Never Said Borrowers Should Be Personally Heard Before Their Accounts Are Classified As Fraud : Supreme Court

The Supreme Court on Friday clarified that its judgment, which mandated that borrowers should be heard by banks before their accounts are classified as fraudulent in terms of the RBI master circulars, did not mean that they should be personally heard.

Opportunity of hearing does not mean personal hearing, said the bench comprising Chief Justice of India DY Chandrachud and Justice PS Narasimha. The bench was dealing with an application filed by the State Bank of India seeking a clarification that the judgment in State Bank of India vs Rajesh Agarwal, which held that borrowers should be given an opportunity of hearing, will apply only prospectively. Through that judgment, delivered on March 27, the Court had upheld the judgment of the Telangana High Court which held that the principles of "audi alteram partem" must be read into the Circular issued by the Reserve Bank of India on the classification of bank accounts as fraud accounts.

Appearing for the SBI, Solicitor General of India Tushar Mehta submitted that the Courts might construe opportunity of hearing as personal hearing. However, the bench was quick to point out that its judgment never stated that personal hearing should be granted to borrowers and only held that the should be given an adequate notice and an opportunity to make a representation.

"Our law has never been that opportunity of hearing means a personal hearing", CJI Chandrachud stated. SG however contended that since the Supreme Court upheld the Telangana High Court, other courts may interpret that personal hearing is necessary.

Senior Advocate Mukul Rohatgi questioned the maintainability of the clarification application and said that the proper remedy is to file a review. He further contended that the SG's apprehensions are misplaced, as the High Court's judgment has merged with the Supreme Court and only the directions given by the latter will prevail.

The bench also said that only the Supreme Court's directions will prevail as per the doctrine of merger. SG however pressed for a clarification, saying that the judgment will reopen several past cases. 

The CJI orally remarked that the application has not provided any data pertaining to the same and that the court never said that a personal hearing was to be given to parties. CJI also said that the judgment clearly said that no opportunity of being heard is required before an FIR is lodged and registered.

As regards the prayer to clarify that the judgment will apply only prospectively, the bench said that a review petition has to be filed.

The bench proceeded to dispose of the application with the following order :

"The apprehension which is expressed by the learned Solicitor General  is that since the judgment of the division bench of the High Court of Telangana was upheld in judgement of this court, the judgement of this court may be interpreted in future to mean that the grant of a personal hearing is mandatory, though it has not been so clarified in the conclusions of the judgement of this Court. We clarify that while upholding the judgment of the High Court of Telangana, the operative directions of this courts are those which are summarized in paragraph 81 of the judgement. Mr.Solicitor further states that in respect of the submission that the judgment of this court should be granted only a prospective effect, the Union of India may be advised to file a review separately."

Directions passed by the Supreme Court in State Bank of India v Rajesh Agarwal

The following conclusions were made by the Supreme Court in its judgement–

1. No opportunity of being heard is required before an FIR is lodged and registered.

2. 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.

3. Debarring the borrowers from accessing institutional finance results in serious civil consequences for the borrowers.

4. Such a debarment is akin to blacklisting the borrowers for being untrustworthy and unworthy of credits by banks. This Court has consistently held that an opportunity of hearing must be provided for a person blacklisted.

5. The application of audi alteram partem cannot be impliedly excluded from the Master Directions on Frauds. In view of the time line in the Master Directions on Frauds, as well as the nature of proceedings, it is reasonably practicable for the lender banks to provide an opportunity of hearing to the borrowers before classifying their accounts as fraud.

6. The principles of natural justice demand that the borrowers must be served an notice, given an opportunity to explain the conclusions in the forensic audit report and be allowed to represent the banks and joint lenders forum before their accounts are classified as fraud. In addition, the decision to classify the account as fraudulent must be made by a reasoned order.

7. Since the Master Directions do not expressly provide for an opportunity of hearing to the borrower, audi alteram partem must be read into the provisions to save them from the vice of arbitrariness.

SBI's plea

The SBI had moved the Supreme Court seeking to clarify that providing relevant extracts from the forensic auditor report would meet the ends of justice and be prospective in operation. In its plea, SBI stated that "the present application seeking clarification is required to be filed as there is an apprehension of the said judgment being misconstrued and misapplied in absence of the clarifications which are sought in the present application.” It further added–

"Their default has substantially contributed to the weakening of the financial position of the banks, affecting the economy of the nation.’

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