The Supreme Court upheld a 2020 order by the Telangana high court (File)
The borrowers must be heard before the banks declare their accounts as fraud, the Supreme Court held today. This comes as a huge setback for banks that follow a central bank circular for classifying frauds.
Declaring an account as fraud leads to serious civil consequences, the Supreme Court noted, upholding a 2020 order by the Telangana high court that was challenged by the centre.
Therefore, the banks must grant an opportunity for hearing to the borrowers under the Reserve Bank of India's master circular, said a bench led by Chief Justice of India DY Chandrachud.
The court emphasised on reading the "audi alterm partem" principle, which means hearing the other side, with the master circular. The RBI circular cannot be presumed as excluding the principle of natural justice, it noted.
The top court also set aside a Gujarat high court judgment that held contrary to the Telangana high court judgment.
The RBI circular cites Indian Penal Code (IPC) provisions, including misappropriation, fraudulent transactions, cheating and forgery, for the classification of accounts as fraud.
The former directors of Anil Ambani's Reliance Communications and others had moved different high courts over their accounts being labelled as fraud and sent to the CBI for investigation.
Though the State Bank of India (SBI) and other banks had forwarded complaints of fraud against Reliance Communication to the CBI two years back, the agency couldn't file a case as the Delhi high court had ordered status quo.