Administrative Action and Criminal Proceedings Stand on Different Footings: Supreme Court Reinstates CBI’s Right to Prosecute in Fraud Cases

"Setting Aside Administrative Orders Does Not Nullify Criminal Offences" - Supreme Court of India delivered a significant judgment in Central Bureau of Investigation v. Surendra Patwa & Others (SLP (Crl.) No. 7735 of 2024 & Connected Matters), restoring multiple criminal proceedings that had been quashed by various High Courts across the country.

The Court sternly observed that "merely because the facts are the same, one cannot say that in the absence of a valid administrative action, no offence which is otherwise cognizable can be registered." The judgment underlined that criminal prosecution is independent of administrative findings and cannot be nullified solely due to procedural lapses in administrative decisions.

The controversy originated when several banks, following the Reserve Bank of India’s Master Directions on Frauds, 2016, declared the accounts of companies as fraudulent without providing them an opportunity to be heard. Based on these findings, criminal complaints were lodged with the CBI and other investigative agencies.

Aggrieved by the classification of their accounts and the ensuing criminal proceedings, the borrowers approached various High Courts. The High Courts quashed both the administrative declarations of fraud and the First Information Reports (FIRs) lodged by the CBI, relying heavily on the Supreme Court’s earlier decision in State Bank of India v. Rajesh Agarwal (2023).

The pivotal issue before the Supreme Court was whether quashing the administrative action of declaring a bank account as fraudulent could automatically result in quashing criminal proceedings based on the same facts.

The Court categorically ruled: "An FIR merely sets the law into motion. It is based on the existence of a cognizable offence and has nothing to do with an administrative decision."

Criticizing the High Courts for misreading the Rajesh Agarwal judgment, the Court clarified: "Principles of natural justice are not applicable at the stage of lodging an FIR. Providing an opportunity of being heard prior to commencement of criminal proceedings would frustrate the very purpose of initiating a criminal action."

Quoting from the Rajesh Agarwal case, the Court reiterated: "No opportunity of being heard is required before an FIR is lodged and registered."
The Court emphasized that while banks must adhere to the principle of Audi Alteram Partem (hear the other side) before classifying an account as fraudulent, the lodging of an FIR and subsequent criminal investigation stands independently of any procedural lapses on the administrative side.

The Supreme Court, through a comprehensive and systematic categorization, dealt with various appeals, restoring FIRs and criminal proceedings in numerous cases. It laid down a structured framework: Where the High Courts had quashed FIRs directly, the matters were remitted to the High Courts for fresh consideration.

Where FIRs were quashed even without being challenged, the respondents were given two weeks to approach the courts afresh if they so wished.
The Court made it abundantly clear that ongoing investigations should continue without coercive steps for a limited period to ensure fair opportunity for the respondents.

Importantly, the Court held: "Setting aside an administrative action on the grounds of violation of principles of natural justice does not bar authorities from proceeding afresh."
Thus, banks and the RBI are free to initiate fresh administrative proceedings by complying with natural justice principles, but the criminal proceedings initiated by the CBI stand revived in their original form.

The judgment in CBI v. Surendra Patwa & Others marks a pivotal reaffirmation that civil and criminal consequences must be treated independently, especially in the complex realm of banking frauds. It restores the investigative agencies’ authority to act on potential criminal misconduct even if administrative processes are found deficient.

By ruling that "Administrative violations cannot shield accused from criminal liability", the Supreme Court has fortified the rule of law, ensuring that procedural missteps on the civil side do not paralyze criminal accountability.

The Court’s judgment stands as a resolute warning against attempts to blur the lines between procedural fairness and substantive criminal justice, echoing its firm stance: "Justice should not only be done but must manifestly be seen to be done."

Date of Decision: April 25, 2025