The Supreme Court on Friday clarified its March 27
verdict, saying it had not directed banks to accord a personal hearing before
classifying a borrower's account as fraud.
The clarification came on the plea of State Bank of
India which flagged two issues pertaining to the March 27 judgement and said
now the NPA account holders, against whom the proceedings were initiated before
the verdict, may come and say that stall everything as they were not heard by
banks and the hearing should not mean personal hearing.
We never stated that the personal hearing be granted
to the borrowers. Rather we had said that they should be given adequate notice
and an opportunity to make a representation," a bench comprising Chief
Justice D Y Chandrachud and Justices P S Narasimha and J B Pardiwala said.
On the issue of applicability of the verdict with
prospective effect, the bench said that a review petition will have to be filed
against the judgement by the SBI.
A bench headed by the Chief Justice, on March 27,
had upheld the Telangana High Court's 2020 verdict, saying the classification
of an account as fraud not only results in reporting the crime to investigating
agencies, but also has other penal and civil consequences for the borrowers.
The apex court had said the principles of natural
justice demand that the borrowers must be served a notice, and given an
opportunity to explain the conclusions of the forensic audit report.
Our law has never been that opportunity of hearing
means a personal hearing", the bench said on Friday.
Solicitor General Tushar Mehta, appearing for the
SBI, then submitted that since the Supreme Court had upheld the Telangana High
Court order, which held that the principles of "audi alteram partem (hear
the other side)" must be read into the Circular issued by the Reserve Bank
of India on the classification of bank accounts as fraud accounts, other courts
may interpret that personal hearing is necessary.
The law officer pressed for a clarification, saying
that the judgement will reopen several past cases.
The judgement was delivered on pleas relating to the
RBI (Frauds Classification and Reporting by Commercial Banks and Select FIs)
Directions 2016 which were challenged before different high courts primarily on
the ground that no opportunity of being heard is envisaged to borrowers before
classifying their accounts as fraudulent.
Elaborating on the consequences when a borrower's
account is declared fraud, the apex court had said this virtually leads to a
credit freeze for the borrower, who is debarred from raising finance from financial
markets and capital markets.
The top court had said 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. Indeed, debarment is akin to blacklisting a borrower from availing
credit," it had said.
Debarring a borrower under the Master Directions on
Frauds is akin to blacklisting the borrower for being untrustworthy and
unworthy of credit by the banks, it had said.
The apex court had said the 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.
"The action of classifying an account as a
fraud not only affects the business and goodwill of the borrower but also the
right to reputation," it had said.