Supreme Court: FIRs Against Borrowers Stand Despite Loan Fraud Classification Being Set Aside I "FIR Sets Law Into Motion" Without Prior Hearing
Kiran Raj
The Supreme Court of India, Division Bench comprising Justice M. M. Sundresh and Justice Rajesh Bindal, addressed the legality of the quashing of FIRs and criminal proceedings arising from administrative actions initiated by banks under the Reserve Bank of India's Master Directions on Frauds – Classification and Reporting (2016).
The Court allowed multiple appeals filed by the Central Bureau of Investigation (CBI) and banks against High Court orders that had previously quashed both administrative actions and consequent criminal proceedings. The Court remitted all connected matters to the respective High Courts, directing them to reconsider the issues afresh within four months.
The dispute originated from the implementation of the RBI’s Master Directions on Frauds issued on July 1, 2016. The Master Directions were intended to establish a framework for early detection, reporting, and investigation of fraudulent activities by banks and financial institutions. Pursuant to these Directions, various banks classified certain borrowers' accounts as fraudulent after conducting internal and forensic audits.
This classification had serious consequences, including debarment from accessing institutional finance and mandatory reporting to investigative authorities such as the CBI. Aggrieved by these actions, the borrowers approached various High Courts, contending that their accounts were classified as fraudulent without granting them an opportunity to be heard, thereby violating the principles of natural justice.
The High Courts, relying heavily on the Supreme Court's judgment in State Bank of India v. Rajesh Agarwal (2023) 6 SCC 1, held that the banks' actions were void for non-compliance with the principles of audi alteram partem. The High Courts quashed not only the administrative declarations but also the subsequent FIRs and criminal proceedings initiated against the borrowers.
The Solicitor General and Additional Solicitor General’s appearing for the CBI submitted that the High Courts had conflated two distinct legal processes: administrative action and criminal investigation. They argued that the registration of an FIR based on a cognizable offence operates independently of the administrative decisions taken by the banks. It was further submitted that some FIRs were quashed even though no prayer had been made for such relief, and in several instances, the CBI was neither impleaded nor heard.
In contrast, the respondents' counsel contended that the criminal proceedings were a direct corollary to the administrative classification of accounts as fraudulent. Therefore, once the classification was quashed, the consequential criminal proceedings must also fall.
The Master Directions themselves specify a procedure for classification and reporting, including the requirement to inform law enforcement agencies upon detecting certain frauds. However, the directions do not provide a detailed mechanism for hearing affected borrowers before such classifications are made.
The Supreme Court distinguished the nature and consequences of administrative actions from criminal investigations. It recorded, "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."
The Court referred to paragraph 39 of Rajesh Agarwal's case and stated, "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 observed, "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 legal premise would not ipso facto nullify the former."
Referring to paragraph 98.1 of Rajesh Agarwal's case, the Court stated, "No opportunity of being heard is required before an FIR is lodged and registered." It stated that the registration of a criminal case does not demand prior adherence to principles of natural justice applicable in administrative matters.
The Court stated that the High Courts, while quashing FIRs, had failed to recognize that criminal proceedings are initiated for the purpose of investigation into cognizable offences and stand independent of any administrative declarations.
In addressing procedural lapses before the High Courts, the Court noted, "In some cases, the Appellant-CBI, despite being a necessary party, has not been heard. In few others, the Appellant-CBI has not even been impleaded as a respondent before the High Courts."
The Court further reiterated from previous precedents, "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."
Additionally, the Court cited State Bank of Patiala v. S.K. Sharma (1996) 3 SCC 364, stating, "Where there is a total violation of natural justice, normally, liberty will be reserved for the authority to take proceedings afresh according to law."
In conclusion of its observations, the Court clarified that while administrative actions taken without hearing must be set aside, criminal investigations, once initiated based on cognizable facts, must continue unless quashed on their own merits.
The Supreme Court, by its judgment, set aside the impugned judgments of the various High Courts. It directed that in cases classified under Category 1, where the FIR was challenged and set aside by the High Court, "we set aside the impugned judgments and remit the matters in their original form to the High Court for fresh consideration on all issues, except the one issue which has been decided by us in these appeals. Needless to state that the FIRs and the subsequent criminal proceedings which have been quashed will also stand restored in their original form." The Court further directed that "we request the High Courts to make an endeavour to dispose of the matters being remitted within a period of 4 months from the date of passing this judgment, after affording an opportunity of hearing to all the concerned parties."
For cases classified under Category 2, where the FIR was not challenged but still set aside by the High Court, the Court held that "we set aside the impugned judgments and grant a period of two weeks, from the date of passing this judgment, for the concerned respondents to resort to appropriate remedies in a manner known to law." It was clarified that "all the issues are left open to be raised, except for the one issue which has been decided by us in these appeals," and that the "FIRs and the subsequent criminal proceedings which have been quashed, despite no prayer being made, will also stand restored in their original form." Moreover, the Court directed that "the respondents before us in the aforementioned cases are directed to compulsorily implead the Appellant-CBI as a party-Respondent while taking resort to the remedy known to law."
With respect to Category 3A, where interim orders had been passed, the Court ordered that "the interim orders passed by the High Court shall continue till the disposal of the petitions being remitted."
For cases under Category 3B, where no interim order had been passed, the Court directed that "no coercive steps shall be initiated against the respondents for a period of two weeks from the date of passing this judgment."
In respect of Category 4A, where investigations are ongoing, the Court directed that "the investigation shall continue, but no coercive steps shall be taken against the concerned respondents/Accused in the meantime."
For Category 4B cases, where the investigation is complete, the Court specifically ordered that "there is no necessity to take coercive steps or arrest the concerned respondents/Accused."
Finally, for Category 5, where the CBI had not been added as a party before the High Court, the Supreme Court directed that "they be impleaded before the High Court by way of a suo moto order being passed by this Court, since these matters are being remitted for fresh consideration," and clarified that "the permission to file the Special Leave Petitions in the aforementioned cases stands granted."
The Court concluded by stating, "the appeals stand allowed, accordingly," and held that "pending application(s), if any, shall stand disposed of."
Case Title: Central Bureau of Investigation v. Surendra Patwa and Others
Neutral Citation: 2025 INSC 572
Case Number: SLP (Crl.) No. 7735 of 2024 & Connected Matters
Bench: Justice M. M. Sundresh, Justice Rajesh Bindal
[Read/Download order]
