Administrative fraud classification and FIRs are distinct; breach of natural justice voids only the administrative order, not criminal proceedings.

An administrative fraud classification under the RBI Master Directions and a criminal investigation operate on distinct legal planes: the former is an administrative decision with civil and penal consequences, while an FIR depends on the existence of a cognizable offence. A defect in the administrative fraud process, including breach of audi alteram partem, does not by itself nullify the FIR or ongoing criminal proceedings, and no pre-FIR hearing is required. Setting aside the administrative order for want of natural justice invalidates only that classification and does not bar fresh administrative action taken in accordance with law. The criminal proceedings were therefore restored, with remand for fresh consideration where necessary.

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Issues: (i) Whether an administrative declaration of fraud under the RBI Master Directions can be treated as the legal basis for quashing FIRs and criminal proceedings. (ii) Whether violation of the audi alteram partem rule in the administrative process necessarily nullifies the consequential criminal proceedings and bars fresh action.

Issue (i): Whether an administrative declaration of fraud under the RBI Master Directions can be treated as the legal basis for quashing FIRs and criminal proceedings.

Analysis: The administrative and criminal spheres operate on different footings. Classification of an account as fraudulent is an administrative exercise undertaken by the bank and RBI framework, whereas registration of an FIR depends on the existence of a cognizable offence and is an act within the criminal law domain. The mere fact that the underlying facts overlap does not mean that a defect in the administrative decision destroys the maintainability of the FIR or the ensuing investigation.

Conclusion: The criminal proceedings could not be quashed merely because the related administrative action was set aside.

Issue (ii): Whether violation of the audi alteram partem rule in the administrative process necessarily nullifies the consequential criminal proceedings and bars fresh action.

Analysis: The principles of natural justice apply to the administrative classification of an account as fraud because that decision carries civil and penal consequences. However, the absence of prior hearing at the administrative stage does not extend to the registration of an FIR, for no pre-FIR hearing is required. Setting aside an administrative order for breach of natural justice does not amount to an adjudication on merits, and the authority may proceed afresh in accordance with law after complying with the required procedure.

Conclusion: The violation of natural justice invalidated only the administrative classification and did not bar fresh administrative action or the criminal process.

Final Conclusion: The impugned judgments were set aside, the matters were remitted for fresh consideration where necessary, and the FIRs and criminal proceedings restored as directed in the respective categories.

Ratio Decidendi: An administrative fraud classification and a criminal investigation are distinct legal processes; therefore, invalidation of the former for breach of natural justice does not automatically vitiate the latter, and no hearing is required before registration of an FIR.

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