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of <h1>Natural Justice Integrated into Fraud Directions: Borrowers Must Be Heard Before Account Classification.</h1> <h3>State Bank of India & Ors Versus Rajesh Agarwal & Ors</h3> State Bank of India & Ors Versus Rajesh Agarwal & Ors - (2023) 6 SCC 1 Issues Involved:1. Whether the principles of natural justice should be read into the provisions of the Master Directions on Frauds.2. Whether the classification of a borrower's account as fraud entails civil consequences.3. Whether the Master Directions on Frauds impliedly exclude the right to be heard.4. Challenge to the constitutional validity of the Master Directions on Frauds.Summary:Issue 1: Whether the principles of natural justice should be read into the provisions of the Master Directions on Frauds.The court held that the principles of natural justice, particularly the rule of audi alteram partem, must be read into the Master Directions on Frauds to save them from arbitrariness. The classification of an account as fraud entails serious civil consequences for the borrower, thus necessitating the observance of natural justice principles.Issue 2: Whether the classification of a borrower's account as fraud entails civil consequences.The court determined that classifying a borrower's account as fraud leads to significant civil consequences, including debarment from accessing institutional finance for five years, akin to blacklisting. This classification affects the borrower's right to reputation and their ability to carry on business, thereby necessitating an opportunity of being heard before such classification.Issue 3: Whether the Master Directions on Frauds impliedly exclude the right to be heard.The court found that the Master Directions on Frauds do not expressly exclude the right to be heard. It emphasized that the principles of natural justice should be read into the provisions where the statute is silent, especially when the action involves significant civil consequences. The court concluded that it is reasonably practicable for banks to provide an opportunity of hearing to borrowers before classifying their accounts as fraud.Issue 4: Challenge to the constitutional validity of the Master Directions on Frauds.The court upheld the Master Directions on Frauds as constitutionally valid but emphasized that the implementation of these directions must comply with the principles of natural justice. The court held that any policy decision with serious civil consequences must be open to challenge for arbitrariness if natural justice principles are not applied.Conclusion:1. No opportunity of being heard is required before an FIR is lodged and registered.2. Classification of an account as fraud results in serious civil consequences against the borrowers.3. Debarring borrowers from accessing institutional finance under Clause 8.12.1 is akin to blacklisting.4. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds.5. The principles of natural justice demand that borrowers must be served a notice, given an opportunity to explain the forensic audit report, and allowed to represent before their account is classified as fraud.6. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing, audi alteram partem must be read into the provisions to save them from arbitrariness.The court upheld the judgment of the Division Bench of the High Court of Telangana dated 10 December 2020 and set aside the judgments of the High Court of Telangana dated 22 December 2021 and 31 December 2021, and of the High Court of Gujarat dated 23 December 2021.
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