Final Order 1

Order Details: Notice of Motion
Pdf Text: 1 N/M No. 1258/2020 in Comm. Suit 195/2021
CNR NO. : MHCC010036262020
IN THE COURT OF CITY CIVIL AND SESSIONS COURT FOR
GR. MUMBAI AT MUMBAI
NOTICE Of MOTION NO.1258 OF 2020
IN
COMMERCIAL SUIT NO.195 OF 2021
Mr. Abhay Narendra Lodha and Ors. ]… Plaintiffs
Versus
Indian Bank ]… Defendant
Appearance:-
Adv. Megha Gupta a/w Priyanka Dubey for Plaintiffs.
Adv. Fatima Lakdawala for Defendant.
CORAM : SHRI. A.S.SALGAR
AD-HOC JUDGE,(C.R.NO.24)
DATED : 10th August, 2023
ORDER
. Plaintiffs have taken out the present Notice of Motion
against the defendant for grant of temporary injunction. The plaintiffs
have prayed that the Court should pass order of stay to the further
effect, execution or implementation of the impugned action of
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defendant in declaring, classifying or reporting to the plaintiff as "fraud"
as per R.B.I. Circular. Plaintiffs have also prayed that the defendant
Bank, its Agents, Servants, and Officers and/or any person/s claiming
through the defendant be restrained temporarily from reporting
plaintiffs as "fraud" as per R.B.I. Circular till decision of the suit. The
plaintiffs have also prayed that the defendant Bank, its Agents,
Servants, and Officers and/or any persons claiming through the
defendant be restrained temporarily from acting upon or taking any
action in any manner whatsoever, on the basis of the defendant’s
impugned action of declaration of plaintiff as "fraud". Plaintiffs have
also prayed that the defendant Bank, its Agents, Servants, and Officers
and/or any person/s claiming through the defendant be restrained
temporarily from declaring, classifying or reporting to the plaintiff as
"fraud" under the R.B.I. Circular till decision of the suit. Plaintiffs have
also prayed that the defendant be directed to reverse the impugned
action of declaring plaintiffs as a "fraud" till decision of the suit. The
plaintiffs have claimed the interim relief in terms of prayer clause (a) to
(e) in the present Notice of Motion. Perused the Notice of Motion,
Affidavit-in-support of the Notice of Motion and Affidavit-in-reply filed
by the defendant.
2. It is the case of the plaintiff that the plaintiffs are the
Guarantor, Director of “Topworth Steels and Power Pvt. Ltd.”, company
which is a duly registered and incorporated under the provisions of the
Companies Act, 1956. The plaintiffs further submitted that the company
had undertaken various credit facilities from the Defendant Bank for
meeting its business requirements. The Defendant Bank has provided
Credit Facilities to the Company to the tune of Rs.126.28 Crore vide
various sanction letters over the year and the facility was renewed and
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validated post restructuring through the sanction letter dated
27.03.2015.
3. The Plaintiffs further states that an agreement was entered
and executed between the company and the defendant Bank and
accordingly, the bank had sanctioned and provided the banking facilities
to the company and sanction letter was issued by the Bank to the
Company upon the terms and conditions as mentioned more
particularly therein and in the loan facility Agreement. The plaintiff
states that the Bank sanctioned the Credit facilities to the Company
after detailed due diligence at its end of the promoters and the
Company and only after satisfaction had sanctioned the credit facilities.
The plaintiffs have also further submitted that additionally, non-
availability of working capital funds adversely affected the ability of the
Company to procure raw material at favourable prices. Pending orders
from reputed clients forced the Company to procure the raw material at
a highest cost, further affecting margins. The plaintiff further states that
the losses in the trading business have depleted the manor portion of
working capital of the company.
4. The plaintiffs further submitted that the company was
finding it difficult to realize the debtors in timely manner. This had
adversely impacted the cash flow of the Company, which resulted in
frequent LC development and delaying the debt. Plaintiffs have further
submitted that in the meantime, State Bank of India approached to the
Hon’ble National Company Law Tribunal (Hereinafter referred as
N.C.L.T.). The Hon’ble N.C.L.T., Mumbai has accepted the Petition and
Corporate Insolvency Resolution Process has started for TSPPL vide
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order dated 29.01.2020.
5. The plaintiff have further submitted that from the officials
of the Defendant Bank, it has come to the information and knowledge
of the plaintiffs that the defendant Bank has declared the account of
TSPPL as “fraud”. However, the plaintiffs has neither received any
communication nor any order from the defendant Bank declaring the
Account of the Company as a “fraud” and thus, the plaintiff has the
serious apprehension that the defendant Bank with the malafide and
dishonest intention and without following any due procedure of law
and totally against the principles of natural justice would go ahead and
publish the name of the plaintiffs as “fraud”.
6. The Plaintiff also further submitted that the vide letter
dated 17.06.2020 addressed to the Deputy General Manager of the
Defendant Bank, it has been placed on record that it has come to the
knowledge that during a regular meeting the defendant Bank has
declared the account of the TSPPL company as “fraud”. It was further
placed on record that neither any information nor any query was raised
by the defendant Bank before taking such a drastic step and further it
was specifically stated that the unilateral step taken by the defendant
Bank which is in complete disregard to the principle of natural justice is
not acceptable. Finally, it was requested that the defendant Bank to
provide with the reasons and documents perused for declaring the
account of the TSPPL company as “fraud”. The defendant Bank has not
replied to the plaintiffs aforesaid letter dated 17.06.2020.
7. The Plaintiffs have further submitted that the defendant
Bank has failed to follow the due legal procedure while declaring the
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account of the TSPPL as “Fraud”. The plaintiff’s have the serious
apprehension that the defendant Bank with the malafide and dishonest
intention and without following any due procedure of law and totally
against the principles of natural justice would go ahead and publish the
name of the plaintiff’s/Company as “Fraud”. Thus, the plaintiffs have
been left with no other alternative than to approach to this Court.
8. The plaintiff’s have also submitted that the R.B.I.
Guidelines DCBR. CO. BPD. MC. No.1/12.05.001/2015-16 dated
01.07.2015 is pertaining to declaration of fraud and the rules and
procedure and guidelines have been provided for doing the same. The
plaintiffs submit that the defendant Bank has failed and neglected to
follow the R.B.I. Guidelines and have also failed and neglected to follow
the same while declaring the account of the Company as “Fraud”. The
account of the Company does not fall within the ambit of the criteria
that are required for declaring an account as “Fraud”. The impugned
action of the defendant is against the R.B.I. Guidelines on “Fraud”.
9. Plaintiff’s have submitted that the no letter or notice was
given to the company from the defendant Bank when the defendant
Bank is declaring account of TSPPL as “Fraud”. The plaintiff’s have also
submitted that the impugned action of the defendant in declaring the
Company’s account as “Fraud” was without giving any personal hearing
to the Plaintiff’s and is done in total violation of principles of natural
justice, fair play and equity. The principle of grant of personal hearing
has always been the backbone of the rule of Audi-Alterem-Partem,
which says that no person can be condemned unheard. If the action
impugned is allowed to stand further duly caused prejudice interest to
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the plaintiffs and would be in violation of provision of law. The plaintiffs
have submitted that they have neither received any letter nor
communication notice from the defendant with respect to the
declaration of the account of plaintiffs as "fraud". There is strong
apprehension that the defendant will continue taking action on the
basis of the said declaration. Plaintiffs has sought the relief of
temporary injunction against the defendant. Hence, the Plaintiffs have
filed the present Notice of Motion and claimed the interim relief in
terms of prayer clause (a) to (e).
10. The defendant bank appeared and filed its reply and
contended that a account of M/s. Topworth Steels and Power Pvt. Ltd.
has been declared "fraud" by the bank, and it is not plaintiffs who have
declared “fraud”. The Bank has lodged the complaint with CBI, after
discovering the fact that that the company and its Director conspired to
cheat the bank by committing breach of trust & defrauded bank.
11. It is submitted by the defendant Bank that the proceedings
before N.C.L.T. and proceedings before the Criminal Authorities are two
different and independent proceedings under law. The N.C.L.T., Mumbai
vide its order dated 29.01.2020 has allowed application under Section 7
of IBC, 2016 for initiating corporate insolvency resolution process. It is
also submitted that as the CIRP has been initiated the Board of the
Company stands suspended as such plaintiff’s have no right to file any
suit for and on behalf of the Company. It is further submitted that the
account of the Company was declared “fraud” and the plaintiff’s in
person have not been classified as such.
12. It is the grievance of the plaintiff’s that in Master Circular
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certain procedure is given for declaring any account as “Fraud”. It is
contended by the plaintiff’s that the defendant Bank has not followed
said procedure and thereby declared plaintiff’s account as “fraud”. It is
further submitted that the defendant Bank has followed the procedure
given in Master Circular before declaring plaintiff’s account as “fraud”.
It is submitted that the account was not red flagged as it is not a
condition precedent to or mandatory requirement to red flag a account
prior to declaring it as “fraud”. The account was declared as “fraud” ab-
initio by the bank. The total amount involved to Allahabad Bank is
Rs.261.88 Crore inclusive of interest upto 13.09.2020 plus interest
payable w.e.f. 14.09.2020 till realization of the total dues of the bank.
13. The defendant further submitted that out of the total amount of
Rs.261.88 Crore, the present outstanding of Kalbadevi now SAM branch
is Rs.17.34 Crore plus 52.51 Crore i.e. interest. The company had
reported to the bank that it had huge recoverable from various
creditors. The bank after examining the matter and the norms had
declared the account as "fraud". Huge public money recovery is due and
pending. The forensic audit conducted has pointed out
misappropriation, fabrication of documents and diversion of fund by
M/s. Topworth Steels and Power Pvt. Ltd. Thus, the relief claimed by
the plaintiffs in Notice of Motion cannot be granted. Hence, defendant
prayed for dismissal of the Notice of Motion.
14. Heard Learned Advocate Megha Gupta along with Learned
Senior Counsel Priyanka Dubey for the plaintiffs and Learned Advocate
Fatima Lakdawala for the defendant at length.
15. Learned Advocate Megha Gupta for the plaintiffs has
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submitted that the defendant Bank had declared the account of plaintiff
as "fraud" without following principles of natural justice. The copy of
forensic report is not supplied to the plaintiffs. It is also argued that
essential conditions as per Master Circular are not followed by the
defendant Bank, before declaring plaintiffs account as "fraud". She
drawn attention of this Court to Rule No.3.2, Rule No.3.2.2, Rule
No.3.2.6 Rule No.3.3, Rule No.3.4 and Rule No.8.3 of Master Circular.
She argued that the defendant Bank is silent in respect of prompt
reporting. She submitted that the plaintiffs issued notices, but no reply
filed by the defendant Bank. She also submitted that the principles of
natural justice is not followed by the defendant Bank before declaring
its account as "fraud". She also argued that prescribed schedule as
stipulated in Master Circular about the the time limit is not followed by
the defendant Bank. Hence, she submitted that the plaintiffs have
prima-facie proved their case and balance of convenience lies in favour
of the plaintiffs. Hence, she prayed that the Notice of Motion in terms of
prayer (a) to (e) be granted. In support of her submission she placed
reliance upon the following rulings:-
In the case of Bank of India Vs. Gupta Coal (Civil Revision
97 of 2017 decided on 04.09.2018) wherein it is observed as under :-
“It is the case of the plaintiff company that in view of
various guidelines of the Reserve Bank of India and
Master Circular, its accounts has been declared as fraud
account without following the due procedure and in
breach of principles of natural justice. In the light of the
challenge as raised, it would be the Civil Court that
would retain jurisdiction to entertain the suit. Same can
not be a reason to reject the plaint. In view of the fact
that the reliefs sought in the plaint are not those reliefs
which are impermissible in view of provisions of the
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Sections 17 and 18 of the Act of 1993 as well as Section
34 of the Act of 2002, the cognizance of the suit is not
barred before the civil court.”
16. Learned Advocate for the plaintiffs has also placed reliance
on the ruling of Hon'ble Telangana High Court in the case of Rajesh
Agarwal Vs. Reserve Bank of India (2020 SCC Online TS 2021) as well
as the Judgment of the Hon'ble Telangana High Court in the case of
Yashdeep Sharma Vs. Reserve Bank of India (2021 SCC OnLine TS
1852).
17. Learned Advocate for the plaintiffs submitted that the
opportunity of hearing ought to be effective hearing. Hence, the
plaintiffs are entitled to claim interim relief against the defendant. In
support of his submission, he placed reliance on the ruling of the
Hon'ble Rajasthan High Court, Jaipur Bench in the case of Moserbaer
Vs. State Bank of Bikaner and Jaipur in Civil Writ Petition No. 7488 of
2016 dated 07.09.2016. I have gone through the said ruling. The said
ruling is in respect of declaration of account as willful defaulter and the
present case is not in respect of the willful defaulter. Hence, the facts of
the reported case and the facts of the present case is not similar. Hence,
the said ruling is not helpful to the plaintiffs. The plaintiffs also relied
upon the ruling of the Hon'ble Delhi High Court in the case of Apple
Sponge and Power Limited Vs. RBI in Writ Petition No. 306 of 2019
wherein it is observed by the Hon'ble Delhi High Court that, “declaring
an account as 'fraud' would arise in a case of egregious default on the
part of an account holder, something more than the account holder
being a 'willful defaulter'. For an account to be declared as 'fraud' must
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entail an element of criminality on the part of the account holder, which
ought to be inferred only on the basis of some substantial material
which must be put to the errant account holder; and after considering
any explanation such account holder has to offer; and not unilaterally
by a stroke of pen.” I have gone through the said ruling. There cannot
be dispute about the propositions laid down in the said ruling. However,
facts of said ruling and facts of present case are not similar. Hence, with
due respect to ratio laid down in the aforesaid ruling, I am of the view
that said ruling is not helpful for the plaintiff.
18. On the contrary Ld. Adv. Fatima Lakdawala submitted that
the prayer made by the plaintiffs in the Notice of Motion and plaint are
similar. She submitted that the company is not coming forward. It is
also argued that the defendant Bank noticed irregularities in
transactions and funds. She argued that the R.B.I. Guidelines nowhere
shows that principles of natural justice must be followed and
opportunities of hearing should be given to the plaintiffs. The Bank
lodged complaint against the company. The matter is under
investigation. The defendant had no authority to stop the proceedings.
She argued that great prejudice will be caused to the defendant Bank, if
the relief is granted to the plaintiffs. Lastly, she submitted that there is
no substance in the Notice of Motion and hence Notice of Motion may
be rejected.
19. Heard both sides at length. Perused the contents of Notice
of Motion as well as reply filed by the defendant. I have gone through
the entire proceedings. The plaintiffs have filed suit for declaration and
permanent injunction against the defendant Bank. The plaintiffs have
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sought interim relief in terms of prayer clause (a) to (e) in notice of
motion. The plaintiffs prayed that the pending hearing and final
disposal of the suit, the Court should stay the further effect and
execution and implementation of the impugned action of defendant in
declaring or reporting plaintiffs as "fraud" as per the R.B.I. Circular. The
plaintiffs also prayed that the defendant Bank or his Agents, Servants or
Officers be restrained temporarily from reporting the plaintiffs as
"fraud" under R.B.I. Circular. Plaintiffs also prayed that the defendant or
his Agents, Servants and Officers or any other person claiming through
them be restrained from taking any action on any manner on the basis
of defendant’s action of declaration of plaintiffs as "fraud". The plaintiffs
further prayed that the defendant or his Agent, Servant or Officers be
temporarily restrained from declaring, classifying or reporting the
plaintiff as "fraud" under R.B.I. Circular. The plaintiffs also prayed that
till the decision of the suit, the court should direct the defendant to
reverse the impugned action of declaring plaintiff as "fraud".
20. Admittedly, the loan was sanctioned by the defendant bank
to the plaintiff company after completion of all the formalities. It is
admitted position that the defendant had approached before N.C.L.T.
stoppage the recovery proceeding. The plaintiff is not challenging the
recovery proceeding and not challenged the proceeding which is
pending before N.C.L.T.. The defendant has raised objection that the
suit is not maintainable before the Civil Court, in view of declaration by
NCNT about the liquidation of borrower company. Admittedly the
defendant has initiated action against the plaintiffs on the basis of
Master Circular dated 01.07.2016. The relief sought by the plaintiffs in
the present suit with regard to declaration that impugned action of
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defendant in declaring account of plaintiff as “fraud” is illegal one. It is
the case of the plaintiff that in view of various guidelines of Reserve
Bank of India and Master Circular, the account has been declared as
"fraud" account without following the due procedure and in breach of
principles of natural justice. In the light of the challenge as raised it
would the Civil Court that would retain the jurisdiction to entertain the
suit. In the light of averments made by the plaintiffs in the plaint, it can
be said that the relief can be granted only by the Civil Court. In my
view, the Civil Court has jurisdiction to entertain the suit. The Ld.
Advocate for the plaintiffs rightly submitted the ruling of
Bank of India
Vs. Gupta Coal India Pvt. Ltd. In Civil Revision No.97 of 2017 dated
04.09.2018, wherein it is observed that the relief sought in plaint in
view of fact of case which are impermissible in view of provisions of
Section of 17, 18 of the Act of 1993, as well as Section 34 of the Act of
2002, the cognizance of the suit is not barred before Civil Court.
21. Applying aforesaid principles of law to the present case, it
can be said that the relief sought by the plaintiffs can be granted by the
Civil Court. Hence, I find no substance in the contention of the
defendant that suit is not maintainable before the Civil Court.
22. It is the contention of the plaintiffs that the defendant bank
has not followed the guidelines and procedure as given in Master
Circular and therefore the declaration of the plaintiffs account as "fraud"
is not proper. On the contrary, it is the contention of defendant that the
plaintiffs account have been declared as "fraud" by following the due
procedure laid down in the Master Circular. Considering the nature of
consequences on declaration as "fraud", the procedure given in Master
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Circular is mandatory in nature. It is necessary to peruse some basic
conditions as mentioned in the Master Circular dated 01.07.2016.
23. Admittedly Master Circular was issued by Reserve Bank of
India for declaring any account as fraud. Rule 2.2 of the Master Circular
deals with classification of fraud. It reads as under.
2.2 Classification of Frauds
2.2.1 In order to have uniformity in reporting, frauds have
been classified as under, based mainly on the provisions of
the Indian Penal code;
a. Misappropriation and criminal breach of trust.
b. Fraudulent encashment through forged instruments,
manipulation of books of account or through fictitious
accounts and conversion of property.
c. Unauthorised credit facilities extended for reward or for
illegal gratification.
d. Cash shortages
e. Cheating and forgery.
f. Fraudulent transactions involving foreign exchange.
g. Any other type of fraud not coming under the specific
heads as above.
24. Thus, it is clear from rule 2.2 that there must be
misappropriation and criminal breach of trust, cheating or forgery,
fraudulent encashment through forged instruments for declaring of any
account as fraud. In present case defendant bank has not given any
details about types of irregularities which plaintiffs have committed as
mentioned in rule 2.2 of Master Circular.
25. Rule 3.2 Reporting of "fraud" to Reserve Bank of India.
Rule 3.2.1. Bank needs to furnish fraud monitoring return
(FMR) in individual fraud cases, in irrespective of the amount involved,
in the R.B.I. to electronically pay using FMR application in XBRL System
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supplied to them within three weeks from the date of detection.
26. Rule 3.2.2. A monthly certificate as per annex-1
(mentioning that soft copy of the FMR’s have been submitted to the
R.B.I.) is to submitted to the bank by CMFC, Bengaluru with a copy to
respective SSM of the bank, within seven days from the end of the
month. Para No.3.2.6 speaks about the time limit for flash report.
27. Rule 8.7 and 8.8 are in respect of prompt reporting:- The
material part is reproduced as follows;
“Delay for the purpose of the circular, would
mean that the fraud was not flashed to CFMC, R.B.I.
or reported on the CRILC platform, R.B.I. within
period from one week from its classification as fraud
through the RFA route, which has maximum timeline
of six month or (ii) detection or declaration as fraud
ab-initio by the bank.
28. It is material to note that the defendant bank is silent in
respect of prompt reporting and stipulating the time mentioned above.
As per Master Circular, liberty was given to the financial institution to
take the help of auditors or forensic audit to declare account as "fraud".
In this case the defendant nowhere made statement that the bank has
conducted forensic audit or not. It is the duty of the defendant bank to
show that the plaintiff has committed irregularities mentioned in rule
No.2.2 of Master Circular so as to declare to their account as "fraud".
There is nothing on record to show that certain investigation or
procedure is followed by the bank which show that the there is
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diversion of fund or manipulation of account. In order to prove the
fraudulent intention, some more or additional evidence must be
produced, besides mere default in repayment of the loan. There is no
material on record to show that how and on what basis the defendant
reached to the conclusion of fraud. Mere default of re-payment of the
loan will not attract the "fraud". It is settled law that the documents that
are relied upon by any authority in arriving at the conclusion must be
made available to the affected party to confirm to the principles of
natural justice. The opportunity of hearing ought to have been given to
the plaintiffs before the taking decision of fraud. It is pertinent to note
that the plaintiffs had issued notice to the defendant. However, no reply
was given by the defendant to notice of plaintiffs.
29. In the present case, it appears that the plaintiffs ought to
have been afforded adequate opportunity to represent their case before
declaration of their account as "fraud". It is settled principle of law that
the documents that are relied upon by any authority in arriving at
conclusion must be made available to the affected party. An opportunity
of hearing ought to have been given to the plaintiffs before taking the
decision of "fraud". As a rule of the principles of natural justice, a person
against whom the order may be passed should be informed of the
allegations and charges against him be given an opportunity to explain
and has right to know evidence alongwith inspection of the documents
relied on for passing of such order. In the present case there is total
violation of the principles of natural justice that is no opportunity of
hearing was given and hence, the action/order cannot be termed as a
valid. The consequences of declaration as "fraud" are the serious in
nature including penal consequences. In my view, it was the duty of the
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defendant bank to give opportunity of the hearing to the plaintiff before
passing the order.
30. In present case, the plaintiff No.1 Abhay Lodha is Director
and Guarantor of the M/s. Topworth Steels and Power Pvt. Ltd. The
Copy of forensic report is not supplied by the defendant to the plaintiffs.
So, also the forensic report is not placed on record before the Court. In
present case the defendant has not placed on record any documents in
support of his reply. Thus, it is clear there is no forensic report prepared
by the defendant Bank. In present case, it appears that the prescribed
schedule as stipulated in Master Circular about the time limit,
responsibility of the staff is not followed by the bank. The letter
declaring the account of plaintiff as "fraud" has no detail reasoning. The
plaintiffs are not making any grievance against the recovery
proceedings initiated by the defendant against the plaintiffs. The
plaintiffs are only seeking the relief against the declaration of "fraud"
without following the due procedure. The defendant bank can proceed
with the recovery proceeding. The defendant has not brought on record
any evidence to show that before such declaration of account of
plaintiffs, the defendant passed reasoned order to that effect. In my
view, prima-facie case is in favour of the plaintiffs and balance of
convenience is lies in favour of the plaintiffs.
31. The rule of Audi-alterem-Partem is recognized as being a
part of guarantee contained in Article 14. The Hon’ble Supreme Court
in the case of
Union of India Vs. Tushiram Patel, 1985 (3) S.C.C. 398
wherein it is observed by Hon’ble Supreme Court that the violation of
the principles of natural justice is a violation of Article 14. The Hon’ble
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Supreme Court is also held that any state action in breach of the
principles of natural justice implicates violation of Article 14. The
Hon’ble Supreme Court in the Case of
Cantonment Board Vs. Taramani
Devi, 1992, Supreme Court, (2) S.C.C. 501 wherein observed that the
rule of Audi-alterem-Partem is part of Article 14. Applying the se
principles of law, I am of the view that the violation of principles of
natural justice is a violation of Article 14. The Master Directions on
"fraud" do not expressly provide the borrowers an opportunity of being
heard before classifying the borrowers account as "fraud". Audi-alterem-
Partem must be then read in to the provisions of Master Direction on
"fraud".
32. A Show cause notice should be issued and opportunity of
being heard should be given to afforded before an order is made. The
principles of natural justice demand that a show cause notice should be
issued and opportunities of hearing should be afforded to the person
concerned. If the requirements of an opportunity to show cause notice is
not read into said Rules, an action would be open to challenge on the
ground that the power confirmed an authority under the provision is
arbitrary one. The rule of Audi-Alterem-Partem ought to be read in
clause 8.9.4 and 8.9.5 of the Master Direction on "fraud". Consistence
with the principles of natural justice, Bank should provide opportunity
to borrower by furnishing copy of audit report & allow the borrower
reasonable opportunity to submit a representation before classifying
account as "fraud". Reasoned order has to be issued on the objection
addressed by the borrower. In present case the defendant bank did not
provide any opportunity of hearing to the plaintiffs before classifying
their account as "fraud". Therefore, the impugned decision to classify
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account as “fraud” is vitiated by the failure to observe the rule of Audi-
Alterem-Partem. The decision of the defendant Bank to classify the
borrower’s account as "fraud" is a violation of principles of natural
justice. The decision classifying the borrower’s account as a fraudulent
must be made by reasoned order. In present case there is no reasoned
order passed by the authority. The Hon’ble Supreme Court in the case of
State Bank of India Vs. Rajesh Agarwal & Ors. in Civil Appeal No.7300
of 2022, has made following observations in para No.81 is as under;
i. No opportunity of being heard is required before an FIR
is lodged and registered.
ii. Classification of an account as "fraud" not only results in
reporting the crime to investigating agencies, but also has
other penal and civil consequences against the borrowers.
iii. Debarring the borrowers from accessing institutional
finance under Clause 8.12.1 of the Master Direction of
"fraud" result in serious civil consequences for the
borrower.
iv. Such a debarment under Clause 8.12.1 fo the Master
Direction of "frauds" is akin to blacklisting the borrowers
for being untrustworthy and unworthy of credit by banks.
This Court has consistently held that an opportunity of
hearing ought to be provided before a person is
blacklisted.
v. The application of Audi-alterem-Partem cannot be
impliedly excluded under the Master Direction on "frauds".
In view of the time frame contemplated under the Master
Direction on "frauds" as well as the nature of procedure
adopted. It is reasonable practicable for the lender banks
to provide an opportunity of a hearing to the borrowers
before classifying their account as "fraud".
vi. 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 Direction
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of frauds. In addition, the decision classifying the
borrower’s account as a fraudulent must be made by a
reason order and
vii. Since the Master Direction on "frauds" do not expressly
provide an opportunity of hearing to the borrowers before
classifying their account as "fraud", Audi-alterem-Partem
has to be read into the provisions of the directions to save
them from the vice of arbitrariness.
33. The ratio laid down in aforesaid ruling is applicable to the
present case. In the light of the ratio laid down by the Hon’ble Supreme
Court, I am of the view that the impugned decision to classify the
borrower’s account as "fraud" is vitiated by the failure to observe the
rule of Audi-alterem-Partem. So, also the decision by the defendant
Bank to classify the account as "fraud" is violative of principles of
natural justice. In present case the plaintiffs have prima-facie proved his
case. Balance of convenience lies in favour of plaintiffs. If the interim
relief is not granted to the plaintiffs, they will suffer irrepairable loss.
On the contrary no hardship or prejudice will be caused to be
defendant, if interim relief is granted to the plaintiffs. In short, the
balance of convenience lies in favour of plaintiffs. Hence, I am of the
view that the Notice of Motion filed by the plaintiffs for grant of
temporary injunction against the defendant needs to be allowed. Hence,
I proceed to pass the following order:-
ORDER
1. Notice of Motion no.1258 of 2020 in Commercial Suit No. 195 of
2021 is allowed in terms of prayer clause (b) to (d).
2. The defendant bank, its agents, servants, officers and/or any
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person claiming through the defendant is hereby temporarily
restrained from reporting plaintiff as a fraud under the R.B.I.
circular till disposal of the suit.
3. The defendant bank, its agents, servants, officers and/or any
person claiming through the defendant is hereby temporarily
restrained from acting upon or taking any action in any manner
whatsoever on the basis of defendant’s impugned action of
declaration of plaintiff as a fraud till disposal of the suit.
4. The defendant bank, its agents, servants, officers and/or any
person claiming through the defendant is hereby temporarily
restrained from declaring, classifying or reporting the plaintiff's as a
fraud as per R.B.I. Circular till disposal of the suit.
5. Notice of Motion no.1258 of 2020 in Commercial Suit No. 195 of
2021 is disposed off accordingly.
Dated : 10.08.2023 A. S. SALGAR
Ad-Hoc Judge,
(C.R.No.24)
City Civil Court
Gr. Mumbai.
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21 N/M No. 1258/2020 in Comm. Suit 195/2021
“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL
SIGNED JUDGMENT/ORDER.”
Upload Date Upload Time Name of Stenographer
22.08.2023 3.10 p.m. TYPERD BY ASHOK SUDHAKAR PATIL
CORRECTED BY PRAJWALA V. PHODKAR
Name of the Judge (With Court
Room No.)
HHJ SHRI. A.S. SALGAR (CR 24)
Date of Pronouncement of
JUDGMENT /ORDER
10.08.2023
JUDGMENT /ORDER signed by
P.O. on
22.08.2023
JUDGMENT /ORDER uploaded on 22.08.2023
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22 N/M No. 1258/2020 in Comm. Suit 195/2021
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