Can banks tag your bank accounts as fraud ? Supreme Court
Observing that declaring a bank account as fraud could be fatal for the borrower leading to his "civil death", the Supreme Court on Monday ruled that banks must serve a notice and grant an opportunity to borrowers to be heard before taking such a decision, instead of unilaterally declaring the account as fraud.A bench of Chief Justice DY Chandrachud and Justice Hima Kohli said that declaring an account as a fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences against the borrowers and principles of natural justice must be followed.The court passed the order on the issue of validity of RBI (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016.Bankers said borrowers are being granted a hearing before being classified as wilful defaulters.Lenders are also required to 'red flag' an account if suspicion is thrown up by the presence of early warning signals on loans of over Rs 50 crore.Once an account has been 'red flagged' banks must do a forensic audit and decide whether to classify it as a fraud within six months. Lenders are now awaiting a revised circular from the RBI on loan classification.The issue of fraud classification was first adjudicated by the high court of Telangana, which held that principles of natural justice must be read into the provisions of the Master Directions on Frauds.The HC decision was assailed by the RBI and lender banks in the apex court."Classification of the borrower's account as fraud under the Master Directions on Frauds virtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets.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," the bench said.The court noted that the procedure adopted under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud and during this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report.Dr. Ajay Kummar Pandey
( LLM, MBA, (UK), PhD, AIMA, AFAI, PHD Chamber, ICTC, PCI, FCC, DFC, PPL, MNP, BNI, ICJ (UK), WP, (UK), MLE, Harvard Square, London, CT, Blair Singer Institute, (USA), Dip. in International Crime, Leiden University, the Netherlands )Advocate & Consultant, Supreme Court of India & High Courts4C Supreme Law International, Delhi, NCR. Mumbai & DubaiTel: M- 91- 9818320572. Email: editor.kumar@gmail.comWebsite: www.ajaykr.com, www.4Csupremelawint.com
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