Supreme Court restores FIRs quashed by High Courts, clarifies no hearing required before FIR but directs fresh administrative hearings under Master Directions

A bench of Justices M.M. Sundresh and Rajesh Bindal heard appeals by the Central Bureau of Investigation and several banks challenging a series of High Court orders that had quashed administrative actions taken under the Reserve Bank of India’s Master Directions on Frauds (2016) and the related First Information Reports (FIRs). The appeals arose from multiple Special Leave Petitions connected with allegations that banks had declared borrower accounts fraudulent without affording an opportunity of hearing.

The Court allowed the appeals, set aside the impugned High Court judgments and restored the FIRs and criminal proceedings in their original form in appropriate cases, while distinguishing administrative classification from criminal prosecution. The bench emphasised that an administrative action and a criminal proceeding "stand on different footings" and that "an FIR, by taking cognizance of an offence, merely sets the law into motion." The Court, in its reasoning, observed: "98. The conclusions are summarised below: 98.1. No opportunity of being heard is required before an FIR is lodged and registered. 98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers. 98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower. 98.4. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted. 98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time-frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud. 98.6. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order. 98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."

Background The dispute originated from administrative steps taken by several commercial banks under the RBI’s Master Directions on Frauds to classify certain borrower accounts as fraudulent, with attendant civil consequences under Clause 8.12 and an obligation in some cases to report the matter to investigating agencies including the CBI. Aggrieved borrowers challenged those administrative classifications before various High Courts on the ground that banks did not afford an opportunity of hearing (audi alteram partem). Relying on this Court’s earlier decision in State Bank of India v. Rajesh Agarwal (2023), several High Courts quashed both the administrative orders and consequential FIRs. The CBI and banks appealed.

The Solicitor General and Additional Solicitor Generals argued that criminal proceedings stood independent of administrative classification and that the High Courts erred in equating the two, sometimes without impleading the CBI. Respondents contended the quashings were correct because administrative action caused the criminal referrals and were vitiated for lack of natural justice. The Supreme Court reiterated that principles of natural justice applied to administrative classification that produced civil consequences and directed that such administrative actions could be reopened and decided afresh after affording hearings, but held that "no opportunity of being heard is required before an FIR is lodged and registered." The Court classified the batch into five categories and issued tailored directions: in many cases it remitted matters to the High Courts for fresh consideration (with a four‑month target for disposal in Category 1), restored FIRs that had been quashed, granted short windows for respondents to pursue remedies where FIRs were set aside without challenge, continued certain interim orders, restrained coercive steps for limited periods, permitted investigations to continue (with no arrests in some completed investigations), and directed that the CBI be impleaded where it had not been made a party.

Case Details: Case No.: 2025 INSC 572 Case Title: Central Bureau of Investigation v. Surendra Patwa & Ors. & Connected Matters Appearances: For the Petitioner(s): Solicitor General of India and Additional Solicitor Generals (for the Appellant-CBI) For the Respondent(s): Senior counsel and counsel for the respondents (appearing for various petitioners)