Banks could not hold hearing before classifying account as fraud: Supreme Court [12.5.2023]

The Supreme Court on Friday clarified its March 27 verdict, saying it had not directed banks to accord a personal hearing before classifying a borrower's account as fraud.

The clarification came on the plea of State Bank of India which flagged two issues pertaining to the March 27 judgement and said now the NPA account holders, against whom the proceedings were initiated before the verdict, may come and say that stall everything as they were not heard by banks and the hearing should not mean personal hearing.

We never stated that the personal hearing be granted to the borrowers. Rather we had said that they should be given adequate notice and an opportunity to make a representation," a bench comprising Chief Justice D Y Chandrachud and Justices P S Narasimha and J B Pardiwala said.

On the issue of applicability of the verdict with prospective effect, the bench said that a review petition will have to be filed against the judgement by the SBI.

A bench headed by the Chief Justice, on March 27, had upheld the Telangana High Court's 2020 verdict, saying the classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences for the borrowers.

The apex court had said the principles of natural justice demand that the borrowers must be served a notice, and given an opportunity to explain the conclusions of the forensic audit report.

Our law has never been that opportunity of hearing means a personal hearing", the bench said on Friday.

Solicitor General Tushar Mehta, appearing for the SBI, then submitted that since the Supreme Court had upheld the Telangana High Court order, which held that the principles of "audi alteram partem (hear the other side)" must be read into the Circular issued by the Reserve Bank of India on the classification of bank accounts as fraud accounts, other courts may interpret that personal hearing is necessary.

The law officer pressed for a clarification, saying that the judgement will reopen several past cases.

The judgement was delivered on pleas relating to the RBI (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 which 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.

Elaborating on the consequences when a borrower's account is declared fraud, the apex court had said this virtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets.

The top court had said 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 privileges, 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," it had said.

Debarring a borrower under the Master Directions on Frauds is akin to blacklisting the borrower for being untrustworthy and unworthy of credit by the banks, it had said.

The apex court had said the classification of a borrower's account as fraud has the effect of preventing the borrower from accessing institutional finance for the purpose of business.

"It also entails significant civil consequences as it jeopardises the future of the business of the borrower. Therefore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance.

"The action of classifying an account as a fraud not only affects the business and goodwill of the borrower but also the right to reputation," it had said.

13 May 2023