2025 (10) TMI 384 - HC - Indian Laws

Bank's fraud classification of corporate account upheld; promoter held liable, non-executive directors exonerated under 2024 Master Directions

Anil D. Ambani Versus State Bank of India Mumbai And Reserve Bank of India, Mumbai

HC upheld the bank's declaration classifying the corporate account as fraud and dismissed the petition. The court found the show-cause notice and final ... Classification of account of Reliance Communications Ltd. (RCOM) as fraud - reporting the name of the Petitioner to the Respondent No.2 – Reserve Bank of India (RBI) in terms of the Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions dated 15th July 2024 - challenge to SCN on the ground that it was issued under the erstwhile Master Directions 2016 - doctrine of audi alterem partem - violation of principles of natural justice - HELD THAT:- Admittedly the impugned SCN was already given to the Petitioner detailing the basis of declaration of fraud as contemplated by SBI. The Petitioner failed to reply the said notice and continued to seek documents, leading to SBI finally proceeding to pass the impugned order. It was in the intervening period i.e., from the date of issuance of the impugned SCN and the final order impugned herein, that the Master Directions 2024 envisaging a SCN came to be issued. SBI was to now ensure that principles of natural justice were followed before any declaration of fraud was made. Issuance of a detailed SCN was mandated. There is no mention in the Master Directions 2024 relating to validity of a SCN being issued prior to the said Directions. Issuance of a detailed SCN to give an opportunity to the borrower of being heard is the only sine qua non as per the Master Directions 2024. As long as the principles of natural justice are complied with and the doctrine of audi alteram partem is ensured, there is no violation of the Master Directions 2024 nor the directions issued by the Supreme Court in Rajesh Agrawal [2023 (3) TMI 1205 - SUPREME COURT]. From the aforesaid judgment in Rajesh Agarwal, it is clear that the principles of natural justice demand that the borrowers must be served a notice, furnished with the forensic audit report, and allowed to submit their representation before their account is classified as fraud. The right contemplated is one of representation, not necessarily of personal hearing. Infact, the right of representation is not read specifically as meaning a right to personal hearing. The proceedings when initiated against the Company or Corporate Body, with a view to classify the account of that company as a fraud account and is declared as one, the Promoter/Directors who were in control of the affairs of the company would automatically be liable to penal measures and to be reported as fraud, more particularly, when the Promoter/Director are found to be in control of the company and responsible for the acts and omissions of the Company. The impugned order and the Annual Reports of RCOM on which reliance is placed by the Respondent No.1-Company in its impugned order clearly reveal that the Petitioner was the Promoter and the person having control of RCOM. It is pertinent to note that the role of the other directors, who were exonerated, was different and distinct from that of the present Petitioner, in-as-much as, they were non-executive directors and were not responsible for the day-to-day functioning of RCOM. The impugned order is a reasoned order and as such, no infirmity can be found in the same. There is no infirmity in the impugned order dated 13th June 2025, passed by the Respondent-SBI, declaring the Petitioner’s account as `fraud’ - there is no merit in the aforesaid petition - petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a show-cause notice issued under earlier bank/RBI Master Directions (2016) remains valid after notification of revised Master Directions (2024) that 'supersede' the earlier directions. 2. Whether the Master Directions 2024 and the Supreme Court's decision interpreting the earlier Directions (reading in audi alteram partem) mandate an oral/personal hearing before a bank classifies an account as 'fraud', or whether a right to make representations in writing suffices. 3. Whether a show-cause notice and subsequent order classifying a company's account as fraud are vitiated for want of adequate disclosure of material (forensic report and annexures) or denial of opportunity to make effective representation. 4. Whether individual promoters/directors (including non-executive/non-whole-time directors) must have specific allegations made against them in the SCN before being reported/subjected to penal measures when a company's account is classified as fraud. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of SCN issued under superseded Master Directions Legal framework: RBI Master Directions 2016; Master Directions 2024 which state they 'shall supersede' earlier Directions; principles on retrospective/clarificatory executive instruments and effect of judicial interpretations read into prior instruments. Precedent treatment: Supreme Court interpretation (read-in of audi alteram partem into Master Directions 2016) and general principles that court judgments operate retrospectively unless otherwise specified; authorities on when subsequent instruments are clarificatory (can be retrospective) versus substantive (prospective). Interpretation and reasoning: The Court treated Master Directions 2024 as clarificatory to bring Directions into conformity with the Supreme Court's reading (audi alteram partem). Where a subsequent instrument clarifies existing obligations (here, requirement to issue a detailed SCN and ensure natural justice), it can be applied to ongoing proceedings begun under prior Directions. The mere fact of a covering letter stating 'shall supersede' does not invalidate an SCN issued prior to the 2024 Directions; the earlier process may continue but must comply with the natural justice requirements as clarified. Ratio vs. Obiter: Ratio - proceedings initiated under prior Directions do not become non-est by reason of supersession if the executing bank ensures compliance with newly clarified natural justice requirements; applicable prospectively to ongoing proceedings in a manner that preserves vested procedural rights. Obiter - observations on General Clauses Act and hypothetical applications beyond facts. Conclusions: The SCN dated prior to Master Directions 2024 was not rendered invalid by the notification; the bank could proceed on that SCN so long as it complied with the principles of natural justice as clarified by the Supreme Court and incorporated in Master Directions 2024. Issue 2 - Nature and scope of the right to be heard: personal/oral hearing versus right to make representations Legal framework: Doctrine of audi alteram partem; Supreme Court conclusions (requiring notice, supply of forensic audit material and an opportunity to explain/report and a reasoned decision); Master Directions 2024 requiring SCN and measures to ensure compliance with principles of natural justice. Precedent treatment: Supreme Court decision interpreted to require opportunity to represent and a reasoned order but not to uniformly mandate a personal/oral hearing in every case; High Court decisions holding personal hearing may be required in particular facts were considered but not treated as universally binding. Interpretation and reasoning: The Court held that Rajesh Agarwal requires an opportunity to make representations (i.e., supply of materials and right to explain) and a reasoned decision; it does not necessarily mandate an oral/personal hearing in all cases. Whether an oral hearing is required depends on facts and practicability. Here, adequate opportunity to make written representations was afforded, the forensic report (and annexures) was furnished, extended timelines were given, and no request for a personal hearing was made by the addressee; accordingly procedural fairness was satisfied by written representation opportunity. Ratio vs. Obiter: Ratio - the right mandated by the Apex Court and Master Directions 2024 is one to make representations with material supplied and to receive a reasoned order; a personal/oral hearing is not an absolute, standalone right in every case. Obiter - contextual remarks on when oral hearings may be necessary in other fact patterns. Conclusions: No mandatory personal hearing was required in the present facts; the bank's compliance with notice, disclosure of the forensic audit and annexures, and opportunity to make written submissions fulfilled audi alteram partem. Issue 3 - Adequacy of disclosure and effect on validity of classification order Legal framework: Requirement to supply forensic auditor's report and material relied upon so the recipient can effectively respond; principle that failure to provide material may vitiate the process if it prevents effective representation. Precedent treatment: Supreme Court directions and Master Directions 2024 require supply of material and reasonable opportunity; prior decisions finding nullity where material withheld. Interpretation and reasoning: The Court examined documentary exchange: initial provision of the forensic report (redactions alleged), subsequent furnishing of annexures and exhibits, repeated requests to present written submissions and extended timelines. Although the petitioner initially complained of incomplete material, during hearing counsel did not press the incompleteness contention; ultimately the annexures were furnished and no further response was received from petitioner. The Court held that because full report and annexures were provided (and further opportunity given) and no timely representation was made, there was no breach of natural justice undermining the classification order. Ratio vs. Obiter: Ratio - withholding of material can vitiate process, but where complete material is supplied and opportunity provided, the classification order is not invalid for alleged earlier incompleteness. Obiter - procedural expectations where material remains disputed. Conclusions: Disclosure was adequate in the factual matrix; absence of further representation after receipt of full material justified the bank's reasoned order classifying account as fraud. Issue 4 - Liability of promoters/directors and requirement of specific allegations against individuals Legal framework: Master Directions 2024 provisions on penal measures (debarring persons/entities associated with defrauded entity) and definitions of 'associated' persons; consequences of classifying a corporate account as fraud extending to persons in control. Precedent treatment: Established principle that, where a company's account is declared fraud, promoters/directors in control can be reported and subjected to penal measures even if SCN primarily addresses the company. Interpretation and reasoning: The Court noted Master Directions 4.4/4.5.2 which debar associated persons; where annual reports and other material demonstrate a person was promoter and in control, the bank was entitled to report that individual upon declaring company's account as fraud. The Court distinguished non-executive directors who were exonerated because their roles differed; it held that specific allegations against an individual are not required in the SCN if the company is the subject and the individual is established to have been in control. Ratio vs. Obiter: Ratio - promoters and persons in control may be reported and subjected to penal measures upon company's fraud classification without separate, specific allegations in the original SCN directed at the individual, provided their control is established in the material. Obiter - cautionary note on differing roles and factual distinctions (e.g., non-executive directors). Conclusions: Classification of the account and reporting of the promoter/director was within the bank's powers; no infirmity in reporting where material showed promoter/control status. Overall Conclusion The Court held that (a) the SCN issued prior to Master Directions 2024 remained operative provided the bank complied with the natural justice requirements read into the earlier Directions by the Supreme Court and clarified in 2024 Directions; (b) the mandatory right is to make representations with disclosure of material and receive a reasoned order - a personal/oral hearing is not an absolute right in every case; (c) adequate material was furnished and opportunity given and no timely representation was filed thereafter; and (d) classification of the company's account as fraud justified reporting/debarment measures against a promoter/person shown to be in control. The petition challenging the classification order was dismissed.