Delhi High Court Reaffirms the Rajesh Agarwal Doctrine: Personal Hearing Must Precede Fraud Classification

Introduction

In a significant ruling that strengthens procedural safeguards for borrowers, the Delhi High Court in IDBI Bank Ltd. v. Gaurav Goel[i] addressed the scope of the principle of audi alteram partem in the context of classifying a borrower’s account as fraudulent under the Reserve Bank of India (‘RBI’) Master Directions on Frauds, 2016[ii] (‘Master Directions’). The central question before the Court was whether the principles of natural justice require that a borrower be granted a personal hearing before such classification is finalized, or whether an opportunity to furnish a written response alone would suffice.

This decision assumes significance given the severe consequences that follow a fraud declaration, ranging from reputational loss to denial of credit facilities and even criminal prosecution. Against this backdrop, a Division Bench of the Court was called upon to examine whether the borrower must be given a real and effective opportunity to defend themselves, including through oral submissions, and not merely vide a written explanation.

Brief Facts

• The Respondent, Gaurav Goel, had availed credit facilities from IDBI Bank Ltd., the Appellant. Alleged irregularities were found in a forensic audit, following which IDBI Bank initiated proceedings under the Master Directions for classification of the Respondent’s account as fraudulent. As part of this process, a show cause notice (‘SCN’) was issued to the borrower. However, no personal hearing was provided before the declaration was made.

• Aggrieved by the proposed declaration, the Respondent filed a writ petition[iii] before the Delhi High Court, contending that a fraud declaration had serious civil and penal consequences and, therefore, warranted strict compliance with the principles of natural justice, including the right to be heard in person. 

• The Respondent relied on the judgment of the Andhra Pradesh and Telangana High Court in Rajesh Agarwal v. RBI[iv], which held that while the Master Directions do not expressly provide for a personal hearing, the principles of natural justice nonetheless require that if a borrower specifically requests such a hearing, the bank must duly consider the request. This reasoning was subsequently upheld by the Supreme Court in SBI v. Rajesh Agarwal[v], which did not disturb the High Court’s position on this aspect.

• In the present case, the Ld. Single Judge of the Delhi High Court allowed the writ petition and held that the borrower was entitled to request a personal hearing. The Court directed the Bank to consider such a request. The IDBI Bank challenged this decision before a Division Bench, arguing that the Master Directions do not expressly mandate a personal hearing and that an opportunity to submit written representations satisfies the requirements of natural justice in an administrative proceeding.

Held

• The Division Bench of the Delhi High Court dismissed the Letters Patent Appeal (LPA) filed by IDBI Bank and affirmed the judgment of the Ld. Single Judge, thereby upholding the borrower’s right to seek a personal hearing before a fraud declaration is made against it. The Court held that the principle of audi alteram partem is firmly applicable to proceedings under the Master Directions, especially given the severe civil and penal consequences, and denial of future banking facilities.

• The Court clarified that the Supreme Court’s decision in SBI v. Rajesh Agarwal (supra), which upheld the judgment of the Andhra Pradesh and Telangana High Courts in Rajesh Agarwal v. RBI (supra), does not exclude the possibility of a personal hearing. If such a request must be meaningfully considered by the bank. Accordingly, the Delhi High Court rejected the Bank’s contention that a written reply alone satisfies the requirement of natural justice.

• The Court interpreted the Master Directions in light of constitutional and administrative law principles, observing that the nature of the proceedings – whether administrative or quasi-judicial – does not dilute the requirement of procedural fairness. Where the consequences of the action are grave and punitive, such as civil disability, reputational damage, or denial of future credit access, the principles of natural justice, including the right to a personal hearing, if sought, must be fully observed.

• Further, the Court addressed the Bank’s reliance on the Supreme Court’s miscellaneous order dated 12.05.2023 in SBI v. Rajesh Agarwal[vi], clarifying that the said order did not modify or override the binding ratio of the earlier 2023 decision in SBI v. Rajesh Agarwal[vii]. Instead, the latter order merely reaffirmed the conclusions already reached and thus could not be interpreted as watering down the borrower’s right to seek a personal hearing.

• The Court thus concluded that banks cannot act unilaterally while invoking the Master Directions. Hence, before a fraud declaration is made, they must provide a real and effective opportunity for the borrower to respond, not just through a written submission but also through a personal hearing, if such a request is made. The duty to act fairly and reasonably includes not merely procedural compliance but also substantive observance of the principles of natural justice.

Our Analysis

The Delhi High Court’s decision reinforces a significant procedural safeguard for borrowers, anchoring it firmly in the broader principles of administrative and constitutional law. The judgment does not merely interpret the Master Directions in isolation but places them within the framework of procedural fairness and natural justice. In doing so, the Court reaffirmed that procedural rights, such as the opportunity to be heard, are not formalities but substantive entitlements, especially when decisions result in serious civil consequences. By affirming that borrowers are entitled to a personal hearing when they explicitly seek one, the judgment draws from and extends the reasoning of the Supreme Court’s decision in SBI v. Rajesh Agarwal (2023) (supra), which had clarified that a personal hearing, when requested, must be duly considered. The Delhi High Court also appropriately distinguished the Supreme Court’s subsequent miscellaneous order in 2024, making clear that it did not overturn the earlier ruling.

This decision will likely serve as a benchmark for the future application of RBI’s Master Directions on fraud declaration. It sends a strong message to financial institutions that procedural compliance cannot be reduced to a box-ticking exercise. Even where the directions do not expressly mandate a personal hearing, constitutional principles require that affected parties be given a meaningful opportunity to be heard, both in form and substance, when adverse civil consequences are at stake. The judgment also categorically cautions against narrow readings of Supreme Court dicta, especially when such readings are invoked to justify procedural shortcuts. In doing so, the Court has fortified the rule of law in the context of bank-borrower relations. It has aligned fraud declaration procedures with broader constitutional mandates of fairness, reasonableness, and non-arbitrariness.

End Notes

[i] 2025 SCC OnLine Del 935 dated 19.02.2025.

[ii] RBI Master Directions on Frauds – Classification and Reporting by Commercial Banks and Select FIs), RBI/DBS/2016-17/28, dated 01.07.2016.

[iii] [W.P.(C) No. 3733 of 2024, dated 22-5-2024].

[iv] 2020] 122 taxmann.com 154 (AP&T).

[v] [2023] 148 taxmann.com 425 (SC).

[vi] [2024] 166 taxmann.com 33 (SC) dated 12.05.2023.

[vii] Supra Note vi.

Authored by the Metalegal Editorial Board, the views expressed are personal and do not constitute legal advice or opinion.