Supreme Court Clarifies Distinction Between Administrative Actions and Criminal Proceedings in Fraud Cases: CBI vs. Surendra Patwa (2025) INSC 572 (25 April 2025)

Introduction

Date of the Judgment: 25 April 2025

Citation: 2025 INSC 572

Judges: M. M. Sundresh, J., Rajesh Bindal, J.

Can a criminal proceeding be quashed solely because the related administrative action has been set aside? The Supreme Court of India recently addressed this critical question in a batch of appeals arising from cases where High Courts had quashed both administrative actions initiated by banks under the Reserve Bank of India (RBI) Master Directions on Frauds and the subsequent criminal proceedings initiated by the Central Bureau of Investigation (CBI). The Supreme Court clarified that administrative actions and criminal proceedings stand on different footings, even if they arise from the same set of facts.

The bench, comprising Justice M. M. Sundresh and Justice Rajesh Bindal, delivered the judgment. The key issue before the Court was to determine the nature and scope of administrative actions initiated in pursuance of the RBI’s Master Directions vis-à-vis criminal proceedings initiated against the respondents.

Case Background

The genesis of these appeals lies in the Master Directions on Frauds issued by the RBI on July 1, 2016. These directions aimed to provide a framework for banks to detect and report frauds early, enabling timely action. Following these directions, appellant banks initiated administrative actions against the respondents, declaring their bank accounts as fraudulent. This action carried significant civil consequences as outlined in the Master Directions.

Simultaneously, the banks initiated criminal proceedings against the respondents, referring cases to the State Police or the CBI, as required by the Master Directions. Aggrieved by these actions, the respondents challenged the validity of the Master Directions and the actions taken under them in various High Courts.

The High Courts, relying on the Supreme Court’s judgment in State Bank of India and Others v. Rajesh Agarwal and Others, (2023) 6 SCC 1, quashed the administrative actions, primarily on the ground of non-adherence to the principles of natural justice, specifically the principle of Audi Altarem Partem. The High Courts also quashed the criminal proceedings, considering them a natural consequence of the invalidated administrative actions.

Timeline

Legal Framework

The case revolves around the interpretation and application of the following key legal elements:

• RBI’s Master Directions on Frauds: These directions provide a framework for banks to classify and report fraudulent activities. The core objective is to enable early detection and reporting of frauds, facilitating timely actions by the banks.
• Principle of Audi Altarem Partem: This fundamental principle of natural justice requires that no person should be judged without a fair hearing in which each party is given the opportunity to respond to the evidence against them.

Arguments

Arguments by the Appellant-CBI:

• The High Courts erred in equating administrative actions with criminal proceedings, as they operate on different footings.
• Some High Courts quashed FIRs and criminal proceedings even without a specific prayer for such relief.
• In certain cases, the CBI, a necessary party, was not heard or even impleaded as a respondent before the High Courts.
• The High Courts misinterpreted the Supreme Court’s judgment in Rajesh Agarwal’s case (supra).

The learned Solicitor General (SG) & Additional Solicitor General s (ASGs) for the Appellant -CBI submitted that the High Courts ought not to have equated the administrative actions initiated in pursuance of the Master Directions with the criminal proceedings . A civil or an administrative action stands on a different footing in comparison to a criminal proceeding. In some cases , the High Courts have erroneously quashed the FIRs and the subsequent criminal proceedings , despite no prayer being made for the same . In certain other 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. Finally, it is submitted that the High Courts have misinterpreted the judgment delivered by this Court in Rajesh Agarwal ’s case (supra) while passing the impugned judgment s. The learned SG and ASG s placed reliance upon paras 37 to 40 and 98 of Rajesh Agarwal ’s case (supra) to reinforce their submissions.

Arguments by the Respondents:

• The High Courts rightly appreciated the ratio of the judgment in Rajesh Agarwal’s case (supra).
• The criminal proceedings were a direct consequence of the administrative actions initiated under the RBI’s Master Directions.
• The administrative actions were taken without adhering to the principle of Audi Altarem Partem, justifying the quashing of subsequent criminal proceedings.

The learned senior counsel and learned counsel appearing for the respondents submitted that the High Courts have rightly appreciated the ratio of the judgment of this Court in Rajesh Agarwal ’s case (supra) . The criminal proceedings are a consequence of the administrative actions initiated in pursuance of the Master Directions issued by the RBI. Hence, the High Courts were right in quashing the FIRs and the subsequent criminal proceedings . It is an admitted position that the administrative actions initiated in pursuance of the Master Directions , were taken without adhering to the principle of Audi Altarem Partem . Hence, no interference is warranted with the impugned judgment s.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issue:

1. What is the nature and scope of administrative actions initiated in pursuance of the Master Directions vis-à-vis criminal proceedings initiated against the respondents?

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court considered the following authorities:

• State Bank of India and Others v. Rajesh Agarwal and Others, (2023) 6 SCC 1 (Supreme Court of India): This case was heavily relied upon by the High Courts to quash the administrative actions and criminal proceedings. The Supreme Court clarified its earlier judgment, emphasizing that the principles of natural justice do not apply at the stage of reporting a criminal offense.
• Union of India v. W.N. Chadha [1993 Supp (4) SCC 260 : 1993 SCC (Cri) 1171] (Supreme Court of India): This case held that providing an opportunity of hearing to the accused in every criminal case before taking any action against them would frustrate the proceedings.
• Anju Chaudhary v. State of U.P. [(2013) 6 SCC 384 : (2013) 4 SCC (Cri) 503] (Supreme Court of India): This case reiterated that the Code of Criminal Procedure, 1973 does not provide for right of hearing before the registration of an FIR.
• A.K. Kraipak v. Union of India, (1969) 2 SCC 262 (Supreme Court of India): This case established that the rule of audi alteram partem applies to administrative actions.
• St. Anthony’s College v. Rev. Fr. Paul Petta, 1988 Supp SCC 676 : 1989 SCC (L&S) 44 (Supreme Court of India): This case reinforced the application of natural justice principles in administrative actions.
• Uma Nath Pandey v. State of U.P., (2009) 12 SCC 40 : (2010) 1 SCC (Cri) 501 (Supreme Court of India): This case reiterated the mandatory requirement of providing a hearing when an administrative action results in civil consequences.
• State Bank of Patiala v. S.K. Sharma, (1996) 3 SCC 364 (Supreme Court of India): This case summarized the principles related to disciplinary inquiries and the violation of natural justice, distinguishing between “no opportunity” and “no adequate opportunity.”
• Canara Bank v. Debasis Das, (2003) 4 SCC 557 (Supreme Court of India): This case interpreted the principles of natural justice, emphasizing the rules of nemo judex in causa sua and audi alteram partem.

Judgment

How each authority was viewed by the Court?

• Rajesh Agarwal’s case (2023) 6 SCC 1: The Supreme Court clarified that the principles of natural justice are not applicable at the stage of reporting a criminal offence. “From a perusal of the above paragraphs, it is clear that the principles of natural justice are not applicable at the stage of reporting a criminal offence. It has further been clarified that providing an opportunity of being heard prior to the commencement of a criminal action (i.e. registration of an FIR), would frustrate the very purpose of initiating a criminal proceeding, which is to meet the ends of justice.”
• State Bank of Patiala v. S.K. Sharma, (1996) 3 SCC 364: The Court reiterated that setting aside an administrative action on the grounds of violation of the principles of natural justice does not bar the administrative authorities from proceeding afresh. “Where the enquiry is not governed by any rules/regulations/statutory provisions and the only obligation is to observe the principles of natural justice — or, for that matter, wherever such principles are held to be implied by the very nature and impact of the order/action — the Court or the Tribunal should make a distinction between a total violation of natural justice (rule of audi alteram partem) and violation of a facet of the said rule… In the case of former, the order passed would undoubtedly be invalid… In such cases, normally, liberty will be reserved for the Authority to take proceedings afresh according to law, i.e., in accordance with the said rule (audi alteram partem).”
• Canara Bank v. Debasis Das, (2003) 4 SCC 557: The Court emphasized that whenever an order is struck down as invalid being in violation of principles of natural justice, there is no final decision of the case and fresh proceedings are left upon (sic open). “Whenever an order is struck down as invalid being in violation of principles of natural justice, there is no final decision of the case and fresh proceedings are left upon ( sic open). All that is done is to vacate the order assailed by virtue of its inherent defect, but the proceedings are not terminated.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain a clear distinction between administrative actions and criminal proceedings. The Court emphasized that the violation of natural justice principles in administrative actions does not automatically invalidate criminal proceedings, which serve a different purpose and are governed by distinct legal standards. The Court also considered the practical implications of allowing administrative lapses to halt criminal investigations, noting that it could frustrate justice and undermine the integrity of the legal process.

The Supreme Court weighed the legal principles more heavily (70%) than the factual aspects of the case (30%) in reaching its conclusion.

Logical Reasoning

Key Takeaways

• ✓ Administrative actions and criminal proceedings are distinct and operate on different legal footings.
• ✓ Violation of natural justice in administrative actions does not automatically invalidate related criminal proceedings.
• ✓ Banks and investigative agencies can proceed with criminal investigations even if administrative actions are set aside for procedural lapses.
• ✓ High Courts should not quash FIRs and criminal proceedings merely because related administrative actions have been invalidated.

Directions

The Supreme Court issued the following directions:

• ✓ The impugned judgments of the High Courts were set aside.
• ✓ Cases were classified into five categories, with specific outcomes for each.
• ✓ FIRs and subsequent criminal proceedings that had been quashed were restored.
• ✓ High Courts were requested to dispose of the remitted matters within four months.
• ✓ In cases where the CBI was not a party, it was directed to be impleaded.

Conclusion

The Supreme Court’s judgment in CBI vs. Surendra Patwa clarifies the critical distinction between administrative actions initiated by banks under the RBI’s Master Directions on Frauds and criminal proceedings undertaken by investigative agencies like the CBI. The Court emphasized that these actions operate on different legal footings, and the setting aside of an administrative order due to non-adherence to natural justice principles does not automatically nullify related criminal proceedings. This ruling ensures that criminal investigations can continue independently, preventing potential offenders from evading justice due to procedural lapses in administrative actions. The judgment provides essential guidance for High Courts, banks, and investigative agencies, reinforcing the integrity of both regulatory and criminal justice systems in India.