2025 (4) TMI 1592 - SC - Indian Laws

FIR registration does not require hearing accused as natural justice principles don't apply at reporting stage

CENTRAL BUREAU OF INVESTIGATION Versus SURENDRA PATWA & ORS.

CENTRAL BUREAU OF INVESTIGATION Versus SURENDRA PATWA & ORS. - 2025 INSC 572 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in these appeals include:Whether the administrative actions initiated by banks under the Reserve Bank of India's Master Directions on Frauds (dated 01.07.2016) require adherence to the principles of natural justice, specifically the audi alteram partem rule, before classifying bank accounts as fraudulent.Whether the quashing of administrative actions for non-compliance with natural justice principles necessarily entails the quashing of First Information Reports (FIRs) and subsequent criminal proceedings initiated based on those administrative actions.The distinction between administrative actions and criminal proceedings in the context of fraud classification and reporting by banks and investigating agencies.The applicability of the precedent set in the judgment of this Court in State Bank of India and Others v. Rajesh Agarwal and Others (2023) regarding natural justice in administrative fraud classification and the registration of FIRs.The procedural propriety and jurisdictional limits of High Courts in quashing FIRs and criminal proceedings when such relief was not specifically sought or when the investigating agency (CBI) was not a party to the proceedings.The scope for banks and regulatory authorities to proceed afresh with administrative actions after setting aside prior actions for procedural defects.The appropriate categorization and treatment of multiple appeals arising from various High Court orders relating to administrative and criminal proceedings in fraud cases.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Requirement of Natural Justice in Administrative Actions under RBI Master DirectionsLegal Framework and Precedents: The Master Directions on Frauds issued by the RBI provide a procedural framework for banks to detect, classify, and report frauds. The Court relied heavily on the judgment in Rajesh Agarwal's case, which clarified that administrative actions involving classification of accounts as fraudulent have serious civil consequences, such as blacklisting and debarment from institutional finance, and therefore attract the principles of natural justice, including audi alteram partem. The Court also referred to established administrative law principles from cases such as A.K. Kraipak v. Union of India, State Bank of Patiala v. S.K. Sharma, and Canara Bank v. Debasis Das, which mandate fair hearing before administrative actions with civil consequences.Court's Interpretation and Reasoning: The Court reaffirmed that the classification of a borrower's account as fraud under the Master Directions is an administrative action that entails civil and penal consequences. Hence, the principle of audi alteram partem applies, requiring notice and an opportunity to be heard before such classification. The Court emphasized that the Master Directions do not expressly exclude natural justice, and it is practicable for banks to provide hearings prior to classification.Key Findings: The Court observed that the High Courts rightly quashed the administrative actions on the ground of non-compliance with audi alteram partem. However, the quashing was limited to procedural violations and did not address the merits of the fraud allegations.Application of Law to Facts: Since the banks had declared accounts as fraudulent without hearing the respondents, the administrative actions were invalid on procedural grounds. The Court clarified that this procedural defect does not preclude banks from initiating fresh proceedings after complying with natural justice.Treatment of Competing Arguments: The respondents argued that the absence of hearing invalidated all consequences of classification. The Court accepted this but clarified that the procedural defect does not invalidate the underlying facts or the possibility of fresh administrative action.Conclusion: Administrative classification of fraud requires adherence to natural justice, and failure to do so renders such action liable to be set aside, but does not bar fresh proceedings.Issue 2: Applicability of Natural Justice and Audi Alteram Partem to Criminal Proceedings and FIR RegistrationLegal Framework and Precedents: The Court examined the distinction between administrative actions and criminal proceedings, relying on Rajesh Agarwal's case and other precedents such as Union of India v. W.N. Chadha and Anju Chaudhary v. State of U.P., which hold that no opportunity of hearing is required before registration of an FIR. The Code of Criminal Procedure does not mandate hearing before FIR registration.Court's Interpretation and Reasoning: The Court clarified that the principles of natural justice do not apply at the stage of FIR registration or reporting a cognizable offence to investigating agencies. The registration of an FIR is merely the initiation of a criminal investigation and is distinct from administrative classification. Even if the administrative action is set aside, the FIR can remain valid if a cognizable offence is disclosed.Key Findings: The Court found that the High Courts erred in quashing FIRs and criminal proceedings solely because the administrative actions were set aside for procedural defects. The Court emphasized that the existence of a cognizable offence is to be determined by the investigating agency and courts in criminal trials, not by invalidation of administrative actions.Application of Law to Facts: The quashing of FIRs and criminal proceedings by the High Courts was held to be beyond their jurisdiction, especially where no challenge to FIRs was made or where the CBI was not a party. The Court underscored that criminal proceedings can continue independently of administrative actions.Treatment of Competing Arguments: The respondents contended that criminal proceedings are a natural corollary to administrative classification and thus invalid if the latter is set aside. The Court rejected this, emphasizing the legal distinction and procedural independence of criminal investigations.Conclusion: Natural justice does not apply to FIR registration; quashing of administrative actions does not ipso facto invalidate FIRs or criminal proceedings.Issue 3: Jurisdiction and Procedural Competence of High Courts in Quashing FIRs and Criminal ProceedingsLegal Framework and Precedents: The Court noted that High Courts have the power to quash FIRs under certain circumstances but must do so only when challenged and after hearing all necessary parties, including investigating agencies like the CBI.Court's Interpretation and Reasoning: The Court observed that several High Courts quashed FIRs and criminal proceedings without any prayer for such relief and without impleading the CBI as a party, which was procedurally improper. The Court directed that the CBI must be impleaded in all such proceedings and that quashing of FIRs cannot be done suo moto or without appropriate pleadings.Key Findings: The Court found procedural lapses in the High Courts' approach and emphasized adherence to due process and party representation.Application of Law to Facts: The Court ordered restoration of FIRs and criminal proceedings set aside without proper challenge and directed impleadment of CBI in all relevant cases.Treatment of Competing Arguments: The CBI argued for strict adherence to procedural norms and against arbitrary quashing. The Court agreed, emphasizing procedural fairness and jurisdictional propriety.Conclusion: High Courts must not quash FIRs or criminal proceedings without proper challenge and without hearing all necessary parties, including the investigating agency.Issue 4: Scope for Fresh Administrative Proceedings after Setting Aside Prior Actions for Violation of Natural JusticeLegal Framework and Precedents: Drawing from State Bank of Patiala v. S.K. Sharma and Canara Bank v. Debasis Das, the Court reiterated that setting aside administrative orders for procedural defects does not bar authorities from proceeding afresh in accordance with law.Court's Interpretation and Reasoning: The Court clarified that a distinction exists between 'no opportunity' and 'no adequate opportunity' to be heard, and that in cases of total violation, the order is void and fresh proceedings can be initiated. The Court emphasized that the RBI and banks are free to initiate fresh administrative action after complying with audi alteram partem.Key Findings: The Court underscored that procedural compliance is mandatory but does not extinguish the right of the regulatory authorities to act on valid fraud allegations.Application of Law to Facts: Since the administrative actions were set aside solely for non-compliance with natural justice, the RBI and banks may recommence proceedings after affording hearings to the concerned parties.Treatment of Competing Arguments: Respondents argued that the quashing should be final. The Court rejected this, emphasizing procedural rectification and continuation of regulatory oversight.Conclusion: Setting aside administrative actions for procedural defects permits fresh proceedings upon compliance with natural justice.Issue 5: Classification and Disposition of Multiple AppealsCourt's Reasoning: Given the volume and diversity of appeals, the Court categorized them into five groups for clarity and appropriate disposition:Category 1: FIR challenged and set aside by High Court - Petitions restored and remitted for fresh consideration; FIRs and criminal proceedings restored.Category 2: FIR not challenged but set aside - Impugned judgments set aside; respondents given two weeks to seek remedies; FIRs and proceedings restored.Category 3A: Interim orders passed - Interim protection to continue till final disposal on remand.Category 3B: Interim orders not passed - No coercive action for two weeks.Category 4A: Investigation ongoing - Investigation to continue; no coercive steps meanwhile.Category 4B: Investigation completed - No coercive steps or arrests to be made.Category 5: CBI not impleaded as party - Directed to be impleaded suo moto by the Court on remand.Application of Law to Facts: This classification ensures procedural fairness, protects rights of accused, and maintains investigatory integrity while allowing fresh administrative and judicial scrutiny.3. SIGNIFICANT HOLDINGSThe Court crystallized several key legal principles and made definitive rulings:'No opportunity of being heard is required before an FIR is lodged and registered.' (para 98.1, Rajesh Agarwal's case)'Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers.' (para 98.2)'The principles of natural justice demand that the borrowers must be served a notice, 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.' (para 98.6)'Setting aside of an administrative action on the grounds of violation of the principles of natural justice does not bar the administrative authorities from proceeding afresh.' (citing State Bank of Patiala v. S.K. Sharma)'An FIR, by taking cognizance of an offence, merely sets the law into motion. This has nothing to do with a decision on the administrative side, made by a different authority.' (para 7 of judgment)'The High Courts have clearly failed to take note of the distinction between administrative actions and criminal proceedings and have erred in quashing FIRs and criminal proceedings on the ground of invalid administrative actions.' (para 8)'High Courts must not quash FIRs or criminal proceedings without proper challenge and without hearing all necessary parties, including the investigating agency.' (para 11)'The appeals stand allowed, the impugned judgments are set aside, and the matters are remitted to the High Courts for fresh consideration after affording an opportunity of hearing to all concerned parties.' (para 14)The Court's final determinations on each issue are:Administrative classification of fraud under RBI Master Directions requires compliance with natural justice, including prior hearing.Criminal proceedings and FIR registration are distinct from administrative actions and do not require prior hearing.Quashing of administrative actions for procedural defects does not automatically invalidate FIRs or criminal proceedings.High Courts exceeded jurisdiction in quashing FIRs without proper challenge or without impleading investigating agencies.Regulatory authorities may proceed afresh with administrative actions after complying with natural justice.The batch of appeals is to be disposed of in classified categories with directions to restore or restrain proceedings as appropriate and to ensure procedural propriety on remand.