Supreme Court Says Banks Should Provide Reasonable Opportunity of Hearing to Borrowers Before Declaration of Account As Fraud
Banks should provide a reasonable opportunity of hearing and representation before classifying a borrower's account as fraud, the Supreme Court said on Monday.
New Delhi, March 27: Banks should provide a reasonable opportunity of hearing and representation before classifying a borrower's account as fraud, the Supreme Court said on Monday.
Upholding a 2020 order of the Telangana high court, a bench of Chief Justice DY Chandrachud and Justice Hima Kohli said 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. Supreme Court Lawyer Collapses While Arguing Case, Doctor Called To Check on Advocate.
The apex court 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. Bullet Train Project: Supreme Court Dismisses Godrej & Boyce's Plea Against Bombay HC Order Allowing Land Acquisition.
"Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud. "A reasoned order has to be issued on the objections addressed by the borrower," the bench said.
The judgement was delivered on pleas relating to the Reserve Bank of India (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 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 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 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 said.
The apex court 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 said.
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