Supreme Court bars banks from listing advocates in IBA Caution List for negligence

A bench of Justices P.S. Narasimha and Alok Aradhe held negligence alone cannot place an advocate on the IBA fraud Caution List, restoring writ scrutiny under Article 226.

The Supreme Court has held that an advocate cannot be placed on the Indian Banks’ Association (IBA) Caution List for alleged negligence in a legal opinion, because that list is meant only for fraud and serious misconduct affecting the banking system. A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe allowed the appeal of advocate Ajay Vijh and set aside an Allahabad High Court order that had refused to hear his writ petition. The Court found that placing his name in a list titled “Third Party Entities Involved in Fraud” on account of negligence was “impermissible and without jurisdiction.” It ruled that questions of professional negligence or misconduct of advocates fall exclusively within the disciplinary domain of the Bar Councils under the Advocates Act, 1961, and directed removal of the appellant’s name with immediate effect.

How a 2015 legal opinion reached the Supreme Court

Ajay Vijh, enrolled as an advocate in 1998, served as panel counsel for Canara Bank. He claims empanelment with the Bank from September 2010. The dispute began with a communication dated 27 July 2018 from the regional manager, alleging that his legal opinion of 8 August 2015 on immovable property offered as security for a Rs. 2 crore credit facility was erroneous.

The Bank said the land, opined to be wholly owned by the guarantor M/s Pushpanjali Buildwell Private Limited, had partly been sold three years earlier under sale deeds dated 31 October 2012, and the opinion missed this. Vijh replied on 17 August 2018 that his opinion rested on a search certificate from the Sub-Registrar, Hapur, and that the alleged sale transactions were not discernible from records available at the time.

By communication dated 31 January 2019 the Bank removed him from its panel on the ground of negligence in verification of title. It then forwarded his name to the IBA, and with effect from 5 February 2020 his name entered the Caution List with the remark that he had given a wrong legal opinion and been negligent, exposing the Bank to loss and financial risk. Vijh says this happened without notice or hearing, and that he learnt of it only later, after it affected his empanelment with other banks.

He moved the High Court of Judicature at Allahabad. By its order dated 20 November 2023 in Civil Misc. Writ Petition No. 12074 of 2023, the High Court dismissed the petition without going into merits, holding that the IBA is not “State” under Article 12 and that a writ under Article 226 was not maintainable.

Why the writ petition was maintainable

The Court said the High Court took a narrow view of Article 226. The appellant’s grievance was not merely de-empanelment, which may be contractual, but the inclusion of his name in the Caution List with remarks casting aspersions on his competence and integrity, affecting his right to practise under Article 19(1)(g).

Article 226, the Court noted, is not confined to authorities under Article 12. The focus has shifted from who the respondent is to the nature of the function performed and the effect on legal rights. Relying on Andi Mukta Sadguru, Zee Telefilms Ltd. v. Union of India and S. Shobha v. Muthoot Finance Ltd., the Court held that a body discharging a public function is amenable to writ jurisdiction where a public law element exists.

The bench distinguished the Bombay High Court decision in Kishor S. Bhat v. Indian Banks’ Association, on which the High Court had relied, as a purely private service dispute. Here the challenge concerned a sector-wide Caution List issued under RBI guidelines. Several High Courts had entertained similar petitions. The Court held the writ petition maintainable.

Caution List is for fraud, not errors of judgment

The Court examined the RBI framework. Under Section 35-A of the Banking Regulation Act, 1949, the RBI issued a circular dated 16 March 2009 on circulation of names of third parties involved in frauds, followed by the 2016 Fraud Classification Directions and the 2024 Master Directions on Fraud Risk Management. The Court read these as confined to fraud and to professionals who facilitated fraudulent transactions.

The present case involved no allegation of fraud, collusion or criminal misconduct, only negligence in title verification. Fraud, the Court said, imports mens rea and deliberate design; an erroneous opinion absent dishonest intent cannot be elevated to fraud. A bank may lawfully discontinue an advocate’s engagement, since the relationship is contractual and rests on trust. But circulating a declaration to all banks about an advocate’s competence goes beyond that power.

The RBI’s power under Section 35-A, the Court held, does not extend to declaring an advocate professionally negligent through a list meant to identify fraudulent entities. The inclusion was therefore unsustainable.

Only Bar Councils can judge professional conduct

The Court held that allegations of professional negligence or misconduct of an advocate fall within the exclusive jurisdiction of the disciplinary authorities under the Advocates Act, 1961. It described the legal profession as sui generis, citing Bar of Indian Lawyers v. D.K. Gandhi PS National Institute of Communicable Diseases.

Sections 35 and 36 vest disciplinary jurisdiction in the State Bar Councils and the Bar Council of India, with appeals under Sections 37 and 38. Relying on Supreme Court Bar Association v. Union of India and Bar Council of Maharashtra v. M.V. Dabholkar, the Court said the power to punish an advocate for professional misconduct vests exclusively in these bodies. Permitting banks to bypass this process and brand an advocate incompetent through a Caution List was “illegal, unsustainable and impermissible.”

If the Bank believes the appellant was negligent, its remedy is to place material before the competent State Bar Council. The action of including his name and commenting on his competency was set aside.

Directions on discipline audit and legal education

The Court clarified that its ruling does not undermine accountability of the Bar. It directed the Bar Council of India to constitute a committee and undertake a performance audit of the disciplinary mechanisms administered by it and the State Bar Councils under the Advocates Act, 1961, and to file an affidavit on action proposed or taken. It drew on Yash Developers v. Harihar Krupa Co-operative Housing Society Ltd. on the need to assess whether a statutory framework achieves its purpose.

The Court also directed the Bar Council of India to institutionalise Continuing Legal Education and to constitute a team to consider establishing a National Legal Academy for lawyers, on the model of the National Judicial Academy for judges.

Order

The Court allowed the appeal and set aside the Allahabad High Court order. It declared that inclusion of the appellant’s name in the Caution List is impermissible and without jurisdiction, and directed the respondents to remove his name with immediate effect. The appeal was listed for further directions on 31 August 2026, with the Bar Council of India to file an affidavit on Continuing Legal Education and the National Legal Academy a week before listing.