Classification of a bank account as fraud : Does not require a personal hearing or natural justice

Bombay High Court Upholds SBI's Fraud Classification of Reliance Communications. Court Rules Natural Justice Satisfied Without Personal Hearing; Promoters Liable for Company Acts

In a significant judgment, the Bombay High Court has upheld the State Bank of India's (SBI) decision to classify the account of Reliance Communications Ltd. (RCOM) as 'fraud'. The Division Bench, comprising Justices Revati Mohite Dere and Dr. Neela Gokhale, dismissed the petition filed by Anil D. Ambani, challenging the classification and procedural compliance.

The judgment clarifies that compliance with the principles of natural justice does not necessitate a personal hearing unless explicitly required by statute. Instead, providing notice and an opportunity to submit a written representation suffices. The court cited the Supreme Court's decision in "Rajesh Agarwal v. State Bank of India," which emphasized the need for a reasoned order following an opportunity for representation.

The case arose after SBI issued a show-cause notice to RCOM and its directors in December 2023, under the Master Directions on Fraud Risk Management 2016. Despite the issuance of new Master Directions in 2024, the court found the prior show-cause notice valid, emphasizing procedural compliance over the requirement of a personal hearing.

The court further held that once a company's account is classified as fraud, its promoters and directors, like Mr. Ambani, who were in control, are liable for penal measures, regardless of their direct involvement in daily operations. This interpretation aligns with the Master Directions 2024, which impose responsibility on those in control of a company's affairs.

Anil D. Ambani's petition argued that he was not provided necessary documents to respond adequately and that the classification was unjust as he was a non-executive director. However, the court noted that the petitioner had sufficient opportunity to make written representations and that the principle of natural justice was adhered to.

This decision underscores the judiciary's stance on fraud classifications in banking, emphasizing accountability and procedural fairness without necessitating oral hearings in every instance.

Bottom Line:

Classification of a borrower's account as fraud does not mandatorily require a personal hearing; compliance with principles of natural justice through an opportunity to make a representation is sufficient.

Statutory provision(s):  - Master Directions 2016 , - Master Directions 2024 , Principles of Natural Justice , - Audi Alteram Partem Doctrine, - Companies Act, 2013  

The court's decision marks a pivotal point in banking regulation enforcement, highlighting the balance between regulatory compliance and individual rights, setting a precedent for similar cases in the future.

Anil D. Ambani v. State Bank of India, (Bombay)(DB) : Law Finder Doc Id # 2790335