Bombay High Court Quashes Bank's Fraud Classification of Borrower's Account

Court mandates compliance with principles of natural justice before declaring accounts as fraud

In a significant judgment that reinforces the principles of natural justice, the Bombay High Court has set aside the classification of a borrower's account as "fraud" by Bank of India due to non-compliance with the principle of audi alteram partem, which mandates an opportunity for representation before such a classification. The decision, delivered by Justices R.I. Chagla and Farhan P. Dubash, resolves the writ petition filed by Naresh Jagdishrai Goyal against the bank's decision, marking a crucial precedent in banking jurisprudence.

Naresh Jagdishrai Goyal's account was declared "fraud" by Bank of India without providing him an opportunity to contest the findings of a forensic audit report. The petitioner argued that the bank's actions were arbitrary and violated fundamental principles of natural justice. The court observed that the impugned Show Cause Notice dated July 1, 2025, which re-examined the petitioner's account previously classified as "fraud," failed to adhere to the Supreme Court's directives in the case of State Bank of India v. Rajesh Agarwal (2023), which stipulate the necessity of providing borrowers an opportunity to explain their stance before such classifications are made.

The court quashed the Show Cause Notice and classification, granting liberty to the bank to issue a fresh notice, provided it complies with the principles of natural justice, specifically the rule of audi alteram partem. The court's decision underlines the importance of due process in banking practices, ensuring that borrowers are not unjustly penalized without the opportunity to present their case.

In its order, the court emphasized that it has not expressed any opinion on the merits of the case itself, leaving all rights and contentions of the parties open. The ruling mandates that any future Show Cause Notice must be issued by a different committee within the bank, distinct from the one responsible for the original classification.

Dr. Chandrachud, representing the bank, assured the court that no action will be taken based on the earlier classification and the impugned notice. This statement was accepted by the court, ensuring immediate relief for the petitioner.

The judgment serves as a reminder to financial institutions of their obligations to uphold principles of fair hearing and procedural fairness, especially when dealing with serious allegations such as fraud. Legal experts view this ruling as a reinforcement of the judiciary's role in safeguarding individual rights against arbitrary administrative actions.

As the banking sector continues to navigate complex fraud detection processes, this decision highlights the critical balance between efficient financial oversight and the protection of borrower rights.

Bottom Line:

Natural justice and classification of accounts as "fraud" - Compliance with the principle of audi alteram partem is mandatory before classifying a borrower's account as "fraud". 

Statutory provision(s):  

• - Principles of Natural Justice  
• - Rule of Audi Alteram Partem  
• - Master Directions on Frauds - Clauses 8.9.4 and 8.9.5

Naresh Jagdishrai Goyal v. Bank of India, (Bombay)(DB) : Law Finder Doc Id # 2786350