Borrowers should be heard before accounts are classified as fraud: SC

The Supreme Court on Monday held that borrowers must be given an opportunity to be heard before their accounts are classified as fraud.

The Supreme Court on Monday held that borrowers must be given an opportunity to be heard before their accounts are classified as fraud.

In a significant judgment, a Bench led by Chief Justice of India D.Y. Chandrachud said the civil consequences of an account being declared as fraud under the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016 or the central bank’s ‘Master Directions on Fraud’ amount to “civil death” to borrowers.

The principle of natural justice — ‘ audi alteram partem’ (hear the other side) — demands that borrowers, who face a condition akin to blacklisting, should be given a chance to be heard first.

‘We hold that the principles of natural justice, particularly the rule of audi alteram partem, has to be necessarily read into the Master Directions on Frauds to save it from the vice of arbitrariness. Since the classification of an account as fraud entails serious civil consequences for the borrower, the Directions must be construed reasonably by reading into them the requirement of observing the principles of natural justice,” Chief Justice Chandrachud held in the 59-page verdict.

The judgment came in appeals filed by the Reserve Bank and other lender banks against a Telangana High Court decision that the principles of natural justice must be read into the provisions of the Master Directions on Frauds. The apex court upheld the High Court’s conclusion.

Chief Justice Chandrachud explained the gravity of the consequences that would visit borrowers whose accounts were declared fraud. “Classification of the borrower’s account as fraud under the Master Directions on Frauds virtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets,” the apex court pointed out.

Such a debarment from raising finances could be fatal to borrower companies. In addition to spelling ‘civil death’ for them, it would also violate their fundamental right to practice any profession, occupation or trade.