Constitutional Law - Fundamental Rights: Hearing Required Before Classifying Bank Accounts as 'Fraudulent,' MP High Court

In a significant ruling, the High Court of Madhya Pradesh, presided over by HON'BLE SHRI JUSTICE SUSHRUT ARVIND DHARMADHIKARI and HON'BLE SHRI JUSTICE PRANAY VERMA, delivered a judgment on September 8, 2023, that reaffirms the importance of fundamental rights and the principles of natural justice in the banking sector.

The case, Writ Petition No. 22760 of 2023, involved a challenge to the constitutional validity of master directions on 'Fraud - Classification and Reporting' issued by respondent No.1, ICICI Bank. The petitioner, Rajiv Soni, alleged that these directions were arbitrary and unjust as they did not provide an opportunity for show cause notice or a personal hearing before classifying an account as 'fraudulent.'

The High Court, in its judgment, emphasized the significance of upholding fundamental rights enshrined in the Indian Constitution. It noted, "No opportunity of being heard is required before an FIR is lodged and registered." The classification of an account as fraudulent not only has criminal consequences but also affects access to banking facilities, making it essential to provide a hearing.

The judgment referred to a similar case in the High Court of Telangana, where the principles of audi alteram partem were upheld. The High Court directed the Joint Lenders' Forum (JLF) to provide an opportunity for a hearing and personal representation before classifying an account as 'fraudulent.'

Importantly, the High Court cited the recent Supreme Court judgment in State Bank of India & Ors. vs. Rajesh Agrawal & Ors., (2023) 6 SCC 1, which upheld the need for a hearing before classifying an account as 'fraudulent.' The judgment summarized its conclusions, stating, "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."

High Court disposed of the petition, quashing any actions taken against the petitioner, including FIR registration and fraud declaration. However, it clarified that the impugned circular on 'Fraud - Classification and Reporting' would remain in existence, and respondents could proceed in accordance with law and the principles laid down in the State Bank of India judgment.

Date of Decision: 8th September 2023

RAJIV SONI vs ICICI Bank Chairman