In a significant ruling, the Supreme Court of India set aside various High Court judgments that had quashed First Information Reports (FIRs) and criminal proceedings against several borrowers whose accounts had been declared fraudulent by banks. The Court held that the annulment of administrative actions by banks for non-adherence to principles of natural justice does not automatically vitiate criminal proceedings based on the same facts.
The judgment was delivered by a Bench comprising Justice M.M. Sundresh and Justice Rajesh Bindal in Central Bureau of Investigation vs. Surendra Patwa & Ors., Criminal Appeal arising from SLP (Crl.) No. 7735 of 2024 and connected matters.
Background
The case stemmed from actions taken by banks pursuant to the Reserve Bank of India’s Master Directions on Frauds – Classification and Reporting by commercial banks and select Financial Institutions, dated 1 July 2016. Following these directions, the banks declared certain borrowers’ accounts as fraudulent and simultaneously referred the matters to the Central Bureau of Investigation (CBI) or State Police, initiating criminal proceedings.
Several affected borrowers challenged these actions before different High Courts, which subsequently quashed not only the administrative actions but also the FIRs and criminal proceedings, primarily relying on the Supreme Court’s judgment in State Bank of India and Others v. Rajesh Agarwal and Others [(2023) 6 SCC 1].
The High Courts found that declaring accounts as fraudulent without giving borrowers an opportunity of hearing violated the principles of audi alteram partem.
Submissions by Parties
The Solicitor General and Additional Solicitor Generals representing the CBI contended that the High Courts erred by equating administrative actions with criminal proceedings. They emphasized that administrative and criminal proceedings operate in distinct legal spheres and that the High Courts misinterpreted Rajesh Agarwal’s case.
They further submitted that the High Courts quashed FIRs even in cases where no prayer for quashing was made or where the CBI was neither heard nor impleaded.
On the other hand, the respondents argued that since the criminal cases stemmed from the administrative classification of fraud — itself tainted by violation of natural justice — the High Courts rightly quashed both.
Supreme Court’s Analysis
The Bench reaffirmed that administrative actions and criminal proceedings stand on different footings. It held:
“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.”
The Court cited paragraph 98.1 of Rajesh Agarwal’s case to highlight:
“No opportunity of being heard is required before an FIR is lodged and registered.”
It further clarified that setting aside administrative actions for breach of natural justice does not preclude the initiation or continuation of criminal proceedings based on the same facts.
The Court also emphasized that where administrative actions are invalidated purely for procedural lapses (without adjudicating on the merits), fresh administrative proceedings can be initiated after complying with natural justice, relying on precedents including State Bank of Patiala v. S.K. Sharma [(1996) 3 SCC 364] and Canara Bank v. Debasis Das [(2003) 4 SCC 557].
Decision
The Supreme Court allowed all the appeals filed by the CBI and the banks. Key directions include:
- Setting aside the impugned High Court orders that quashed FIRs and criminal proceedings.
- Restoration of FIRs and criminal cases to their original status.
- Remand of matters to the respective High Courts for fresh consideration on merits, except on the issue decided by the Supreme Court.
- Continuation of interim orders where they had been passed by High Courts.
- No coercive action for two weeks against respondents where no interim protection was granted earlier.
- Ongoing investigations to continue without coercive steps; where investigations are complete, no arrest or coercive action is permitted.
- Mandatory impleadment of CBI as a party in remanded matters where it was previously not heard.
The Court also urged the High Courts to dispose of the remanded cases within four months.
