FIRs Can Continue Against Borrowers Despite Setting Aside Of Their Loans' Classification As Fraudulent : Supreme Court

The Supreme Court today held that merely because the classification of bank accounts as fraudulent was set aside on technical grounds, the criminal proceedings and FIRs initiated against the account holders for the offence of fraud cannot be quashed.

Observing so, the Court restored various criminal proceedings initiated by the Banks against borrowers.

The bench of Justice MM Sundresh and Justice Rajesh Bindal was hearing the appeals filed by the CBI challenging various High Courts' orders, which had quashed criminal action taken against defaulting borrowers for alleged fraud under the Master Directions issued by the Reserve Bank of India.

The borrowers approached the High Courts challenging the classification of their accounts as fraudulent on the basis of the master directions dated 1.7.2016 on 'Fraud – Classification and Reporting' issued by the RBI. In 2023, the Supreme Court, in the case of  State Bank of India & Ors vs. Rajesh Agrawal & Ors, had held that accounts cannot be classified as fraudulent without hearing the borrower. Relying on this judgment, the High Courts not only quashed the classification of the accounts as fraudulent but also quashed the FIRs.

Arguments Raised By The Parties 

The CBI, represented by the Solicitor General and Additional Solicitor Generals , mainly contended that the High Court was wrong in equating the administrative actions to criminal proceedings, which are both on a different footing. 

While the counsels for the respondents supported the impugned decision and the reliance placed on Rajesh Agarwal Case. It was contended that the criminal proceeding arose as a result of the administrative actions under the Master Directions. 

Court Differentiates Between Administrative Actions Under Master Directions & Criminal Proceedings 

The Court at the outset referred to paragraph 39 of the Rajesh Agarwal Case. Notably, under this portion, the Supreme Court clarified that the criminal provisions would apply to the fraudulent defaulters just as they apply to wilful defaulters under the penal laws. 

The Court also observed that an FIR, which launches criminal investigation, is distinct from an administrative action taken by the bank to classify the account.. 

"An FIR, by taking cognizance of an offence, merely sets the law into motion. This has nothing to do with a decision on the administrative side, made by a different authority. Merely because the facts are same or similar, one cannot say that in the absence of a valid administrative action, no offence which is otherwise cognizable, can be registered. At that stage, one only has to see the existence of a cognizable offence, based on the FIR registered. Therefore, even assuming that there is no action forthcoming on the administrative side, an FIR can be held to be maintainable. The scope and role of both the actions are totally different and distinct, more so when undertaken by different statutory/public authorities."

The existence of criminal cases depends on the material that comes out from the investigation that follows the FIR. Even if the administrative action is set aside, that cannot be a valid ground to strip one of any possible criminal liability. The Court explained : 

"The foundational facts may well be the same. Even in a case where an FIR is registered based on an administrative action, setting aside the latter on a technical or a legal premise would not ipso facto nullify the former. It is ultimately a matter for investigation by the appropriate authority. When an administrative order is set aside on the ground of non-compliance of a legal necessity or mandate, the facts mentioned thereunder could still be the basis for the registration of an FIR. Hence, the High Courts have clearly failed to take note of the same." 

Can Administrative Actions Be Set Aside On Grounds Of Violation Of Principles Of Natural Justice? Bench Explains The Ambit Of Courts 

Referring to the observations in Paragraph 98.1 of Rajesh Agarwala, the Court noted that  no opportunity of being heard is required before an FIR is lodged or registered. 

It further concluded that principles of natural justice and fair hearing are not necessary at the initial step of registering an offence in the form of an FIR. Granting an opportunity to hear before the criminal process kick-starts would be contrary to the objective of reporting the crime in the first place. The Court explained : 

"It is clear that the principles of natural justice are not applicable at the stage of reporting a criminal offence. It has further been clarified that providing an opportunity of being heard prior to the  commencement of a criminal action (i.e. registration of an FIR), would frustrate the very purpose of initiating a criminal proceeding, which is to meet the ends of justice." 

The Court accepted the argument that the High Courts had no jurisdiction to quash FIRs which were not even challenged before it. Where the FIRs were in fact challenged, to quash them without giving a fair hearing to the CBI or without impleading CBI as a party was not justified as observed by the bench. 

The Court also clarified that the setting aside of administrative actions on the basis of a lack of fair hearing and not on merits does not mean that the administrative authorities cannot initiate fresh actions. 

"It is pertinent to mention that the administrative actions initiated in pursuance of the RBI's Master Directions were set aside only on the ground of non adherence to the principle of Audi Altarem Partem and not on merits. Setting aside of an administrative action on the grounds of violation of the principles of natural justice does not bar the administrative authorities from proceeding afresh."

In holding, the bench also placed reliance on the decision in Canara Bank v. Debasis Das, where it was clarified that "Whenever an order is struck down as invalid being in violation of principles of natural justice, there is no final decision of the case and fresh proceedings are left upon (sic open). All that is done is to vacate the order assailed by virtue of its inherent defect, but the proceedings are not terminated." 

Thus the bench clarified that the RBI and complainant Banks are not barred from proceeding afresh while keeping the principles of natural justice in mind. 

To deal with the batch of petitions, the bench classified the pleas into 5 categories, and directed specific outcomes as per the facts/circumstances of cases falling under each such classification. This is tabulated as follows : 

Case Details : CENTRAL BUREAU OF INVESTIGATION vs. SURENDRA PATWA & Connected Matters | SLP(Crl) No. 007735 - / 2024

Citation : 2025 LiveLaw (SC) 481

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