Natural justice bars fraud classification of borrower accounts without hearing; consequential FIRs and coercive actions also fall.

Classification of borrowers' accounts as fraud under an RBI framework was treated as an administrative action carrying serious civil consequences, so prior notice and hearing were required under audi alteram partem unless validly excluded. The court noted that absence of an express hearing clause does not displace natural justice where valuable rights are affected, and that a fraud declaration made without prior opportunity of hearing is unsustainable. Because the later FIRs and coercive measures were founded on that defective classification, they also fell with the illegal foundation. The lending institutions were left free to proceed afresh in accordance with natural justice.

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Issues: (i) Whether classification of borrowers' accounts as fraud under the RBI circular, without prior hearing, was legally sustainable; (ii) whether FIRs and coercive actions founded on such classification could also be quashed.

Issue (i): Whether classification of borrowers' accounts as fraud under the RBI circular, without prior hearing, was legally sustainable.

Analysis: The circular creates an administrative framework for early detection and reporting of fraud, but the classification of an account as fraud carries serious civil consequences for the borrower. The Court relied on the binding principle that audi alteram partem applies to administrative action producing civil consequences, and that the absence of an express hearing provision does not exclude natural justice where the decision affects valuable rights.

Conclusion: The fraud classification, if made without prior opportunity of hearing, is unsustainable and is liable to be set aside in favour of the petitioners.

Issue (ii): Whether FIRs and coercive actions founded on such classification could also be quashed.

Analysis: Once the foundational fraud declaration is vitiated for non-compliance with natural justice, later actions resting on that declaration cannot survive if they are inseparably linked to the illegal foundation. The Court applied the principle that when the basis of an action falls, all consequential proceedings fall with it. At the same time, the liberty of the lending institutions to proceed afresh after following due process was preserved.

Conclusion: The consequential FIRs and coercive actions based on the impugned fraud declarations are also liable to be quashed in favour of the petitioners.

Final Conclusion: The impugned fraud declarations and consequential FIRs/coercive measures were set aside for want of prior hearing, while leaving it open to the lending institutions to proceed again in accordance with natural justice.

Ratio Decidendi: Where an administrative classification entails serious civil consequences, prior notice and hearing are mandatory unless validly excluded, and all subsequent proceedings founded on an illegal foundational order fall with it.

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