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2021 (5) TMI 218 - HC - Companies LawNon-inclusion of principles of natural justice especially audi alteram partem (giving opportunity of hearing to the other side) in the Master Directions on Fraud dated 01.07.2016 - Section 35-A of the Banking Regulation Act, 1949 - borrower Company is holder of fraudulent account or not? - resolution of the Fraud Identification Committee (FIC) dated 31.07.2019, whereby both the JLF and the FIC have classified the account of M/s. B. S. Limited, of which the petitioner was the former Chairman and Managing Director, as ‘fraud’ and ‘willful defaulter’. HELD THAT:- The argument of urgency is belied by the record. For, the Company’s account was declared as NPA on 29.06.2016; the JLF declared the Company’s account as fraud on 15.02.2019, yet the FIC did not declare the Company’s account as fraud till 31.07.2019. Thus, there is a gap of 4 ½ months between the decision of the JLF and the FIC. Hence, obviously, the decision to declare the account as fraud has not been taken on an ‘urgent’ basis - Furthermore, if the requirement of principle of nature justice is not read into the Master Circular, it would suffer from vagueness. For, on the one hand, Clauses 8.9.4 and 8.9.5 of the Master Circular prima facie seem to deny the opportunity of hearing to the borrower. Yet, Clause 8.12.1 of the Master Circular clearly states that the procedure for declaring a borrower as a willful defaulter has to be followed. In the case of Jah Developers (supra), the Hon’ble Supreme Court has already declared that prior to declaring a borrower as a willful defaulter, an opportunity of hearing has to be given. If the principle of audi alteram partem were not read into Clauses 8.9.4 and 8.9.5 of the Master Circular, there would be a contradiction between the procedure adopted for declaring a borrower as ‘a willful defaulter’, and the procedure adopted for declaring an account as ‘fraud’. Obviously, the Master Circular could not speak in self-contradictory terms. Therefore, to erase the self-contained contradiction, and to save the Master Circular from the virus of vagueness, the principles of natural justice perforce would have to be read into Clauses 8.9.4 and 8.9.5 of the Master Circular. Since the right to livelihood is part and parcel of fundamental right to life under Art. 21 of the Constitution of India, the fundamental right can be deprived only by a reasonable procedure established by law. However, to deny the said fundamental right without giving an opportunity of hearing would be highly unreasonable, unfair and unjust. Thus, the Master Circular, as interpreted by the RBI, would be in violation of Article 21 of the Constitution of India. Therefore, to save Clauses 8.9.4 and 8.9.5 of the Master Circular from being declared as unconstitutional, it is essential to read the principle of natural justice into the said Clauses - since the Master Circular also imposes a duty on the banks to lodge a complaint with the CBI / criminal investigating agency within a short period, after detecting / declaring an account as ‘fraud’, obviously, the borrowing Company, its Promoter / Director would quickly be embroiled in criminal investigation and in criminal proceedings. Such involvement in criminal proceedings not only affects the social standing of an individual and the goodwill of a Company, but also forces an individual to spend money, to invest energy, and to go through the rigmarole of a criminal trial. Therefore, the classification of an account as ‘fraud’ has devastating impact on the life of a person. The ‘right to be heard’ has been given to third parties, such as builders, warehouse/cold storage owners, motor vehicle/ tractor dealers, travel agents, etc. and professionals such as architects, valuers, chartered accountants, advocates, etc., if they have played a vital role in sanction/disbursement, or facilitated for preparation of fraud. Hence, while those who are allegedly the peripheral accomplices are granted an opportunity of hearing, the main actor is denied the right to speak and to defend his position. Considering the grave civil consequences and penal action, which would be followed as a result of classifying a borrower as ‘a fraudulent borrower’, or ‘a holder of a fraudulent account’, it is imperative that principles of natural justice must be read into Clauses 8.9.4 and 89.9.5 of the Master Circular - Fair play in governance is the gravitational force which binds the entire State. Therefore, before a person or entity is obliterated, or is subjected to civil and penal consequences, the person or entity must be given an opportunity of hearing. Without giving an opportunity of hearing, without giving an opportunity to explain the intricacies of the accounts, or of the business dealings, to denounce a person is to act unfairly, unjustly, unreasonably, and arbitrarily. Even in an administrative action, justice should not only be done, but also must appear to be done to the satisfaction of all the parties. Therefore, the principles of audi alteram partem, howsoever short, have to be applied before declaring a party as ‘a fraudulent borrower’, or as ‘a holder of fraudulent account’. Once the JLF was of the opinion that further clarification is required from the Forensic Auditor, once it is in the process of taking a decision, once it has decided to wait till further clarification is submitted, the JLF is not justified in concluding that “the account be treated as fraud”. In fact, the JLF was legally required to wait for further clarification, or non-clarification from the Forensic Auditor - A bare perusal of the resolution of FIC, dated 31.07.2019, also reveals that the said resolution is based on the Report submitted by Dr. K.V. Srinivas, IRP. However, there is no evidence available on record to establish the fact that a copy of the said Report was furnished to the borrower Company, or to the petitioner. Thus, neither the borrower Company, nor the petitioner, nor any other Director was given a chance to explain, or to challenge the finding of the said Report. A copy of the said Report has not been placed even before this Court by the respondents. The principle of audi alteram partem, part of the principles of natural justice, is to be read in Clause 8.9.4 and 8.9.5 of the Master Circular - the decision, dated 15.02.2019, passed by the JLF, and the resolution dated 31.07.2019, passed by the FIC are, hereby, set aside - the JLF is directed to give an opportunity of hearing by furnishing copies of both the Reports, namely the Forensic Auditor Report, dated 06.04.2018 and the subsequent Report submitted by Dr. K.V. Srinivas, IRP, to the petitioner, and to the OL - the JLF is directed to give an opportunity of personal hearing both to the petitioner and to the OL before taking any decision on the issue whether the account should be classified as ‘fraud’ or not? - after the JLF has taken its decision, the FIC is directed to pass its resolution whether the decision of the JLF should be confirmed or not? Application disposed off.
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