“Patwa Doctrine” – Decoupling Administrative ‘Fraud’ Designations from Criminal Process under Indian Banking Law

1. Introduction

Central Bureau of Investigation v. Surendra Patwa & Ors. (2025 INSC 572) is a landmark pronouncement of the Supreme Court of India which clarifies the inter-relationship between:
• Administrative measures adopted by banks under the Reserve Bank of India’s Master Directions on Frauds (01.07.2016); and
• Criminal investigations initiated by law-enforcement agencies (CBI / police) on the same factual matrix.

The appeals arose out of numerous High Court orders that simultaneously quashed (i) banks’ decisions classifying borrowers’ accounts as “fraudulent” and (ii) the FIRs and criminal proceedings that followed. Relying on SBI v. Rajesh Agarwal (2023) 6 SCC 1, the High Courts held that violation of audi alteram partem (no opportunity of hearing) in the administrative sphere contaminated the criminal side as well. The Supreme Court, led by Sundresh, J., reversed this approach, restored the FIRs, and issued a detailed roster for the pending matters.

Core Issue: Does invalidation of a bank’s administrative classification of an account as “fraud” (for breach of natural justice) automatically nullify the FIR and criminal investigation that rely on the same facts?

2. Summary of the Judgment

Administrative v. Criminal Spheres Distinct: An FIR merely sets the criminal law in motion and is independent of any administrative decision by a bank. Hence, setting aside the latter on natural-justice grounds does not ipso facto annul the former.
Natural Justice Not Required before FIR: Re-affirming Rajesh Agarwal, the Court held that no opportunity of hearing is necessary before lodging/ registering an FIR.
High Courts Exceeded Jurisdiction: Many FIRs were quashed even without any prayer, or without impleading CBI. Such wholesale quashing is impermissible.
Restorative Directions: The Court categorised 60-plus connected matters into five practical clusters, restoring FIRs, remitting writ petitions to High Courts, and protecting accused from coercive action for short windows where needed.
Prospect for Fresh Administrative Action: Banks/RBI may recommence administrative proceedings de novo with due notice and hearing; the prior quashing was only for procedural lapse, not on merits.

3. Analysis

3.1 Precedents Cited

a) State Bank of India v. Rajesh Agarwal (2023) 6 SCC 1

Found that borrowers must be heard before banks brand them fraudulent (para 98.6).
Equally clarified that such hearing is not required at the stage of filing an FIR (para 98.1).
High Courts relied on the first limb but ignored the second, leading to erroneous conflation.

b) Union of India v. W.N. Chadha 1993 Supp (4) SCC 260 and Anju Chaudhary v. State of U.P. (2013) 6 SCC 384

Confirm that CrPC does not envisage pre-FIR hearing; expediency would otherwise be defeated.

c) A.K. Kraipak (1969) 2 SCC 262, State Bank of Patiala v. S.K. Sharma (1996) 3 SCC 364, and Canara Bank v. Debasis Das (2003) 4 SCC 557

Canonise natural-justice principles; however, they apply primarily to decisions producing ‘civil consequences’, not to statutory police action at inception.

3.2 The Court’s Legal Reasoning

Conceptual Segregation: Administrative blacklisting (by banks) is governed by RBI’s Master Directions and attracts civil disabilities (e.g., loan embargo). Criminal proceedings, by contrast, emanate from the Indian Penal Code & CrPC and are enforced by investigative agencies. Overlap of factual substratum does not collapse legal boundaries.
Statutory Source & Competence: Banks act under RBI supervisory regime; CBI acts under DSPE Act/ CrPC. Distinct authorities, mandates and objectives demand distinct legal scrutiny.
Effect of Procedural Violation: Citing S.K. Sharma, the Court held that quashing for breach of natural justice results in a ‘voidable’ administrative order, but facts recorded therein can still be a legitimate information for a cognisable offence.
No “Fruit of the Poisonous Tree” Doctrine in Indian Criminal Law: Unlike some jurisdictions, India does not automatically exclude evidence or prosecution solely because prior administrative action was invalid.
Practical Administration of Justice: Bulk quashing without CBI’s presence prevented effective investigation and undermined public-interest prosecution. Remittal with structured interim protections balances individual rights with the State’s investigative imperative.

3.3 Likely Impact of the Judgment

High Courts’ Writ Practice: Courts must maintain the administrative-criminal demarcation; future challenges to “fraud” tagging cannot entail automatic FIR quash.
Banking Sector Compliance: Banks will be compelled to embed hearing mechanisms before fraud declaration, but can still fulfil mandatory FIR reporting without delay or fear of collateral quashing.
Investigative Continuity: CBI investigations in high-value bank frauds (often ₹100 crore+) get judicial reinforcement, insulating them from procedural foot-faults of banks.
Procedural Template: The categorical directions (Categories 1-5) supply a blueprint for managing mass banking-fraud litigations: restoration, remand, interim relief and party impleadment.
Doctrine of Severability Extended: The judgment enlarges severability principles to conjoint administrative–criminal fact situations, a guidance tool for other regulatory arenas (SEBI, IRDAI, etc.).

4. Complex Concepts Simplified

Master Directions on Frauds (RBI): A consolidated rulebook instructing banks on detecting, reporting and preventing frauds. Non-compliance can invite RBI penalties.
Fraud Classification: When an account is tagged as ‘fraudulent’, borrowers face civil disabilities (loan embargo, reputational damage) in addition to possible criminal complaints.
FIR (First Information Report): A document recorded under § 154 CrPC when police receive information of a cognisable offence. It triggers investigation; no judicial determination of guilt is involved.
Audi Alteram Partem: Latin for “hear the other side.” A cornerstone of natural justice requiring notice and opportunity to respond before a decision that affects rights is taken.
Quashing: Setting aside legal proceedings by High Court under Articles 226/227 (writ) or § 482 CrPC, typically to prevent abuse of process.
CBI Jurisdiction (DSPE Act): CBI can investigate offences against Central Government departments/ banks exceeding ₹3 crore (for banks), subject to State consent (unless ordered by court).

5. Conclusion

The Patwa judgment crystallises a pivotal doctrinal clarification: the invalidation of an administrative “fraud” label on procedural grounds does not vitiate or fetter ongoing criminal investigations into the same alleged wrongdoing. By disentangling the two domains, the Supreme Court has:

Secured investigative autonomy of law-enforcement agencies;
Preserved borrowers’ procedural rights in the banking regulatory sphere;
Provided a pragmatic roadmap for lower courts confronted with overlapping civil, regulatory and criminal disputes.

Going forward, litigants must tailor their challenges precisely—seeking relief against the specific decision-maker and decision under attack—and cannot expect a domino effect across distinct legal tracks. Regulators, banks and investigation agencies, on their part, are reminded to act within their respective statutory remits while respecting natural-justice norms wherever applicable.

— Commentary prepared by the Legal Analysis Unit, April 2025