of the accounts of the assessee. This Court held that since the exercise of power under section 142(2-A) of the Income Tax Act leads to serious civil consequences for the assesee, the requirement of observing the principles of natural justice is to be read into the said provision.

¶76In Kesar Enterprises Ltd v. State of Uttar Pradesh57, the Court dealt with a challenge to the validity of Rule 633(7) of the Uttar Pradesh Excise Manual which allowed the imposition of a penal ty for breach of the conditions of a bond without expressly issuing a show-cause notice. D K Jain, J speaking on behalf of the two-judge bench held that a show-cause notice should be issued and an opportunity of being heard should be afforded before an order under Rule 633(7) is made. The Court held that the rule would be open to challenge for being violative of Article 14 of the Constitution unless the requirement of an opportunity to show cause is read into it. The Court observed:

¶30Having considered the issue, framed in para 16, on the touchstone of the aforenoted legal principles in regard to the applicability of the principles of natural justice, we are of the opinion that keeping in view the nature, scope and 56 (2008) 14 SCC 151 57 (2011) 13 SCC 733 [DR. DHANANJAYA Y CHANDRACHUD, CJI] consequences of direction under sub-rule (7) of Rule 633 of the Excise Manual, the principles of natural jus tice demand that a show-cause notice should be issued and a n opportunity of hearing should be afforded to the pers on concerned before an order under the said Rule is ma de, notwithstanding the fact that the said Rule does not contai n any express provision for the affected party being given an opportunity of being heard. […]

¶32In our view, therefore, if the requirement of an opportunity to show cause is not read into the said Rule, an ac tion thereunder would be open to challenge as violative of Article 14 of the Constitution of India on the ground that the power conferred on the competent authority under the provision is arbitrary. (emphasis supplied)

¶77It has been elucidated in the preceding paragraphs that the classification of a borrower’s account as fraud in accordance with the procedure laid down in the Master Directions on Frauds entails significant civil consequences for the borrower. Since the Master Direct ions 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 sa ve them from the vice of arbitrariness.

¶78Before concluding, we also want to address the argument by the borrowers that the requirement of passing a reasoned order must be read into the Master Directions on Frauds. The borrowers also relied on Jah Developers (supra) where it was held that a final decision of the Review Committee declaring the borrower as a ‘wilful defaulter’ must be made by a reasoned order. We agree with this contention of the borrowers because: (i) a reasoned order allows an aggrieve d party to demonstrate that the reasons which persuaded the authority to p ass an adverse order against the interests of the aggrieved partyare extraneous or perverse; and (ii) the obligation to record reasons acts as a check on the arbitrary exercise of the powers.58 The reasons to be recorded need 58 Kranti Associates (P) Ltd. v. Masood Ahmed Khan, ( 2010) 9 SCC 496 not be placed on the same pedestal as a judgment of a court. The reasons may be brief but they must comport with fairness by indica ting a due application of mind

¶79In 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 not provide an opportunity of hearing to the borrowers before classifying their accounts as 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 th e 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 l iberty to take fresh steps in accordance with this decision.

¶80Lastly, the borrowers have argued that the Master Directions on Frauds suffer from manifest arbitrariness because the y stipulate an opportunity of a hearing to third parties, while denying the sa me to borrowers, who face significant civil consequences. Clause 8.12.5 of the Master Directions on Frauds provides that banks have to satisfy themselves of the involvement of third parties and provide them with an opportunity of being heard before reporting them to Indian Banks’Association. We are unable to accept this argume nt of the borrowers in light of the fact that the borrowers and the thir d parties stand on a different footing because: (i) the borrowers are th e main perpetrators of fraud, while the third parties are merely facilitators; and

(ii) it is the borrowers who face the significant civ il consequences stipulated under clauses 8.12.1 and 8.12.2, while the third party service providers are merely referred to the Indian Banks’ Associ ation which maintains a caution list of such service providers. Howeve r, this view doesnot affect our conclusions in view of the discussion in the preceding paragraphs. [DR. DHANANJAYA Y CHANDRACHUD, CJI] E. Conclusion

¶81The 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 Mast er 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 implie dly 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 borrowe rs 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.

¶82In the result, the judgment of the Division Bench of the High Court of Telangana dated 10 December 2020 is upheld. The judgments of the High Court of Telangana dated 22 December 20 21 and31 December 2021, and of the High Court of Gujarat dated 23 December 2021 are accordingly set aside. The Civil Appeals are disposed of. Writ Petition (C) No. 138 of 2022 is also disposed of in above terms. There shall be no order as to costs.

¶83Pending application(s), if any, shall stand disposed of. Ankit Gyan Appeals disposed of. (Assisted by : Mahendra Yadav, LCRA) [DR. DHANANJAYA Y CHANDRACHUD, CJI]