Simbhaoli Sugars Limited v. Punjab National Bank & Anr

J U D G M E N T MINI PUSHKARNA, J: (ORAL)

CM APPL. 66872/2023

¶1The present application has been filed for restoration of the present petition, which had been dismissed in default and for non-prosecution on 01st September, 2023.

¶2Considering the submissions made in the present application, the same is allowed. The writ petition is restored to its original number. The application is disposed of. W.P.(C) 3903/2022

¶3Learned counsel appearing for respondent no.2 – Reserve Bank of India has brought to the notice of this court the judgment dated 02nd

November, 2023 passed in W.P.(C) No. 3191/2022.

¶4It is submitted that the present matter is squarely covered by the aforesaid judgment passed by the Division Bench of this court.

¶5The present petition has been filed seeking to challenge the action of the respondent no.1 in declaring the petitioner's account as 'fraud'. It is the case of the petitioner that the said action is arbitrary and that the account of the petitioner has been declared as 'fraud' without affording any opportunity of being heard. Thus, prayer has been made for quashing the letter dated 07th September, 2021 issued by the respondent no.1, to the extent the same communicates that the account of the petitioner has been declared as 'fraud'.

¶6It is to be noted that Division Bench of this court in the case of Boom Agro India Pvt. Ltd. & Anr. Versus Reserve Bank of India and Anr., vide its judgment dated 02nd November, 2023 has passed the following order: "1. At the outset, Learned Counsel for the Reserve Bank of India has stated before this Court that the issue involved in the present matter is already covered by a judgment delivered by the Hon"ble Supreme Court in Civil Appeal No. 7300/2022 titled State Bank of India & Others Vs. Rajesh Agarwal & Others.

¶2The aforesaid judgement of the Hon"ble Supreme Court arose out of a challenge to the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select Financial Institutions) Directions 2016 (hereinafter, "Master Directions on Frauds') on grounds that it did not grant an opportunity of hearing to borrowers before classifying their accounts as fraudulent.

¶3It was held by the Hon"ble Supreme Court 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. It was so held that as 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 requirement of observing the principles of natural justice. It was held that the administrative proceedings which entail significant civil consequences must be

read consistent with the principles of natural justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory rule to render it compliant with the principles of equality and non-arbitrariness envisaged under Article 14. The Master Directions on Frauds did not expressly provide the borrowers an opportunity of being heard before classifying the borrower"s account as fraud. The Hon"ble Supreme Court, therefore, held that the principle of audi alteram partem must then be read into the provisions of the Master Directions on Frauds.

¶4The relevant paragraphs of the judgement passed by the Hon"ble Supreme Court read as under:

"81. The conclusions are summarized below: i. No opportunity of being heard is required before an FIR is lodged and registered; ii. Classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences against the borrowers; iii. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower; iv. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted; v. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud; vi. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as

fraudulent must be made by a reasoned order; and vii. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."

¶5In light of the aforesaid judgment passed by the Hon"ble Supreme Court, as no opportunity of hearing was granted to the Petitioners herein, the action of the Respondent No. 2 Bank in declaring the accounts of the Petitioners as "Fraud" is hereby set aside. However, liberty is granted to the Respondent No. 2 Bank to proceed in accordance with law laid down in Rajesh Agarwal (supra).

¶6It is made clear that this Court has not commented upon any criminal case/ FIR registered against either of the Petitioners, if any.

¶7The Petitions stand disposed of in the aforesaid terms."

¶7In the present case also, the main contention raised by the petitioner is that his account has been declared as 'fraud' without affording an opportunity of hearing. Supreme Court in the case of State Bank of India & Ors. Versus Rajesh Aggarwal & Ors., Civil Appeal No.7300/2022, has categorically held that the principles of natural justice for granting hearing to the concerned parties, has to be necessarily read into the Master Directions on Frauds issued by the Reserve Bank of India, under which the concerned action for declaration of accounts as 'fraud' is taken.

¶8In view thereof, the present petition is allowed and the impugned letter dated 07th September, 2021 issued by respondent no.1 is set aside.

¶9However, liberty is granted to respondent no.1 to proceed against the petitioner in accordance with law in terms of the law laid down in the judgment of the Supreme Court in State Bank of India & Ors. Versus Rajesh Aggarwal & Ors (supra).

¶10With aforesaid directions the present writ petition is disposed of.

(MINI PUSHKARNA) JUDGE JANUARY 16, 2024/kr

* IN THE HIGH COURT OF DELHI AT NEW DELHI + W.P.(C) 3903/2022 & CM APPL. 66872/2023 SIMBHAOLI SUGARS LIMITED ..... Petitioner Through: Ms. Sneha Jain, Adv. versus PUNJAB NATIONAL BANK & ANR. ..... Respondents Through: Mr. Ramesh, Ms. Manisha Singh, Ms. Nisha Sharma, Mr. Rohan Srivastava & Ms. Tanya, Advs. Mr. Rajesh Kumar Gautam, Mr. Anant Gautam, Mr. A. Achumi, Mr. R.P., Ms. Shivani and Mr. Dinesh, Advs. % Date of Decision: 16th January, 2024 CORAM: HON'BLE MS. JUSTICE MINI PUSHKARNA