New Delhi: No opportunity of personal or oral hearing is necessary before labelling a bank account as “fraud”, the Supreme Court ruled Tuesday while laying down guidelines for authorities to deal with such cases
In a 106-page ruling, a bench of Justices J.B.Pardiwala and K.V.Viswanathan said allowing an opportunity of personal hearing to borrowers of potentially fraudulent accounts could create opportunities for them to destroy evidence or even abscond.
Significantly, the court made it clear that an oral hearing in such cases could lead to unwarranted consequences such as protracting the entire process. “Oral hearing is bound to convert an administrative process, which was intended to be swift, into a protracted one, defeating the very purpose of the exercise.”
Apart from this, the court noted that significant logistical and infrastructural burden could also be caused to the banks. Such a move could also provide an opportunity to disobedient borrowers to “dissipate assets, destroy evidence or even abscond causing enormous prejudice to public interest”. Stretching out this process will put public money “in jeopardy” as borrowers will continue to enjoy exposures from banks, the court said, adding that logistically also, it will seriously encumber the working hours of the bank officials.
“While consideration of the representation and the making of a reasoned order could be made by the committee even beyond banking hours, a personal hearing would mean that it will have to be held during office hours. This will also cause enormous inconvenience to public interest,” the two-judge bench noted in its ruling.
These observations were made by the apex court while acting on a plea filed by State Bank of India and other banks against a company called Amit Iron Ore Private Ltd, and another associated children’s apparel company called Lilliput Kidswear.
In August 2019, the SBI labelled the bank accounts of Amit Iron was labelled as a Non-Performing Asset (NPA) for defaulting in paying back the loan amount. In May last year, the bank account of the kidswear company was also classified as “fraud” under the RBI (Reserve Bank of India) norms.
Although the Delhi High Court last year provided some relief to the company and granted it an opportunity of personal hearing, the banks challenged this ruling, before the Supreme Court.
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How case unfolded
In December 2023, the SBI issued a show-cause notice to the iron ore company on grounds of not complying with the agreed loan terms and allegedly committing financial irregularities, leading to the assumption of fraudulent activity.
Although the 2023 notice asked the company to respond as to why action should not be taken against it, the firm responded denied any breach of the terms and conditions of the loan. The bank went ahead and classified the company’s account as “fraud” in February 2024.
Last year, the company moved the Delhi High Court while pointing out that no opportunity of personal hearing was given before declaring the company as fraudulent. In July, the HC passed an order saying that such an opportunity should be given to the company before declaring it as fraudulent. The same month, a two-judge bench of the HC, upheld this decision.
Challenging this, the SBI moved the top court. In November, the SC directed the RBI to be made a party to this case.
However, the borrowers argued that this issue was squarely covered in the 2023 ruling in the SBI vs Rajesh Aggarwal case, where a two-judge SC bench ruled that in such cases, the borrower should be given an opportunity to explain in person, and a Forensic Audit Report should be supplied to the borrower.
Why court favoured the banks
Making it clear that the SC ruling in Rajesh Aggarwal’s case did not recognise any such right to the borrower, the top court said that any judgment of the HCs taking a contrary view to this would now stand overruled.
The 2023 ruling outlined a procedure which strikes “a fair balance between promptitude and fairness” and duly comports with the principles of natural justice ensuring fairness to the borrower whose account is likely to be classified as a fraud account, it said.
Although the court set aside the previous direction to the banks to give a personal hearing to the borrowers, it said that the borrowers must still be supplied with audit reports, including the forensic audit reports, post the red-flagging of bank accounts.
“A Red Flagged Account (RFA) is one where a suspicion of fraudulent activity is thrown-up” so that banks can be alerted and take preventative measures against them,” the court said, relying on the RBI Master Guidelines.
After six months of an account being classified as an RFA, the banks have to either lift the red-flag status or label the account as “fraud”. Although the objective of natural justice principles is to “ensure fairness in action and prevent miscarriage of justice”, such a principle is a “flexible concept”, it said.
For instance, an opportunity to be served with a show cause notice and eliciting a reply with an obligation to pass a reasoned order is one facet of natural justice, the court said.
One cannot start with the assumption that as a matter of right, one is entitled to personal hearing, the court said, pointing out the 1996 ruling in Union of India vs. Jesus Sales Corporation, where it had emphasized how it is the authority’s discretion to decide if a personal hearing is warranted or not.
Taking into account the fact that frauds “are of various hues”, it said granting the right of personal hearing to each and every borrower would be practically inexpedient considering “a large volume of cases”.
Another possible consequence, the court said, could be extending the 180-day timeline otherwise given to banks to either lift the status of a RFA or to classify it as fraud. “It will be impossible to stick to the timeline if a right of personal hearing is to be guaranteed.”
Underlining that the entire exercise is broadly a form of “housekeeping due diligence, internally carried out by the bank”, the court said that classification is an internal administrative decision.
The court rejected the borrowers’ argument that Rajesh Aggarwal had used the words “personal hearing” in all 98 paragraphs of the judgment. “Realising that not once in the judgment containing 98 paragraphs did the Court use the word personal hearing, as part of this court’s holding, learned senior counsels were still undeterred.”
(Edited by Tony Rai)