Many cases may have to be reopened after SC ruling on borrowers' voice

The Supreme Court’s decision to allow borrowers a chance to be heard before their accounts are flagged as fraudulent by lenders is expected to result in several cases being reopened where the borrower is aggrieved because of such classification, bankers said.

Still, the reopening of cases would not be automatic. A borrower who is aggrieved by the ‘fraud’ classification will have to approach the bank and consequently, the bank will take the necessary steps so that the apex court’s order is followed in letter and spirit, they said.

According to bankers, the Supreme Court order is expected to play out in three phases. One, the borrowers whose accounts were categorised as “fraud” may approach the bank for hearing them again.

This shall lead to the reopening of decided cases.

Second, even if the due process is followed based on the order, the borrower can still challenge the bank’s verdict in court, further dragging the matter.

Eventually, bankers said, going forward, this decision will help streamline the whole process of classifying accounts as frauds but the decision to arrive at a judgment (whether the account can be classified as fraud or not) may get tougher.

On Monday, the Supreme Court, in a significant judgment, said, “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”.

The two-judge Bench of Chief Justice of India D Y Chandrachud and Justice Hima Kohli, in their judgment, said: “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.”

Bankers said the decision won’t deter them from marking an account as fraudulent. “It’s only about following a process, which will have no impact on banks in declaring a fraud, if a fraud has been committed,” said a banker.

According to legal experts, in the cases where banks have declared an account as fraud and the same are under challenge, banks can come up with fresh steps, which are in accordance with the order of the Supreme Court.

“As the circular has been held to be violating the principles of natural justice, in the cases wherever bankers have declared an account as fraudulent, without providing any opportunity, there is a great possibility that most of those affected people may challenge those decisions of banks. This would lead to multiple litigation,” said Ashish Pyasi, associate partner, Dhir and Dhir Associate.

“Financial institutions usually follow the practice of giving borrowers an opportunity to present their side, before they can be labelled as wilful defaulter, fraud, non-cooperative, etc,” said Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co. “The operational process that banks follow would be streamlined following the Supreme Court judgment. The addition of a mandatory layer (to give the borrower an opportunity of being heard) is unlikely to lead to any substantial increase in time for completing the fraud classification,” she said.

According to her, there is no need to wait for any specific amendment to the RBI regulations after the top court’s verdict, as this is the principle of common law and equity, too.

Legal experts explained that the principles of natural justice mandate that both parties need to be heard, before arriving at a decision. “With this decision, the (RBI) circular stands the test of both Article 14 and principles of natural justice,” said Abhinay Sharma, managing partner, ASL Partners.

“This order would be a significant relief to other parties who are similarly placed and affected by fraud classification by lenders without the principles of natural justice being followed,” said Anushkaa Arora, principal & founder, ABA Law Office.