Supreme Court says borrowers must be heard before declaring them fraud
The Supreme Court of India in a very important verdict has said that the principles of natural justice demand that the borrowers must be 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. The apex court also said that the decision classifying the borrower’s account as fraudulent must be made by a reasoned order.
The court was hearing multiple petitions arise out of a challenge to the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. Issued by the Reserve Bank of India, these directions (also called master Direction on Frauds) 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.
The Supreme Court in its verdict said that 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.
The court in its verdict passed on 27 March also observed that 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.
“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. 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,” said the Supreme Court in its 59-page order.
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