New Delhi: The Supreme Court Tuesday ruled that banks cannot put lawyers on a “caution list” for negligence or professional incompetence. It said such lists are meant only for cases involving fraud, dishonesty, criminality or other serious misconduct, and banks cannot publicly declare a lawyer competent or incompetent.
Although such “caution list” may or may not be public documents, their circulation to all banking institutions essentially operated as a declaration about the lawyers’ incompetence, and negative character, the two-judge bench ruled.
These observations were made in a 41-page ruling delivered by a two-judge bench of Justices P. S. Narasimha and Alok Aradhe, while acting on the plea of Ajay Vijh, an advocate who had served as a panel counsel for Canara Bank.
The court also said that when it comes to lawyers or advocates, and matters concerning their professional conduct or misconduct, these matters fall under the jurisdiction of regulatory bodies like the Bar Council of India, and Bar Councils of respective states, envisaged under the Advocates Act, 1961.
Although banks have the choice of disengaging a lawyer and removing their name from the panel if the services are considered inadequate, “an action in the nature of public declaration to all other banks about the conduct, competency or incompetency of an advocate is clearly beyond their power and jurisdiction and clearly illegal,” the court ruled, looking at the actions of Canara Bank in this case.
The court also went on to note that there was no element of fraud, collusion, criminal misconduct, or deliberate facilitation of fraudulent activity by Vijh. Instead, the case related to negligence in carrying out title verification and rendering a legal opinion, it said.
Although the bank’s action of putting Vijh’s name in the “caution list”, which otherwise related to fraudulent parties was deemed “illegal”, the bank was well within its rights to terminate his employment.
“An advocate has no right to be empanelled with a bank or to be continued so, as the relationship between the bank and the advocate is primarily contractual and also founded upon trust and confidence. Consequently, where a bank is dissatisfied with the services rendered, it is always open to discontinue such engagement or decline future empanelment,” the court said.
Vijh’s case & why he approached court
The problem arose in 2015, when Vijh was on the panel of Canara Bank. He gave an “erroneous” legal opinion to the bank, which resulted in the bank removing his name from its panel of advocates. The opinion had allegedly exposed the bank to financial risk as well. In 2020, the bank also added his name to the “caution list” maintained by the Indian Banks’ Association (IBA). The list was titled ‘third party entities involved in fraud’.
Vijh approached the court challenging the bank’s action, but initially his plea was dismissed as the Allahabad HC found that the Indian Banks’ Association (IBA) does not fall under the definition of a “state” under Article 12 of the Constitution. The provision defines “state” and includes under its ambit government, authorities, and bodies under the government’s control.
Vijh argued in court that the bank acted without giving him notice or an opportunity to be heard, and the action had a cascading effect on his professional engagements, resulting in termination of his empanelment with other banking institutions, seriously denting his honour and reputation. He also said he became aware of his inclusion in the “caution list” only much later, as there was no intimation of such inclusion.
On the other hand, the bank argued before the court that the entire purpose of these lists was to caution member banks about the inefficiency or professional negligence of Vijh.
Under Section 35A of the Banking Regulation Act, 1949, the RBI is empowered to issue directions to banking institutions in public interest and for proper management of banking affairs, the bank had argued, pointing out that the RBI had issued circulars on issues of fraud prevention, fraud risk management and reporting of irregularities.
However, the court rejected this argument, saying that the question before it was not whether RBI had the power to issue circulars.
The court then answered this by noting that the circulars issued by the RBI under Section 35A to alert member banks against fraudulent transactions, as also fraudulent professionals, “cannot be interpreted to authorise banks or the IBA to include cases of alleged negligence or professional (in)competence of an advocate”.
What are caution lists & what SC ruled
The court also made it clear that the “caution list” was never designed to address cases resting merely on alleged negligence or errors of professional judgment. “Consequently, we have held that inclusion of appellant’s name in the caution list solely on account of negligence is unsustainable in law,” the court ruled.
After considering issues relating to the independence of the legal profession and the freedom of self-regulation, the court said that matters relating to professional conduct or misconduct of advocates fall within the exclusive jurisdiction of the regulatory bodies constituted under the Advocates Act 1961.
The court directed that the lawyer’s name be removed from the “caution list” with immediate effect. The court also made it clear to the bank that publicly announcing the competency or incompetency of an advocate is clearly beyond their power and jurisdiction.
Emphasising that public confidence in the legal profession is indispensable to the administration of justice and can be sustained only when disciplinary mechanisms inspire trust and credibility, the court said that the purpose of “caution list” is restricted to alerting banks and financial institutions about third-party entities, including advocates, valuers, chartered accountants and other professionals whose acts of omission or commission are perceived to have exposed banks to fraud or financial risk.
However, it drew an important distinction, stating that courts cannot comment on the competence or incompetence of an advocate and the same is clearly beyond their jurisdiction, and “illegal”.
The object underlying the maintenance and dissemination of information through such a list is to enable banks to exercise due caution while engaging or dealing with such entities in future transactions, the court said.
Emphasising that fraud, by its very nature, includes an element of “intention”, and a design to defraud, the court said: “An erroneous legal opinion or an omission in the course of due diligence, absent any allegation of dishonest intent or deliberate facilitation of illegality, cannot be elevated to the level of fraud.”
Had Vijh committed fraud in this case he would be liable to criminal prosecution, and entirely different considerations would arise, the court said.
(Edited by Viny Mishra)
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