Bank borrower should be heard before declaring account as fraud, says Supreme Court

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The Supreme Court on Monday said that a borrower should be given the opportunity to be heard first before declaring the account as fraudulent by a bank.

A bench of Chief Justice of India D Y Chandrachud and Justice Hima Kohli upheld a decision of the Telangana High Court in 2020 and set aside a decision of the Gujarat High Court in this regard.

"The principles of audi alteram partem (hearing the other side) have to be applied before declaring a party as 'a fraudulent borrower', or as 'a holder of fraudulent account'", the Telangana High Court had said.

The court said that declaring accounts as fraud results in serious civil consequences for the borrowers and then ends in “blacklisting” of borrowers. So, the opportunity of hearing must be granted to the borrowers under the Master Directions on Fraud, the court said.

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The court stressed that the banks must give an opportunity to the borrower to be heard before terming an account as fraud under the Circular issued by the Reserve Bank of India on the classification of bank accounts as fraud accounts.

However, the Court said that the opportunity for a hearing is not necessary before the registration of a First Information Report (FIR).

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