- 1 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 13TH DAY OF FEBRUARY, 2025 BEFORE THE HON'BLE MR JUSTICE M.NAGAPRASANNA WRIT PETITION NO. 14192 OF 2023 (GM-RES) C/W CRIMINAL PETITION NO. 4909 OF 2023 WRIT PETITION NO. 13269 OF 2023 (GM-RES) IN WP No. 14192/2023 BETWEEN: MR. B. K. AMARNATH S/O. LATE DR. B. L. KUPPASWAMY NAIDU, AGED ABOUT 68 YEARS, RESIDING AT APARTMENT NO. 7-A, 1ST BLOCK, ALPS ESTATE, 460/1, KAIKONDRANAHALLI, BENGALURU - 560 035. …PETITIONER (BY SRI. BIPIN HEGDE, ADVOCATE FOR SRI. A. MAHESH CHOUDHARY, ADVOCATE) AND: 1. CENTRAL BUREAU OF INVESTIGATION ANTI CORRUPTION BRANCH, 36, BELLARY ROAD, GANGANAGAR, BENGALURU - 560 032. REPRESENTED BY DEPUTY SP, CBI, ACB. 2. STATE BANK OF INDIA STRESSED ASST MANAGEMENT BRANCH, Digitally signed by NAGAVENI Location: High Court of Karnataka - 2 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 2ND FLOOR, OFFICE COMPLEX BUILDING, LOCAL HEAD OFFICE COMPOUND, BENGALURU - 560 001. REPRESENTED BY SHRI. M. RAMAKRISHNA SHENOY, ASSISTANT GENERAL MANAGER. …RESPONDENTS (BY SRI. P. PRASANNA KUMAR, ADVOCATE) THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA R/W SEC. 482 OF CR.P.C PRAYING TO QUASH THE IMPUGNED CHARGE SHEET NO. 23 DATED 17.12.2022 IN CRIME NUMBER 6556/2023 FOR OFFENSES UNDER SECTIONS 120B R/W 420, 468, 471 AND 477A OF INDIAN PENAL CODE, 1860 (IN SHORT IPC) BEFORE THE HONBLE XVII ADDL CHIEF METROPOLITAN MAGISTRATE, BANGALORE (SPECIAL COURT FOR CBI CASE) VIDE ANNEXURE A AND ALL CONSEQUENT PROCEEDINGS AS BEING ERRONEOUS, ILLEGAL AND BAD IN THE EYES OF LAW AND ETC., IN CRL.P NO. 4909/2023 BETWEEN: SRI. M. SRINIVAS S/O LATE MUNISWAMY RAJU, AGED ABOUT 66 YEARS, NO.8, M KOTHANUR DINNE , SOS POST, 6th CROSS, J.P. NAGAR, 8th PHASE, BENGALURU - 560 076. ...PETITIONER (BY SRI. KIRAN S. JAVALI, SENIOR COUNSEL AND SRI. SANDESH CHOUTHA, SENIOR COUNSEL FOR SRI. MANE SHIVAJI HANAMANTAPPA, ADVOCATE) - 3 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 AND: CENTRAL BUREAU OF INVESTIGATION, (ANTI CORRUPTION BRANCH) NO. 36, BELLARY ROAD, GANGANAGAR, BANGALORE - 560 032, REPRESENTED BY SUPERINTEND OF POLICE AND HEAD OF BRANCH. ...RESPONDENT (BY SRI. PRASANNA KUMAR P, ADVOCATE) THIS CRL.P IS FILED U/S.482 OF CR.P.C PRAYING TO i) QUASH THE FINAL REPORT FILED BY THE RESPONDENT IN C.C.NO.6556/2023 DATED 17.12.2022 PENDING BEFORE THE XVII ADDL.C.M.M. AND SPECIAL COURT FOR CBI CASES, BENGALURU AGAINST THE PETITIONER/ACCUSED NO.3 FOR ALLEGED OFFENCE P/U/S 120B R/W 420, 468, 471 AND 477-A OF IPC (VIDE ANNEXURE-A). IN WP NO. 13269/2023 BETWEEN: 1. SRI. VINOD RAMNANI S/O PRASRAMRAMNANI, AGED ABOUT 66 YEARS, NO.115, KASAVANAHALLI SARJAPUR ROAD, VARTHUR ROAD, VARTHUR, BENGALURU - 560 035. 2. M/S. OPTO CIRCUTI INDIA LIMITED A COMPANY REGISTERED UNDER THE COMPANIES ACT, HAVING ITS OFFICE AT NO. 118 KASAVANAHALLI, SARJAPUR ROAD, CARMELRAM POST, VARTHUR HOBLI, BANGALORE. - 4 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 PRESENTLY UNDER CRIP REPRESENTED IN BY CC 6556/2023, THROUGH ITS ERSTWHILE DIRECTOR/ CHAIRMAN/ PROMOTER MR. VINOD RAMNANI ...PETITIONERS (BY SRI. KIRAN S. JAVALI, SENIOR COUNSEL AND SRI. SANDESH CHOUTHA, SENIOR COUNSEL FOR SRI. SAMARTH SHREEDHAR, ADVOCATE) AND: CENTRAL BUREAU OF INVESTIGATION (ANTI CORRUPTION BRANCH) NO.36, BELLARY ROAD, GANGANAGAR, BANGALORE - 560 032, REPRESENTED BY SUPERINTEND OF POLICE AND HEAD OF BRANCH. ...RESPONDENT (BY SRI. PRASANNA KUMAR P, ADVOCATE) THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA R/W SEC. 482 OF CR.P.C PRAYING TO CALL FOR THE RELEVANT RECORDS QUASH THE ENTIRE PROCEEDINGS IN CC NO. 6556/2023 PENDING ON THE FILE OF THE HONBLE XVII ADDL CHIEF METROPOLITAN MAGISTRATE AND SPECIAL COURT FOR CBI CASES BENGALURU IN SO FAR AS THE PETITIONER /ACCUSED NO.1 AND 2 FOR OFFENSES PUNISHABLE UNDER SEC 120B R/W 420, 468, 471 AND 477A OF INDIAN PENAL CODE 1860 (VIDE ANNX-A) IN SO FAR AS PETITIONER CONCERNED AND ETC., THESE PETITIONS, COMING ON FOR FURTHER HEARING, THIS DAY, ORDER WAS MADE THEREIN AS UNDER: - 5 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 CORAM: HON'BLE MR JUSTICE M.NAGAPRASANNA ORAL ORDER The petitioners in the batch of these petitions call in question proceedings in C.C.No.6556/2023 pending on the file of XVII Additional Chief Metropolitan Magistrate, Bangalore registered for offences punishable under Sections 120B read with Sections 420, 468, 471 and 477A of the Indian Penal Code, 1860. 2. Heard Shri Bipin Hegde, learned counsel for Shri A. Mahesh Choudhary, learned counsel appearing for the petitioners and Shri P. Prasanna Kumar, learned counsel appearing for the respondents. 3. Facts in brief germane are as follows: The accused No.1 - Opto Circuits (India) Private Limited (hereinafter referred to as a 'company' for short) was established in the year 1992. It is engaged in the business of manufacturing of invasive and non-invasive medical devices. Accused Nos.3 and 4 are partners of the firm. One Shri Vinod Ramani is the Director of accused No.1 - the company. - 6 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 4. The company began Banking with respondent No.2 State Bank of India (hereinafter referred to as the 'Bank' for short) and obtained a business loan from their IFB branch, which stood approved up to 27.11.2009. Between 2009 to 2012, loan was enhanced by respondent No.2 and the working capital limit was increased to Rs.186/-crores. It appears that the company defaulted in repayment of loan at appropriate schedule. This led the Bank to initiate recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Several notices were issued. The accounts of the company were declared to be a non performing asset by the Bank. The directors were removed from Board of Directors of the company. The Debt Recovery Tribunal passes a final order in the Original Appeal (O.A.) that was instituted by the Bank, recovery certificate was issued in favour of the Bank. Respondent No.2 issued a sale proclamation for the properties owned by the company. 5. When things stood thus, the Assistant General Manager of the Bank registered a complaint against the - 7 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 petitioners and the company alleging fraud, cheating and other offences committed by the company due to which a loss of Rs.354.32/-crores was projected. Based upon the said complaint, a crime comes to be registered by the CBI for the afore-quoted offences and the offences under the Prevention of Corruption Act, 1988 against the public servants. The allegation was that the petitioners along with unknown public servants had conspired to cheat the Bank causing a wrongful loss as aforesaid. The concerned Court transfers the case to the special judge for CBI cases and the matter was pending therein. The CBI after investigation filed their charge sheet. The charge sheet was clearly based upon the accounts of the petitioners becoming an NPA and being termed as a fraud or the petitioners being described as willful defaulters by the Bank. Two criminal petitions have sprung from the concerned Court taking cognizance and issuing summons against these petitioners. Two of them are tagged in these petitions. 6. One annulatus development takes place. The classification of the account of the company and the petitioners to be a fraud or the petitioners being willful defaulters was challenged before this Court in W.P.No.10213/2023. The - 8 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 writ petition comes to be disposed by a Co-ordinate Bench of this Court on 06.12.2024. The Co-ordinate Bench has held as follows: "2. The petitioner is the borrower of loan from the respondent - Bank . The respondent asserting that the petitioners willfully defaulted on the repayment of the loan, classified the petitioner's account as ‘Fraudulent’ on 1.4.2019. 3. Sri. Kiran S. Jawali, learned Senior Counsel representing the petitioner, submitted that before classifying the petitioner's loan account as ‘Fraudulent’, respondent was obligated to provide the petitioner's an opportunity to offer an explanation. In this instance, the respondent, without providing an opportunity for a hearing, classified the account as ‘Fraudulent’, which is not legally sustainable. In support, reliance is placed on the decision of the Apex Court in the case of State Bank of India and Others v. Rajesh Agarwal and Others reported in (2023) 6 SCC 1. 4. After carefully examining the submissions of the learned counsel for the parties, the following is noted: "Admittedly, the petitioner is a defaulter, and the loan account has been treated as a ‘non-performing asset’.” 5. The contention of respondent is that the loan sanctioned to the petitioner was diverted for purposes of other than those for which it was sanctioned. 6. The Apex Court, in the case of SBI v. Rajesh Agarwal, (supra) at paragraph No.2, ruled that the principles of natural justice, particularly the rule of audi alteram partem, must be necessarily read into the Master Directions on Frauds to save them from the vice of arbitrariness. Further, at paragraph No.93, the Court ruled that the classification of a borrower’s account as fraudulent in accordance with the procedure laid down in the Master Directions on Frauds entails significant civil consequences for the borrower. Although the - 9 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 Master Directions on Frauds do not expressly provide an opportunity for the borrower to be heard before classifying an account as fraudulent, the rule of audi alteram partem must be read into the provisions of the said directions to save them from arbitrariness. 7. In view of the legal principles established in the aforementioned decision, the classification of the petitioner's loan account as fraudulent is arbitrary, discriminatory, and in violation of the principles of natural justice. 8. Accordingly, the petition is disposed of directing the respondent to reclassify the petitioner's account as a ‘Non-Fraudulent Account’. The respondent is granted liberty to reclassify the petitioner's account as ‘Fraudulent’ if permissible, after providing an opportunity for a hearing to the petitioner. 9. In view of the disposal of the petition, pending I.As, if any, do not survive for consideration and stand disposed of accordingly." 7. In the interregnum, this Court had granted interim order of stay of further proceedings before the concerned Court i.e., CBI Court. The proceedings had not proceeded further in the light of the interim order granted. The Co-ordinate Bench sets aside the treatment of the account of the petitioners to be fraudulent account and reserves liberty to re-classify the petitioners account as a fraud, if permissible and after affording opportunity to the petitioners. To arrive at the said finding, the Co-ordinate Bench follows the judgment of the Apex Court in - 10 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 the case of STATE BANK OF INDIA Vs. RAJESH AGARWAL1. The Apex Court has held as follows: "D. Analysis D.1. Regulatory framework 17. RBI is a statutory body constituted under Section 3 of the Reserve Bank of India Act, 1934. RBI has been constituted for the purpose of taking over the management of currency from the Central Government, regulating the issue of Bank notes, keeping of reserves with a view to securing monetary stability, and operating the currency and credit system of India. RBI is entrusted with the statutory obligation of administering the provisions of the Banking Regulation Act, 1949 (“the BR Act”). The BR Act vests RBI with various powers with respect to Banking companies such as granting licences, conducting inspections and giving directions. 18. Section 35-A of the BR Act empowers RBI to issue directions to Banking companies. Such directions are statutory in nature. Section 35-A is extracted below: “35-A. Power of the Reserve Bank to give directions.—(1) Where the Reserve Bank is satisfied that— (a) in the public interest; or (aa) in the interest of Banking policy; or (b) to prevent the affairs of any Banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the Banking company; or (c) to secure the proper management of any Banking company generally; it is necessary to issue directions to Banking companies generally or to any Banking company in particular, it may, from time to time, issue such directions as it deems fit, and the Banking companies or the Banking company, as the case may be, shall be bound to comply with such directions. 1 (2023) 6 SCC 1 - 11 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which modifications or cancellation shall have effect.” 19. RBI has been issuing “master directions” on diverse issues since 2016. These directions encompass the instructions on that particular subject. The master directions are updated whenever there is a change in policy, and such changes get reflected on RBI's website. In exercise of the power conferred by Section 35-A, RBI issued the Master Directions on Frauds on 1-7-2016 to consolidate and update seven earlier circulars on classification of fraud, reporting and monitoring issued between June 2009 and January 2016. The Master Directions on Frauds were updated on 3-7-2017. 20. The purpose of the Master Directions is extracted below: “1.3. Purpose These directions are issued with a view to providing a framework to Banks to enable them to detect and report frauds early and taking timely consequent actions like reporting to the investigative agencies so that fraudsters are brought to book early, examining staff accountability and do effective fraud risk management. These directions also aim to enable faster dissemination of information by the Reserve Bank of India (RBI) to Banks on the details of frauds, unscrupulous borrowers and related parties, based on the Banks' reporting so that necessary safeguards/preventive measures by way of appropriate procedures and internal checks may be introduced and caution exercised while dealing with such parties by Banks.” 21. The above directions were issued to achieve specific purposes : (i) early and timely detection and reporting of fraud; (ii) early and timely reporting of fraud to investigative agencies; (iii) quicker dissemination of information pertaining to details of fraud and fraudulent borrowers to Banks; and (iv) to facilitate the adoption of preventive measures by Banks. These purposes are - 12 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 reflected in Clause 2.1.1 of the Master Directions on Frauds: “Clause 2.1.1 The Chairmen and Managing Directors/Chief Executive Officers (CMD/CEOs) of Banks must provide focus on the “Fraud Prevention and Management Function” to enable, among others, effective investigation of fraud cases and prompt as well as accurate reporting to appropriate regulatory and law-enforcement authorities including Reserve Bank of India.” (emphasis supplied) 22. Clause 2.2.1 classifies frauds based on the provisions of the Penal Code, 1860: “Clause 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.” 23. Clause 3 advises Banks to make full use of the Central Fraud Registry (“CFR”) (a database created by RBI to enable Banks to share information on fraudulent accounts) for timely identification, control, reporting, and mitigation of risks associated with fraud. Clause 3.3 of the said directions emphasises the need to provide timely information on frauds and penalises Banks for non- adherence to timelines: “3.3.1. Banks should ensure that the reporting system is suitably streamlined so that delays in reporting of frauds, submission of delayed and incomplete fraud reports are avoided. Banks must fix staff accountability in respect of delays in reporting fraud cases to RBI. - 13 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 3.3.2. Delay in reporting of frauds and the consequent delay in alerting other Banks about the modus operandi and dissemination of information through Caution Advice/CFR against unscrupulous borrowers could result in similar frauds being perpetrated elsewhere. Banks should therefore, strictly adhere to the time-frame fixed in this circular for reporting of fraud cases to RBI failing which they would be liable for penal action prescribed under Section 47-A of the Banking Regulation Act, 1949.” (emphasis supplied) 24. The Master Directions on Frauds provides a regulatory framework for four types of frauds : (i) Chapter IV deals with attempted fraud; (ii) Chapter VII deals with cheque related frauds; (iii) Chapter VIII deals with loan frauds; and (iv) Chapter X deals with cases relating to theft, burglary, dacoity, and Bank robberies. The dispute in the present batch of cases is concerned with Chapter VIII dealing with loan frauds. 25. Chapter VI states that as a general rule, cases involving fraud/embezzlement should invariably be referred to the State Police or CBI. Chapter VIII provides for more robust safeguards which ensure that Banks report frauds to investigating agencies after forming an informed opinion. 26. The framework for dealing with loan frauds was put in place by a Circular dated 7-5-2015. The objective of the framework has been enumerated in Clause 8.2: “8.2. Objective of the framework The objective of the framework is to direct the focus of Banks on the aspects relating to prevention, early detection, prompt reporting to RBI (for system level aggregation, monitoring and dissemination) and the investigative agencies (for instituting criminal proceedings against fraudulent borrowers) and timely initiation of the staff accountability proceedings (for determining negligence or connivance, if any) while ensuring that the normal conduct of business of the Banks and their risk taking ability is not adversely impacted and no new and onerous responsibilities are placed on the Banks. In order to achieve this objective, the framework has stipulated timelines with the action incumbent on a Bank. The timelines/stage-wise actions in the loan life-cycle are - 14 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 expected to compress the total time taken by a Bank to identify a fraud and aid more effective action by the law- enforcement agencies. The early detection of fraud and the necessary corrective action are important to reduce the quantum of loss which the continuance of the fraud may entail.” 27. Clause 8.3 deals with Early Warning Signals (“EWS”) and Red-Flagged Accounts (“RFA”). Under Clause 8.3.1, an RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more EWS. EWS which should alert Bank officials about wrongdoings in a loan account are set out in Annexure II. Some of those enumerated are set out below: 27.1. (a) Default in undisputed payment to statutory bodies as declared in the annual report; (b) dishonour of high value cheques; 27.2. Delay in payment of outstanding dues; 27.3. Funds coming from other Banks to liquidate the outstanding loan amount except in the normal course; 27.4. Exclusive collateral charged to a number of lenders without NOCs of existing charge holders; 27.5. Dispute on title to collateral securities; and 27.6. Critical issues in the stock audit report. 28. EWS provide indications of wrongdoing which may later turn out to be frauds. A Bank is put on alert by the presence of EWS and must use them to trigger a detailed investigation into the Bank account concerned. According to Clause 8.3.5, the officer responsible for operations in the account should promptly report any manifestation of EWS to the Fraud Monitoring Group (“FMG”) constituted by the Bank. The clause directs Banks to take cognizance of EWS and launch a detailed investigation into an RFA. 29. Clause 8.8 deals with situations where a Bank is the sole lender. In such situations, the FMG is entrusted with the responsibility to take a call on whether a Bank account in which EWS are observed should be classified as RFA. The Bank is permitted to use external auditors before taking a final call on RFA status. However, within six months the Bank is required to either lift the RFA status or classify the account as fraud in accordance with the investigation or forensic audits. - 15 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 30. Clause 8.9 deals with lending under consortium or multiple Banking arrangements (“MBA”). Clause 8.9.2 provides that all Banks which have financed a borrower under an MBA should take coordinated action based on a commonly agreed strategy for subsequent legal actions, follow-ups, exchange of details and information on a consistent basis. Clauses 8.9.4 and 8.9.5 provide the procedure for classification of a borrower's account as fraud: “8.9.4. The initial decision to classify any standard account or NPA account as RFA or fraud will be at the individual level and it would be the responsibility of this Bank to report the RFA or fraud status of the account on the CRILC platform so that other Banks are alerted. In case it is decided at the individual Bank level to classify the account as fraud straightaway at this stage itself, the Bank shall then report the fraud to RBI within 21 days of detection and also report the case to CBI/Police, as it is being done hitherto. Further, within 15 days of RFA/fraud classification, the Bank which has red-flagged the account or detected the fraud would ask the consortium leader or the largest lender under MBA to convene a meeting of JLF to discuss the issue. The meeting of JLF so requisitioned must be convened within 15 days of such a request being received. In case there is a broad agreement, the account should be classified as fraud; else based on the majority rule of agreement amongst Bank with at least 60% share in the total lending, the account should be red-flagged by all the Banks and subjected to a forensic audit commissioned or initiated by the consortium leader or the largest lender under MBA. All Banks, as part of the consortium of multiple-Banking arrangement, shall share the costs and provide the necessary support for such an investigation. 8.9.5. The forensic audit must be completed within a maximum period of three months from the date of JLF meeting authorising the audit. Within 15 days of the completion of the forensic audit, JLF shall reconvene and decide on the status of the account, either by consensus or the majority rule as specified above. In case the decision is to classify the account as a fraud, the RFA status shall be changed to Fraud in all Banks and reported to RBI and on the CRILC platform within a week of the said decision. Besides, within 30 - 16 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 days of RBI reporting, the Bank commissioning/initiating the forensic audit should lodge a complaint with the CBI on behalf of all Banks in the consortium/MBA. For this purpose, if the Bank initiating the forensic audit is a private sector Bank, the complaint shall be lodged with the CBI by the PSU Bank with the largest exposure to the account in the consortium/MBA. If there is no PSU Bank in the consortium/MBA or it is a solo Bank lending by a private sector Bank/foreign Bank, the private Bank/foreign Bank shall report to the police as per extant instructions. This would be in addition to the complaint already lodged by the first Bank which had detected the fraud and informed the consortium/MBA.” (emphasis supplied) 31. Clause 8.9.4 stipulates that the initial decision to classify an account as RFA or fraud vests with the individual Bank. Once the Bank classifies the account as fraud, it is the responsibility of that Bank to report the RFA or fraud status on the account on the Central Repository of Information on Large Credits (“CRILC”) platform to alert other Banks. In case the individual Bank decides to straightaway classify the account as fraud, it is obligated to report the fraud to RBI within 21 days of detection and also report the case to CBI/Police. Further, within 15 days the individual Bank could ask the consortium leader or the largest lender under the MBA to convene a meeting of JLF to discuss the issue. The meeting of JLF has to be convened within 15 days of the request being received. JLF can classify an account as fraud in case there is a broad consensus. Otherwise, the clause indicates that based on an agreement amongst Banks with at least a 60% share in total lending, the account should be red- flagged by all Banks and subjected to forensic audit commissioned or initiated by the consortium leader or the largest lender under MBA. 32. Clause 8.9.5 states that the forensic audit has to be completed within 3 months from the date of JLF meeting authorising the audit. Within 15 days of the completion of the audit, JLF has to decide to classify the account as fraud and report it to RBI. The clause also requires the Bank commissioning the audit to lodge a complaint with CBI on behalf of all Banks in the consortium within 30 days of reporting to RBI. - 17 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 33. Clause 8.11 deals with the filing of complaints to law-enforcement agencies. Clause 8.11.1 requires Banks to lodge complaints with law-enforcement agencies immediately on detecting fraud. The clause enjoins Banks to avoid delay in filing a complaint as it may result in loss of documents, unavailability of witnesses, absconding borrowers, loss of money trail and asset tripping by fraudulent borrowers. 34. The penal measures for fraudulent borrowers are set out in Clause 8.12 which reads as follows: 8.12. Penal measures for fraudulent borrowers 8.12.1. In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent borrowers including the promoter/Director(s) and other whole-time Directors of the company insofar as raising of funds from the Banking system or from capital markets by companies with which they are associated is concerned, etc. In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing Bank finance from scheduled commercial Banks, development financial institutions, government- owned NBFCs, investment institutions, etc. for a period of five years from the date of full payment of the defrauded amount. After this period, it is for individual institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non- whole time Directors (like nominee Directors and independent Directors) only in rarest of cases based on conclusive proof of their complicity. 8.12.2. No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts. However, in cases of fraud/malfeasance where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, Banks and JLF may take a view on restructuring of such accounts based on their viability, without prejudice to the continuance of the criminal actions against the erstwhile promoters/management. 8.12.3. No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued. - 18 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 8.12.4. In addition to above borrower-fraudsters, 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. are also held accountable if they play a vital role in credit sanction/disbursement or facilitated the perpetration of frauds. Banks are advisable to report to Indian Banks Association (“IBA”) the details of such parties involved in frauds. 8.12.5. Before reporting to IBA, Banks have to satisfy themselves of the involvement of third parties concerned and also provide them with an opportunity of being heard. In this regard the Banks should follow normal procedures and the processes followed should be suitably recorded. On the basis of such information, IBA would, in turn, prepare caution lists of such third parties for circulation among the Banks.” (emphasis supplied) 35. Clause 8.12.1 provides that the penal provisions as applicable to wilful defaulters would apply to fraudulent borrowers as regards the raising of funds from the Banking system and financial institutions. Importantly, under the clause, fraudulent borrowers include promoters, Directors, and other whole-time Directors of the borrowing company. It debars fraudulent borrowers from availing Banking finance from the scheduled commercial Banks, development financial institutions, government-owned NBFCs, investment institutions, etc. for a period of five years from the date of full payment of the defrauded amount. Even after the completion of the five-year period, it is for the individual financial institutions to decide whether to lend to fraudulent borrowers, including Directors and promoters of the borrowing company. Additionally, under Clause 8.12.2, fraudulent borrowers are denied restructuring or grant of additional facilities by Banks and other such financial institutions. D.2. Audi alteram partem 36. We need to bear in mind that the principles of natural justice are not mere legal formalities. They constitute substantive obligations that need to be followed by decision-making and adjudicating authorities. The - 19 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 principles of natural justice act as a guarantee against arbitrary action, both in terms of procedure and substance, by judicial, quasi-judicial, and administrative authorities. Two fundamental principles of natural justice are entrenched in Indian jurisprudence : (i) nemo judex in causa sua, which means that no person should be a Judge in their own cause; and (ii) audi alteram partem, which means that a person affected by administrative, judicial or quasi-judicial action must be heard before a decision is taken. The courts generally favour interpretation of a statutory provision consistent with the principles of natural justice because it is presumed that the statutory authorities do not intend to contravene fundamental rights. Application of the said principles depends on the facts and circumstances of the case, express language and basic scheme of the statute under which the administrative power is exercised, the nature and purpose for which the power is conferred, and the final effect of the exercise of that power. [Union of India v. J.N. Sinha, (1970) 2 SCC 458] 37. While the borrowers argue that the actions of Banks in classifying borrower accounts as fraud according to the procedure laid down under the Master Directions on Frauds is in violation of the principles of natural justice, RBI and lender Banks argue that these principles cannot be applied at the stage of reporting a criminal offence to investigating agencies. At the outset, we clarify that principles of natural justice are not applicable at the stage of reporting a criminal offence, which is a consistent position of law adopted by this Court. 38. In Union of India v. W.N. Chadha [Union of India v. W.N. Chadha, 1993 Supp (4) SCC 260 : 1993 SCC (Cri) 1171] , a two-Judge Bench of this Court held that that providing an opportunity of hearing to the accused in every criminal case before taking any action against them would “frustrate the proceedings, obstruct the taking of prompt action as law demands, defeat the ends of justice and make the provisions of law relating to the investigation lifeless, absurd, and self-defeating” [Id, SCC p. 293, para 98.] . Again, a two-Judge Bench of this Court in Anju Chaudhary v. State of U.P. [Anju Chaudhary v. State of U.P., (2013) 6 SCC 384 : (2013) 4 SCC (Cri) 503] has reiterated that the Code of Criminal - 20 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 Procedure, 1973 does not provide for right of hearing before the registration of an FIR. 39. Chapter VIII of the Master Directions on Fraud provides detailed procedures to be followed by the Banks before forming an opinion to proceed with a criminal complaint against the borrowers. Under the said chapter, the lender Banks have to report a borrower to the CBI after classifying the borrower's account as fraudulent. However, the classification of the borrower's account does not simpliciter lead to reporting of criminal complaint with the enforcement authorities; it also entails penal consequences for the borrowers as laid down under Clause 8.12. 40. The process of forming an informed opinion under the Master Directions on Frauds is administrative in nature. This has also been acceded to by RBI and lender Banks in their written submissions. It is now a settled principle of law that the rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions. [A.K. Kraipak v. Union of India, (1969) 2 SCC 262; St. Anthony's College v. Rev. Fr. Paul Petta, 1988 Supp SCC 676 : 1989 SCC (L&S) 44; Uma Nath Pandey v. State of U.P., (2009) 12 SCC 40 : (2010) 1 SCC (Cri) 501.] It is also a settled position in administrative law that it is mandatory to provide for an opportunity of being heard when an administrative action results in civil consequences to a person or entity. 41. In State of Orissa v. Binapani Dei [State of Orissa v. Binapani Dei, AIR 1967 SC 1269] , a two-Judge Bench of this Court held that every authority which has the power to take punitive or damaging action has a duty to give a reasonable opportunity to be heard. This Court further held that an administrative action which involves civil consequences must be made consistent with the rules of natural justice : (AIR p. 1271, para 9) “9. … The rule that a party to whose prejudice an order is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set-up that every citizen is protected against exercise of arbitrary authority by the State or its officers. Duty to act - 21 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 judicially would therefore arise from the very nature of the function intended to be performed : it need not be shown to be super-added. If there is power to decide and determine to the prejudice of a person, duty to act judicially is implicit in the exercise of such power. If the essentials of justice be ignored and an order to the prejudice of a person is made, the order is a nullity. That is a basic concept of the rule of law and importance thereof transcends the significance of a decision in any particular case.” 42. In Maneka Gandhi v. Union of India [Maneka Gandhi v. Union of India, (1978) 1 SCC 248] , a seven- Judge Bench of this Court held that any person prejudicially affected by a decision of the authority entailing civil consequences must be given an opportunity of being heard. This has been reiterated in a catena of decisions of this Court. 43. In view of the settled position of law, the next question that arises before us is the scope and definition of the phrase “civil consequences”. 44. In Mohinder Singh Gill v. Chief Election Commr. [Mohinder Singh Gill v. Chief Election Commr., (1978) 1 SCC 405] , a Constitution Bench of this Court held that “civil consequences” cover infraction of not merely property or personal rights but of civil liberties, material deprivations, and non-pecuniary damages. In that case, the Court held that denial of a democratic right to cast a vote inflicts civil consequences. In D.K. Yadav v. J.M.A. Industries Ltd. [D.K. Yadav v. J.M.A. Industries Ltd., (1993) 3 SCC 259 : 1993 SCC (L&S) 723] , a three-Judge Bench of this Court observed that “everything that affects a citizen in his civil life inflicts a civil consequence”. 45. In Canara Bank v. V.K. Awasthy [Canara Bank v. V.K. Awasthy, (2005) 6 SCC 321 : 2005 SCC (L&S) 833] , a two-Judge Bench of this Court succinctly summarised the history, scope, and application of the principles of natural justice to administrative actions involving civil consequences in the following terms : (SCC pp. 331-32, para 14) “14. Concept of natural justice has undergone a great deal of change in recent years. Rules of natural - 22 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 justice are not rules embodied always expressly in a statute or in rules framed thereunder. They may be implied from the nature of the duty to be performed under a statute. What particular rule of natural justice should be implied and what its context should be in a given case must depend to a great extent on the fact and circumstances of that case, the framework of the statute under which the enquiry is held. The old distinction between a judicial act and an administrative act has withered away. Even an administrative order which involves civil consequences must be consistent with the rules of natural justice. The expression “civil consequences” encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and non-pecuniary damages. In its wide umbrella comes everything that affects a citizen in his civil life.” (emphasis supplied) 46. There is a consistent pattern of judicial thought that civil consequences entail infractions not merely of property or personal rights, but also of civil liberties, material deprivations, and non-pecuniary damages. Every order or proceeding which involves civil consequences or adversely affects a citizen should be in accordance with the principles of natural justice. 47. The next question that requires our consideration is whether the classification of a borrower's account as fraudulent under the Master Directions on Frauds entails civil consequences to the borrowers. 48. RBI and lender Banks have argued that the civil consequences contemplated in Clause 8.12.1 of the Master Directions on Frauds are reasonable. Under the said clause, the borrower, including the promoters and Directors of the company, are barred from availing credit from financial markets and credit markets for a period of five years, and possibly even beyond. According to RBI and lender Banks, such a restriction has to be perceived from the perspective of public interest. While acknowledging that the procedure which has been laid down in the Master Directions on Frauds is conceived in public interest, to protect the Banking system, we cannot ignore the serious civil consequences which emanate to the borrowers. - 23 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 49. Clause 8.12 of the Master Directions on Frauds deals with the penal measures for borrowers. Clause 8.12.1 provides that penal provisions as applicable to wilful defaulters would apply to fraudulent borrowers, including the promoters and Directors of the borrower company. The consequences that apply to a wilful defaulter under the Master Circular on Wilful Defaulters have been culled out in Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] : (SCC p. 795, para 9) “9. … serious consequences follow after a person has been classified as a wilful defaulter. These consequences are as follows: (a) No additional facilities to be granted by any Bank/financial institution [Para 2.5(a)]. (b) Entrepreneurs/Promoters would be barred from institutional finance for a period of 5 years [Para 2.5(a)]. (c) Any legal proceedings can be initiated, including criminal complaints [Para 2.5(b)]. (d) Banks and financial institutions to adopt proactive approach in changing the management of the wilful defaulter [Para 2.5(c)]. (e) Promoter/Director of wilful defaulter shall not be inducted by another borrowing company [Para 2.5(d)]. (f) As per Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot be a resolution applicant.” 50. In addition to the above consequences, borrowers are also liable to suffer the following consequences under the Master Directions on Frauds: 50.1. No restructuring may be made in the case of an RFA or fraud accounts (Clause 8.12.2). 50.2. No compromise on settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued (Clause 8.12.3). 50.3. The above consequences show that the classification of a borrower's account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower. The classification of an account as fraud not only results in reporting the fact to investigating - 24 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 agencies, but has other penal and civil consequences as specified in Clauses 8.12.1 and 8.12.3. 51. The borrowers have placed reliance on Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] to submit that debarring them from accessing institutional finance under Clause 8.12.1 of the Master Directions affects the fundamental right of the borrower to carry on business. On the other hand, RBI and lender Banks have argued that reliance on the observations in Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] is misplaced because the decision dealt with the classification of a borrower as wilful defaulter, whereas the present batch of appeals deals with the classification of a borrower's account as fraud. 52. The question in Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] was whether a person who is declared to be a wilful defaulter according to the procedure laid down in the Master Circular on Wilful Defaulters is entitled to be represented by a lawyer of their choice before such a declaration is made. The Court held that a borrower does not have the right to be represented by a lawyer in the course of in-house proceedings envisaged in Para 3 of the Master Circular on Wilful Defaulters. Para 3 of the Master Circular on Wilful Defaulters provides a two-tier process for identification of a wilful defaulter. At the first stage, a First Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the Bank must, after examining the evidence of wilful default and concluding that wilful default has occurred, issue a show-cause notice to the borrowers and promoters/whole-time Directors concerned calling for their submissions. The First Committee has to consider the submissions before recording the fact of wilful default with reasons. If the Committee deems it necessary, it could also provide a personal hearing to the borrower and the promoter/whole-time Director of the borrowing company. The second stage is that the order of the First Committee is reviewed by another Committee, known as the Review Committee. Thus, it is clear that the procedure for declaration of a borrower as a wilful defaulter is different from the procedure envisaged under the Master Directions on Frauds for classifying a borrower's account as fraud. - 25 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 However, by virtue of Clause 8.12.1 of the Master Directions on Frauds, the penal provisions applicable to wilful defaulters also apply to fraudulent borrowers. Thus, although the procedure adopted for declaration of a wilful defaulter is different from that envisaged for classifying the borrower's account as fraud, they will face similar consequences. In fact, as mentioned above, the borrowers' accounts classified as fraud under the Master Directions on Frauds will face certain additional consequences which have been laid down in Clauses 8.12.2 and 8.12.3. 53. Since the consequences flowing from the two circulars are similar, the observations in Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] on the effect of declaring a borrower as wilful defaulter will be squarely applicable to the present case. The observations of the Court are extracted below : (SCC p. 803, para 24) “24. … However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any Bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/Director of a wilful defaulter cannot be made promoter or Director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably.” (emphasis supplied) 54. In Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] , this Court construed the Master Circular on Wilful Defaulters by harmonising it with the principles of natural justice. Particularly, it was directed that : (i) the First Committee must give its order to the borrower as soon as possible; (ii) the borrower, thereafter, can file a written - 26 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 representation against the order of First Committee to the Review Committee; and (iii) the Review Committee must pass a reasoned order which must be provided to the borrower. 55. 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 bar from raising finances could be fatal for the borrower leading to its “civil death” in addition to the infraction of their rights under Article 19(1)(g) of the Constitution. Since debarring disentitles a person or entity from exercising their rights and/or privileges, it is elementary that the principles of natural justice should be made applicable and the person against whom an action of debarment is sought should be given an opportunity of being heard. 56. Indeed, debarment is akin to blacklisting a borrower from availing credit. Black's Law Dictionary [Black's Law Dictionary, 5th Edn. (1979).] explains the term “blacklist”, which has been defined in the following terms: “A list of persons marked out for special avoidance, antagonism, or enmity on the part of those who prepare the list or those among whom it is intended to circulate; as where a trades union “blacklists” workmen who refuse to conform to its rules, or where a list of insolvent or untrustworthy persons is published by a commercial agency or mercantile association.” (emphasis supplied) Similarly, P. Ramanatha Aiyar's Law Lexicon [ P. Ramanatha Aiyar, The Law Lexicon : The Encyclopaedic Law Dictionary (1997 Edn.).] defines the term “blacklist” as follows: “Blacklist is a list of persons or firms against whom its compiler would warn the public, or some section of the public; a list of persons unworthy of credit, or with whom it is not advisable to make contracts. Thus the official list of defaulters on the Stock Exchange is a blacklist. To put a man's name on such a blacklist without lawful cause is actionable; and the further publication of such a list will be restrained by injunction.” - 27 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 (emphasis supplied) 57. A blacklist is : (i) a list of insolvent or untrustworthy persons published by a commercial agency or mercantile association; and (ii) a list of persons unworthy of credit, or with whom it is not advisable to make contracts. Before this Court, RBI and lender Banks have submitted that debarring borrowers from accessing institutional finance is necessary to not only prevent the same persons from committing frauds in other Banks, but also to proscribe Banks from dealing with unscrupulous borrowers in public interest. Debarring a borrower under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrower for being untrustworthy and unworthy of credit by the Banks. This Court has consistently held that an opportunity of a hearing ought to be provided before a person is put on a blacklist. 58. In Erusian Equipment & Chemicals Ltd. v. State of W.B. [Erusian Equipment & Chemicals Ltd. v. State of W.B., (1975) 1 SCC 70] , the issue before this Court was whether a person is entitled to a notice to be heard before being blacklisted by the Government. This Court held that since blacklisting affects the privileges of the blacklisted person, fundamentals of fair play require that such a person be provided an opportunity of being heard : (SCC p. 75, para 20) “20. Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purposes of gains. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist.” 59. In Joseph Vilangandan v. Executive Engineer (PWD) [Joseph Vilangandan v. Executive Engineer (PWD), (1978) 3 SCC 36] , the issue before the two-Judge Bench pertained to debarment of a government contractor from seeking any further contract with the Government without providing an opportunity of being heard. The material sentence of the notice there read as follows : (SCC p. 41, para 17) - 28 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 “17. … ‘You are therefore requested to show cause … why the work may not be arranged otherwise at your risk and loss, through other agencies after debarring you as a defaulter….’ ” (emphasis in original) This Court applied the position of law in Erusian Equipment & Chemicals [Erusian Equipment & Chemicals Ltd. v. State of W.B., (1975) 1 SCC 70] to hold that the Executive Engineer ought to have given the contractor adequate opportunity to represent against the proposed action of debarment. 60. In Raghunath Thakur v. State of Bihar [Raghunath Thakur v. State of Bihar, (1989) 1 SCC 229] , a two-Judge Bench of this Court held that since blacklisting entails civil consequences an order of blacklisting should be issued only after following the principles of natural justice : (SCC p. 230, para 4) “4. … Insofar as the contention that there is no requirement specifically of giving any notice is concerned, the respondent is right. But it is an implied principle of the rule of law that any order having civil consequence should be passed only after following the principles of natural justice. It has to be realised that blacklisting any person in respect of business ventures has civil consequence for the future business of the person concerned in any event. Even if the rules do not express so, it is an elementary principle of natural justice that parties affected by any order should have right of being heard and making representations against the order.” 61. In Gorkha Security Services v. State (NCT of Delhi) [Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105] , the issue before this Court pertained to the form and content of a show-cause notice that is required to be served before blacklisting the noticee. A two-Judge Bench of this Court observed that that an order blacklisting a person is stigmatic. The relevant observation is extracted below : (SCC p. 115, para 16) “16. It is a common case of the parties that the blacklisting has to be preceded by a show-cause notice. Law in this regard is firmly grounded and does not even demand much amplification. The necessity of compliance with the principles of natural justice by giving the opportunity to the person against whom - 29 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 action of blacklisting is sought to be taken has a valid and solid rationale behind it. With blacklisting, many civil and/or evil consequences follow. It is described as “civil death” of a person who is foisted with the order of blacklisting. Such an order is stigmatic in nature and debars such a person from participating in government tenders which means precluding him from the award of government contracts.” (emphasis supplied) 62. Classification of a borrower's account as fraud has the effect of preventing the borrower from accessing institutional finance for the purpose of business. It also entails significant civil consequences as it jeopardises the future of the business of the borrower. Therefore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds. The action of classifying an account as fraud not only affects the business and goodwill of the borrower, but also the right to reputation. 63. In State of Maharashtra v. Public Concern for Governance Trust [State of Maharashtra v. Public Concern for Governance Trust, (2007) 3 SCC 587] , a two-Judge Bench of this Court held that a decision taken by any authority affecting the right to reputation of an individual has civil consequences. Therefore, in such situations the principles of natural justice would come into play. The Court held that any order or decision of the authority adversely affecting the personal reputation of an individual must be taken after following the principles of natural justice : (SCC p. 606, para 41) “41. It is thus amply clear that one is entitled to have and preserve one's reputation and one also has a right to protect it. In case any authority in discharge of its duties fastened upon it under the law, travels into the realm of personal reputation adversely affecting him, it must provide a chance to him to have his say in the matter. In such circumstances, right of an individual to have the safeguard of the principles of natural justice before being adversely commented upon is statutorily recognised and violation of the same will have to bear the scrutiny of judicial review.” - 30 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 64. RBI and lender Banks have relied on Peerless General Finance & Investment Co. Ltd. v. RBI [Peerless General Finance & Investment Co. Ltd. v. RBI, (1992) 2 SCC 343] , Joseph Kuruvilla Vellukunnel v. RBI [Joseph Kuruvilla Vellukunnel v. RBI, AIR 1962 SC 1371] and Internet & Mobile Assn. of India v. RBI [Internet & Mobile Assn. of India v. RBI, (2020) 10 SCC 274] to submit that the Master Directions on Frauds are akin to a statutory regulation and a decision on economic policy, which must be accorded a level of deference. 65. The competence of RBI to issue the Master Directions on Frauds is not a bone of contention in these appeals. RBI, in its estimation, has the power to determine and frame economic measures in the public interest to ensure the proper management of Banking companies. The point however is that the implementation of a decision to secure the health of Banking companies must comport with the due process of law. The civil consequences which follow upon a classification of a borrower's account as fraud are serious and prejudicial to the interests of a borrower. Principles of fair play require that the borrower ought to be given an opportunity of being heard before classifying the account as fraud in accordance with the procedure laid down under the Master Directions on Frauds. D.3. No implied exclusion of audi alteram partem 66. RBI and the lender Banks have contended that the Master Directions on Frauds impliedly exclude the right to be heard. The objective of the Master Directions on Frauds is to ensure timely detection and reporting of cases of fraud to alert other Banks and initiate criminal proceedings. The Directions contemplate an opportunity of hearing to a third party who is involved in the commission of fraudulent activity, but do not explicitly provide for hearing to a borrower. Thus, it is urged that hearing to the borrowers is excluded by necessary implication. 67. The Master Directions on Frauds do not expressly exclude a right of hearing to the borrowers before action to class their account as frauds is initiated. The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of - 31 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed. 68. In a decision of a three-Judge Bench of this Court in Swadeshi Cotton Mills v. Union of India [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664] , the issue was whether the Central Government was required to comply with the requirements of audi alteram partem before it took over the management of an industrial undertaking under Section 18-AA(1)(a) of the Industries (Development and Regulation) Act, 1951. R.S. Sarkaria, J. speaking for the majority consisting of himself and D.A. Desai, J. laid down the following principles of law : (SCC p. 689, para 44) “44. In short, the general principle — as distinguished from an absolute rule of uniform application — seems to be that where a statute does not, in terms, exclude this rule of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage. Conversely, if the statute conferring the power is silent with regard to the giving of a pre-decisional hearing to the person affected and the administrative decision taken by the authority involves civil consequences of a grave nature, and no full review or appeal on merits against that decision is provided, courts will be extremely reluctant to construe such a statute as excluding the duty of affording even a minimal hearing shorn of all its formal trappings and dilatory features at the pre-decisional stage, unless, viewed pragmatically, it would paralyse the administrative progress or frustrate the need for utmost promptitude. In short, this rule of fair play ‘must not be jettisoned save in very exceptional circumstances where compulsive necessity so demands’. The court must make every effort to salvage this cardinal rule to the maximum extent possible, with situational modifications. But, to recall the words of Bhagwati, J., the core of it must, however, remain, namely, that the person affected must have reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise.” (emphasis supplied) - 32 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 69. The main point for consideration before this Court in Swadeshi Cotton Mills [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664] was whether the use of the phrase “immediate action is necessary” under Section 18- AA(1)(a) of the IDR Act impliedly excluded the application of the audi alteram partem rule. Sarkaria, J. held that the expression “immediate action”, construed in light of the overall context, object and reasons of the legislation, did not necessarily indicate an intention to exclude the requirement of prior hearing. The Court held that the use of the phrase does not exclude the duty to comply with the audi alteram partem rule : (SCC pp. 704-705, para 77) “77. The second reason — which is more or less a facet of the first — for holding that the mere use of the word “immediate” in the phrase “immediate action is necessary”, does not necessarily and absolutely exclude the prior application of the audi alteram partem rule, is that immediacy or urgency requiring swift action is a situational fact having a direct nexus with the likelihood of adverse effect on fall in production. And, such likelihood and the urgency of action to prevent it, may vary greatly in degree. The words “likely to affect … production” used in Section 18-AA(1)(a) are flexible enough to comprehend a wide spectrum of situations ranging from the one where the likelihood of the happening of the apprehended event is imminent to that where it may be reasonably anticipated to happen sometime in the near future. Cases of extreme urgency where action under Section 18-AA(1)(a) to prevent fall in production and consequent injury to public interest, brooks absolutely no delay, would be rare. In most cases, where the urgency is not so extreme, it is practicable to adjust and strike a balance between the competing claims of hurry and hearing.” (emphasis supplied) Sarkaria, J. observed that that the owner of an undertaking is entitled to a fair hearing at the pre- decisional stage because the power of the Central Government under Section 18-AA(1)(a) to take over is far- reaching and adversely affects the rights and interests of owners. - 33 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 70. In Mangilal v. State of M.P. [Mangilal v. State of M.P., (2004) 2 SCC 447 : 2004 SCC (Cri) 1085] , a two- Judge Bench of this Court held that the principles of natural justice need to be observed even if the statute is silent in that regard. In other words, a statutory silence should be taken to imply the need to observe the principles of natural justice where substantial rights of parties are affected : (SCC pp. 453-54, para 10) “10. Even if a statute is silent and there are no positive words in the Act or the Rules made thereunder, there could be nothing wrong in spelling out the need to hear the parties whose rights and interest are likely to be affected by the orders that may be passed, and making it a requirement to follow a fair procedure before taking a decision, unless the statute provides otherwise. The principles of natural justice must be read into unoccupied interstices of the statute, unless there is a clear mandate to the contrary. No form or procedure should ever be permitted to exclude the presentation of a litigant's defence or stand. Even in the absence of a provision in procedural laws, power inheres in every tribunal/court of a judicial or quasi- judicial character, to adopt modalities necessary to achieve requirements of natural justice and fair play to ensure better and proper discharge of their duties. Procedure is mainly grounded on the principles of natural justice irrespective of the extent of its application by express provision in that regard in a given situation. It has always been a cherished principle. Where the statute is silent about the observance of the principles of natural justice, such statutory silence is taken to imply compliance with the principles of natural justice where substantial rights of parties are considerably affected. The application of natural justice becomes presumptive, unless found excluded by express words of statute or necessary intendment. … Its aim is to secure justice or to prevent miscarriage of justice. Principles of natural justice do not supplant the law, but supplement it. These rules operate only in areas not covered by any law validly made. They are a means to an end and not an end in themselves.” (emphasis supplied) 71. As a counter to the above legal position, RBI and lender Banks have contended that the principles of natural - 34 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 justice could be excluded in cases where there is a requirement of promptitude or exigent action. In support of the submission, RBI and Banks have relied upon Ajit Kumar Nag v. Indian Oil Corpn. Ltd. [Ajit Kumar Nag v. Indian Oil Corpn. Ltd., (2005) 7 SCC 764 : 2005 SCC (L&S) 1020] , which in turn relied on the Constitution Bench decision of this Court in Union of India v. Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] . In Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] , this Court observed that a right to a prior notice and an opportunity to be heard could be excluded if allowing for such a right would obstruct the taking of prompt action : (Tulsiram Patel case [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] , SCC p. 479, para 101) “101. … So far as the audi alteram partem rule is concerned, both in England and in India, it is well established that where a right to a prior notice and an opportunity to be heard before an order is passed would obstruct the taking of prompt action, such a right can be excluded. This right can also be excluded where the nature of the action to be taken, its object and purpose and the scheme of the relevant statutory provisions warrant its exclusion; nor can the audi alteram partem rule be invoked if importing it would have the effect of paralysing the administrative process or where the need for promptitude or the urgency of taking action so demands, …” 72. The borrowers have dwelt on Clause 8.9.6 of the Master Directions on Frauds according to which the entire exercise commencing from the detection of fraud by an individual Bank up to the declaration of fraud by JLF is to be completed within six months. Clause 8.9.6 provides thus: “8.9.6 It may be noted that the overall time allowed for the entire exercise to be completed is six months from the date when the first member Bank reported the account as RFA or fraud on the CRILC platform.” 73. In K.I. Shephard v. Union of India [K.I. Shephard v. Union of India, (1987) 4 SCC 431 : 1987 SCC (L&S) 438] , this Court was called upon to decide the validity of amalgamation schemes drawn by RBI, whereunder three private Banks were amalgamated with - 35 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 nationalised Banks. At the time of merger, some employees of the private Banks were excluded from employment as their services were not taken over by the transferee Banks in view of allegations of misconduct against them. While noting the fact that the entire process of amalgamation was statutorily required to be completed within 6 months, this Court held that the said time-frame provides scope for granting an opportunity of hearing to the affected employees : (SCC p. 448, para 15) “15. … We do not think in the facts of the case there is any justification to hold that rules of natural justice have been ousted by necessary implication on account of the time-frame. On the other hand we are of the view that the time limited by statute provides scope for an opportunity to be extended to the intended excluded employees before the scheme is finalised so that a hearing commensurate to the situation is afforded before a section of the employees is thrown out of employment.” 74. The decision of this Court in Swadeshi Cotton Mills [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664] and K.I. Shephard [K.I. Shephard v. Union of India, (1987) 4 SCC 431 : 1987 SCC (L&S) 438] demonstrates that the exigency of a situation is contextual. The Court must lean in favour of reading in the principles of natural justice when faced with a regulatory silence. Any exclusion must be confined to the narrowest possible limits. The application of the requirement of a prior hearing could be excluded only in situations where importing it would have the effect of paralysing the entire process. 75. As mentioned above, Clause 8.9.6 of the Master Directions on Frauds contemplates that the procedure for the classification of an account as fraud has to be completed within six months. The procedure adopted under the Master Directions on Frauds provides enough time to the Banks to deliberate before classifying an account as fraud. During this interval, the Banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report. Given the wide time- frames contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for Banks to provide an adequate - 36 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 opportunity of a hearing to the borrowers before classifying their account as fraud. 76. The exclusion contemplated in the decision of this Court in Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] would not be applicable because giving an opportunity of a hearing to the borrowers will not obstruct the taking of prompt action under the Master Directions on Frauds. 77. RBI and lender Banks have further submitted that the requirement of natural justice is already fulfilled under the Master Directions on Frauds as the borrower is allowed to participate during the preparation of the forensic audit report. On the other hand, the borrowers have submitted that the Master Directions do not expressly provide for participation of the borrowers during forensic audit report. It was also submitted that merely seeking inputs of borrowers during the preparation of the forensic audit report does not satisfy the requirements of the principles of natural justice as the borrowers should also be heard before classifying them as fraud. 78. In Keshav Mills Co. Ltd. v. Union of India [Keshav Mills Co. Ltd. v. Union of India, (1973) 1 SCC 380] , this Court was dealing with the issue of a takeover of a company by the Government under the IDR Act, 1951 after completion of a full investigation into the affairs of the company. The issue was whether the report of an investigating body appointed by an administrative authority should be made available to the person concerned before the authority takes a decision upon that report. While deciding to lay down a general principle, this Court observed that there may be certain situations where an investigation report is required to be furnished to the party concerned to make an effective representation about the proposed action : (SCC p. 393, para 21) “21. In our opinion it is not possible to lay down any general principle on the question as to whether the report of an investigating body or of an inspector appointed by an administrative authority should be made available to the persons concerned in any given case before the authority takes a decision upon that report. The answer to this question also must always depend on the facts and circumstances of the case. It is not at all unlikely that there may be certain cases - 37 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 where unless the report is given the party concerned cannot make any effective representation about the action that Government takes or proposes to take on the basis of that report. Whether the report should be furnished or not must therefore depend in every individual case on the merits of that case. We have no doubt that in the instant case non-disclosure of the report of the Investigating Committee has not caused any prejudice whatsoever to the appellants.” (emphasis supplied) 79. In Swadeshi Cotton Mills [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664] , this Court held that a company is entitled to an opportunity to explain the evidence collected against it and represent why the proposed action should not be taken : (SCC p. 707, para 85) “85. The contention does not appear to be well founded. Firstly, this documentary evidence, at best, shows that the Company was in debt and the assets of some of its “units” had been hypothecated or mortgaged as security for those debts. Given an opportunity the Company might have explained that as a result of this indebtedness there was no likelihood of fall in production, which is one of the essential conditions in regard to which the Government must be satisfied before taking action under Section 18- AA(1)(a). Secondly, what the rule of natural justice required in the circumstances of this case, was not only that the Company should have been given an opportunity to explain the evidence against it, but also an opportunity to be informed of the proposed action of take over and to represent why it be not taken.” (emphasis supplied) 80. Audi alteram partem has several facets, including the service of a notice to any person against whom a prejudicial order may be passed and providing an opportunity to explain the evidence collected. In Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] , this Court explained the wide amplitude of audi alteram partem : (SCC p. 476, para 96) “96. The rule of natural justice with which we are concerned in these appeals and writ petitions, namely, the audi alteram partem rule, in its fullest amplitude means that a person against whom an order to his - 38 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 prejudice may be passed should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses who are to give evidence against him examined in his presence and have the right to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not, however, conform to the judicial process in a court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing within the meaning of audi alteram partem rule in a quasi-judicial or administrative inquiry.” (emphasis supplied) 81. Audi alteram partem, therefore, entails that an entity against whom evidence is collected must : (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decision to classify an account as fraud involves due application of mind to the facts and law by the lender Banks. The lender Banks, either individually or through a JLF, have to decide whether a borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender Banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds. D.4. Challenge to constitutional validity 82. The borrowers have argued that the Master Directions on Frauds will have to be struck down as arbitrary and unconstitutional for conferring unguided and unbridled powers on Banks. To counter the submission, - 39 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 RBI and lender Banks have relied upon the decision in Delhi Cloth & General Mills Co. Ltd. v. Union of India [Delhi Cloth & General Mills Co. Ltd. v. Union of India, (1983) 4 SCC 166] to submit that the provisions of the Master Directions on Frauds are not arbitrary as they have a reasonable nexus to the object sought to be achieved. It was further argued that the Courts should not interfere with and supplant their wisdom in an economic policy decision unless there is blatant perversity, arbitrariness, or mala fides. 83. RBI has the right to take all such measures as are necessary to protect the health of the Banking system. Hence, the Master Directions on Frauds lay down the procedure for Banks, who in case of a breach of loan agreements by the borrowers, can seek appropriate remedies by approaching law-enforcement agencies and debarring borrowers from accessing further institutional finance. However, any policy decision which contemplates serious civil consequences for any person will be open to challenge for being arbitrary if the principles of natural justice are not applied during the process. 84. In E.P. Royappa v. State of T.N. [E.P. Royappa v. State of T.N., (1974) 4 SCC 3 : 1974 SCC (L&S) 165] , this Court held that an arbitrary State action is violative of Article 14 of the Constitution. Again, in Maneka Gandhi [Maneka Gandhi v. Union of India, (1978) 1 SCC 248] this Court reiterated that the principle of non-arbitrariness pervades Article 14. An administrative action can be tested for constitutional infirmities under Article 14 on four grounds : (i) unreasonableness or irrationality; (ii) illegality; (iii) procedural impropriety; [State of A.P. v. McDowell & Co., (1996) 3 SCC 709; Om Kumar v. Union of India, (2001) 2 SCC 386 : 2001 SCC (L&S) 1039] and (iv) proportionality. However, the scope of such judicial review is limited to ascertaining the deficiency in the decision-making process, and not the correctness of the choice made by the administrator. [United Commercial Bank v. P.C. Kakkar, (2003) 4 SCC 364 : 2003 SCC (L&S) 468] 85. Fairness in action requires that procedures which permit impairment of fundamental rights ought to be just, fair, and reasonable. The principles of natural justice have a universal application and constitute an important facet of - 40 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 procedural propriety envisaged under Article 14. The rule of audi alteram partem is recognised as being a part of the guarantee contained in Article 14. A Constitution Bench of this Court in Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398 : 1985 SCC (L&S) 672] has categorically held that violation of the principles of natural justice is a violation of Article 14. The Court held that any State action in breach of natural justice implicates a violation of Article 14 : (SCC p. 476, para 95) “95. The principles of natural justice have thus come to be recognised as being a part of the guarantee contained in Article 14 because of the new and dynamic interpretation given by this Court to the concept of equality which is the subject-matter of that article. Shortly put, the syllogism runs thus : violation of a rule of natural justice results in arbitrariness which is the same as discrimination; where discrimination is the result of State action, it is a violation of Article 14 : therefore, a violation of a principle of natural justice by a State action is a violation of Article 14. Article 14, however, is not the sole repository of the principles of natural justice. What it does is to guarantee that any law or State action violating them will be struck down. The principles of natural justice, however, apply not only to legislation and State action but also where any tribunal, authority or body of men, not coming within the definition of “State” in Article 12, is charged with the duty of deciding a matter. In such a case, the principles of natural justice require that it must decide such matter fairly and impartially.” (emphasis supplied) 86. In Cantonment Board v. Taramani Devi [Cantonment Board v. Taramani Devi, 1992 Supp (2) SCC 501] , a two-Judge Bench of this Court held that the rule of audi alteram partem is a part of Article 14. Similarly, in DTC v. Mazdoor Congress [DTC v. Mazdoor Congress, 1991 Supp (1) SCC 600 : 1991 SCC (L&S) 1213] , this Court observed that the rule of audi alteram partem enforces the equality clause in Article 14. Therefore, any administrative action which violates the rule of audi alteram partem is arbitrary and violative of Article 14. 87. Administrative proceedings which entail significant civil consequences must be read consistent with the - 41 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 principles of natural justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory rule to render it compliant with the principles of equality and non- arbitrariness envisaged under Article 14. The Master Directions on Frauds do not expressly provide the borrowers an opportunity of being heard before classifying the borrower's account as fraud. Audi alteram partem must then be read into the provisions of the Master Directions on Frauds. 88. In Olga Tellis v. Bombay Municipal Corpn. [Olga Tellis v. Bombay Municipal Corpn., (1985) 3 SCC 545] , a Constitution Bench of this Court was called upon to adjudge the validity of Section 314 of the Bombay Municipal Corporation Act, 1888. The provision enabled the Municipal Commissioner to remove, without notice, any object, structure or fixture which was set up in or upon any street. Y.V. Chandrachud, C.J. delivering the judgment of the Constitution Bench held that the impugned provision must be construed to ensure that the procedure contemplated is fair and reasonable. It was further held : (SCC pp. 580-81, para 44) “44. … What Section 314 provides is that the Commissioner [Ed. : The matter between two asterisks has been emphasised in original.] may [Ed. : The matter between two asterisks has been emphasised in original.] , without notice, cause an encroachment to be removed. It does not command that the Commissioner shall, without notice, cause an encroachment to be removed. Putting it differently, Section 314 confers on the Commissioner the discretion to cause an encroachment to be removed with or without notice. That discretion has to be exercised in a reasonable manner so as to comply with the constitutional mandate that the procedure accompanying the performance of a public act must be fair and reasonable. We must lean in favour of this interpretation because it helps sustain the validity of the law. Reading Section 314 as containing a command not to issue notice before the removal of an encroachment will make the law invalid.” (emphasis supplied) 89. In Union of India v. J.N. Sinha [Union of India v. J.N. Sinha, (1970) 2 SCC 458] , a two-Judge - 42 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 Bench of this Court held that an endeavour must be made to interpret a statutory provision consistent with the principles of natural justice : (SCC p. 461, para 8) “8. … It is true that if a statutory provision can be read consistently with the principles of natural justice, the courts should do so because it must be presumed that the Legislatures and the statutory authorities intend to act in accordance with the principles of natural justice. But if on the other hand a statutory provision either specifically or by necessary implication excludes the application of any or all the principles of natural justice then the court cannot ignore the mandate of the legislature or the statutory authority and read into the provision concerned the principles of natural justice. Whether the exercise of a power conferred should be made in accordance with any of the principles of natural justice or not depends upon the express words of the provision conferring the power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power.” (emphasis supplied) 90. In C.B. Gautam v. Union of India [C.B. Gautam v. Union of India, (1993) 1 SCC 78] , the question before a Constitution Bench of this Court was whether a show-cause notice must be issued to an intending purchaser and seller of property before making a compulsory purchase under Section 269-UD(1) of Chapter XX-C of the Income Tax Act, 1961. M.H. Kania, C.J. speaking for the Constitution Bench held that where the validity of a provision would be open to serious challenge for want of an opportunity of being heard, courts have read such a requirement into the provision. In C.B. Gautam [C.B. Gautam v. Union of India, (1993) 1 SCC 78] , this Court read the principles of natural justice into the provisions of Chapter XX-C to save them from the vice of arbitrariness. The Constitution Bench held : (SCC p. 104, para 30) “30. … Again, there is no express provision in Chapter XX-C barring the giving of a show-cause notice or reasonable opportunity to show cause nor is there anything in the language of Chapter XX-C which could lead to such an implication. The observance of principles of natural justice is the pragmatic requirement of fair play in action. In our view, - 43 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 therefore, the requirement of an opportunity to show cause being given before an order for purchase by the Central Government is made by an appropriate authority under Section 269-UD must be read into the provisions of Chapter XX-C. There is nothing in the language of Section 269-UD or any other provision in the said Chapter which would negate such an opportunity being given. Moreover, if such a requirement were not read into the provisions of the said Chapter, they would be seriously open to challenge on the ground of violations of the provisions of Article 14 on the ground of non-compliance with principles of natural justice. The provision that when an order for purchase is made under Section 269-UD — reasons must be recorded in writing is no substitute for a provision requiring a reasonable opportunity of being heard before such an order is made.” (emphasis supplied) 91. In Sahara India (Firm) (1) v. CIT [Sahara India (Firm) (1) v. CIT, (2008) 14 SCC 151] , a two-Judge Bench of this Court was called upon to decide whether an opportunity of being heard has to be granted to an assessee before any direction could be issued under Section 142(2-A) of the Income Tax Act, 1961 for special audit of the accounts of the assessee. This Court held that since the exercise of power under Section 142(2-A) of the Income Tax Act leads to serious civil consequences for the assessee, the requirement of observing the principles of natural justice is to be read into the said provision. 92. In Kesar Enterprises Ltd. v. State of U.P. [Kesar Enterprises Ltd. v. State of U.P., (2011) 13 SCC 733] , the Court dealt with a challenge to the validity of Rule 633(7) of the Uttar Pradesh Excise Manual which allowed the imposition of a penalty for breach of the conditions of a bond without expressly issuing a show-cause notice. D.K. Jain, J. speaking on behalf of the two-Judge Bench held that a show-cause notice should be issued and an opportunity of being heard should be afforded before an Order under Rule 633(7) is made. The Court held that the rule would be open to challenge for being violative of Article 14 of the Constitution unless the requirement of an opportunity to show cause is read into it. The Court observed : (SCC p. 743, paras 30 & 32) - 44 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 “30. Having considered the issue, framed in para 16, on the touchstone of the aforenoted legal principles in regard to the applicability of the principles of natural justice, we are of the opinion that keeping in view the nature, scope and consequences of direction under sub-rule (7) of Rule 633 of the Excise Manual, the principles of natural justice demand that a show-cause notice should be issued and an opportunity of hearing should be afforded to the person concerned before an order under the said Rule is made, notwithstanding the fact that the said Rule does not contain any express provision for the affected party being given an opportunity of being heard. *** 32. In our view, therefore, if the requirement of an opportunity to show cause is not read into the said Rule, an action thereunder would be open to challenge as violative of Article 14 of the Constitution of India on the ground that the power conferred on the competent authority under the provision is arbitrary.” (emphasis supplied) 93. It has been elucidated in the preceding paragraphs that the classification of a borrower's account as fraud in accordance with the procedure laid down in the Master Directions on Frauds entails significant civil consequences for the borrower. Since the Master Directions on Frauds do not expressly provide an opportunity of being heard to the borrower before classifying an account as fraud, the rule of audi alteram partem has to be read into the provisions of the said directions to save them from the vice of arbitrariness. 94. Before concluding, we also want to address the argument by the borrowers that the requirement of passing a reasoned order must be read into the Master Directions on Frauds. The borrowers also relied on Jah Developers [SBI v. Jah Developers (P) Ltd., (2019) 6 SCC 787 : (2019) 3 SCC (Civ) 412] wherein it was held that a final decision of the Review Committee declaring the borrower as a “wilful defaulter” must be made by a reasoned order. We agree with this contention of the borrowers because : (i) a reasoned order allows an aggrieved party to demonstrate that the reasons which persuaded the authority to pass an adverse order against the interests of the aggrieved party are extraneous or - 45 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 perverse; and (ii) the obligation to record reasons acts as a check on the arbitrary exercise of the powers. [Kranti Associates (P) Ltd. v. Masood Ahmed Khan, (2010) 9 SCC 496 : (2010) 3 SCC (Civ) 852] The reasons to be recorded need not be placed on the same pedestal as a judgment of a court. The reasons may be brief but they must comport with fairness by indicating a due application of mind. 95. In light of the legal position noted above, we hold that the rule of audi alteram partem ought to be read in Clauses 8.9.4 and 8.9.5 of the Master Directions on Fraud. Consistent with the principles of natural justice, the lender Banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud. A reasoned order has to be issued on the objections addressed by the borrower. On perusal of the facts, it is indubitable that the lender Banks did not provide an opportunity of hearing to the borrowers before classifying their accounts as fraud. Therefore, the impugned decision to classify the borrower account as fraud is vitiated by the failure to observe the rule of audi alteram partem. In the present batch of appeals, this Court passed an ad interim order [Shree Saraiwwalaa Agrr Refineries Ltd. v. Union of India, 2022 SCC OnLine SC 1905] restraining the lender Banks from taking any precipitate action against the borrowers for the time being. In pursuance of our aforesaid reasoning, we hold that the decision by the lender Banks to classify the borrower accounts as fraud, is violative of the principles of natural justice. The Banks would be at liberty to take fresh steps in accordance with this decision. 96. Lastly, the borrowers have argued that the Master Directions on Frauds suffer from manifest arbitrariness because they stipulate an opportunity of a hearing to the third parties, while denying the same to borrowers, who face significant civil consequences. Clause 8.12.5 of the Master Directions on Frauds provides that the Banks have to satisfy themselves of the involvement of the third parties and provide them with an opportunity of being heard before reporting them to the Indian Banks' Association. - 46 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 97. We are unable to accept this argument of the borrowers in light of the fact that the borrowers and the third parties stand on a different footing because : (i) the borrowers are the main perpetrators of fraud, while the third parties are merely facilitators; and (ii) it is the borrowers who face the significant civil consequences stipulated under Clauses 8.12.1 and 8.12.2, while the third-party service providers are merely referred to the Indian Banks' Association which maintains a caution list of such service providers. However, this view does not affect our conclusions in view of the discussion in the preceding paragraphs. E. Conclusion 98. The conclusions are summarised below: 98.1. No opportunity of being heard is required before an FIR is lodged and registered. 98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers. 98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower. 98.4. Such a debarment under Clause 8.12.1 of the Master Directions on 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. 98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time-frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender Banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud. 98.6. 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 Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order. - 47 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness. 99. In the result, the judgment of the Division Bench of the High Court of Telangana dated 10-12-2020 [Rajesh Agarwal v. RBI, 2020 SCC OnLine TS 2021] is upheld. The judgments of the High Court of Telangana dated 22-12- 2021 [Shree Saraiwwalaa Agrr Refineries Ltd. v. Union of India, 2021 SCC OnLine TS 1816] and 31-12-2021 [Yashdeep Sharma v. RBI, 2021 SCC OnLine TS 1852] , and of the High Court of Gujarat dated 23-12-2021 [Mona Jignesh Acharya v. Bank of India, 2021 SCC OnLine Guj 2811] are accordingly set aside. The civil appeals are disposed of. Writ Petition (C) No. 138 of 2022 is also disposed of in the above terms. There shall be no order as to costs. 100. Pending application(s), if any, shall stand disposed of". 8. Following the judgment of the Apex Court in the case RAJESH AGARWAL (supra), the Division Bench of High Court of Madhya Pradesh in the case of VIJAY KUMAR JAIN Vs. RBI,2 has held as follows: "14. In this concern, the Apex Court had laid down the dictum that application of audi alterm partem cannot be impliedly excluded under the master directions on fraud and whereas the lender banks are required to follow the principles of natural justice, more particularly by serving a notice upon the borrower and after considering the objections of the borrower, a reasoned order is required to be passed. Relevant 2 2024 SCC OnLine MP 1199 - 48 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 extracts of the judgment are reproduced below for convenience and ready reference: 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 Directions on Frauds results in serious civil consequences for the borrower; iv Such a debarment under Clause 8.12.1 of the Master Directions on 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 alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably 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 Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order; and vii. - 49 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness. 15. So far as the case in hand is concerned, from perusal of the record it is ambiguous that respondent no. 2/bank has not afforded any opportunity to the petitioners before declaring the account of the company as ‘fraud’, though it is the contention of respondent no. 2/bank that as per the Master Directions issued by the RBI, such a procedure was not envisaged. But, in view of the recent pronouncement by the Apex Court in the case of State Bank of India v. Rajesh Agrawal (supra), this Court is not required to dwell into whether the stand of respondent no. 2/bank is correct or not. 16. In view of the aforesaid, in the considered opinion of this Court without entering into the details of the issue raised in the present petition, this petition is disposed off in terms of the law laid down in the case of State Bank of India v. Rajesh Agrawal (supra)." and the judgment of the High Court of Punjab and Haryana in AGR STEEL STRIPS (P) LTD. V. RBI3, has held as follows: "21. Necessarily, FIRs, if any, if became registered, against the petitioners concerned, in terms of the otherwise tainted but for the reasons supra, declarations of ‘fraud’ being made of the accounts concerned of the petitioners concerned, therebys there is plenitude of jurisdiction vested in this Court, to 3 2024 SCC OnLine P&H 4290 - 50 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 therebys construe that such lodged FIRs, thus are also required to be quashed and set aside. 24. If so, since the FIRs, if any, which become lodged against the petitioners and which are insegregably interlinked with the declarations of ‘fraud’ as became made vis-a-vis the petitioners' accounts concerned, besides if the said declarations of ‘fraud’ are so made without evident non-adherences by the entity concerned, vis-a-vis the principles of audi alteram partem, therebys when the FIR is born from such stained or declarations of frauds visa-vis the accounts of the petitioners concerned. Resultantly, the inevitable consequence thereof, is that, the child or the FIR procreated by the stained declaration of ‘fraud’, is also likewise required to be quashed and set aside." In the light of the law laid down by the Apex Court in the case of RAJESH AGARWAL (supra) and the Division Bench of High Court of Madhya Pradesh and the High Court of Punjab and Harayana, as also the Co-ordinate Bench judgment, the found of the registration of the crime is now no longer in existence. The issue is when the foundation is no longer in existence, would the superstructure i.e., the registration of the crime based upon the said foundation should be permitted to be standing. 9. It is an admitted fact that the reason for registration of the crime is declaration of the account of the petitioners to be a fraud. If that itself is now obliterated, it - 51 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 becomes rather difficult to accept the contention of the respondents that these proceedings should be permitted to be continued. 10. At this juncture, all the learned counsels representing the petitioners and the CBI would submit that the liberty that is given by the Co-ordinate Bench to the Bank should be reserved to the CBI as well to initiate the proceedings all over again, if the Bank were to hold that the petitioners account would still be declared as a fraud. 11. In the light of the aforesaid circumstance and the submission of the learned counsel for the petitioners and respondents, I deem it appropriate to obliterate the proceedings in CC No.6556/2023 and reserve liberty to the respondent-CBI to initiate proceedings, if permissible after the Banks action of declaration of the account to be a fraud all over again. 12. For the aforesaid reasons, the following: ORDER (i) Writ petitions are allowed-in-part. - 52 - NC: 2025:KHC:6552 WP No. 14192 of 2023 C/W CRL.P No. 4909 of 2023 WP No. 13269 of 2023 (ii) C.C.No.6556/2023 pending on the file of XVII Additional Chief Metropolitan Magistrate for the offences punishable under Sections 120B read with Sections 420, 468, 471 and 477A of the Indian Penal Code, 1860 stands quashed. (iii) Liberty is reserved to the respondent-CBI to initiate / re-initiate proceedings in the event the Bank exercising liberty granted by the Co-ordinate Bench holds the account of the petitioners to be a fraud, yet again. Ordered accordingly. Sd/- (M.NAGAPRASANNA) JUDGE JY List No.: 19 Sl No.: 63 CT: BHK