Court Upholds Principles of Natural Justice in Banking Fraud Allegations; Sets Aside Show Cause Notice and Fraud Declaration
News Report: In a landmark judgment, the Calcutta High Court has quashed Punjab National Bank's (PNB) fraud classification of Visa Power Ltd., emphasizing the importance of adhering to principles of natural justice in banking procedures. The judgment was delivered by Justice Krishna Rao, following a challenge by Vishambhar Saran and others against PNB’s actions of declaring their accounts as fraud.
The controversy began when PNB issued a show cause notice to Visa Power Ltd., calling for explanations on alleged fraudulent transactions based on a Transaction Audit Report by Deloitte. However, this report had previously been deemed unsubstantial by both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), which rejected claims of fraudulent, preferential, and undervalued transactions. The bank proceeded to declare the account as fraud without independent material evidence, relying heavily on a Joint Lenders Meeting where 60% of lenders supported the fraud classification.
Justice Rao stressed that the bank's reliance on the Transaction Audit Report, which had been discredited by the NCLT and NCLAT, violated the principles of natural justice. The court pointed out that Visa Power Ltd. was not given a fair opportunity to respond to the allegations or participate in the Joint Lenders Meeting. Furthermore, the court highlighted that the bank failed to provide adequate notice or allow for representation before classifying the account as fraud.
The judgment also addressed the procedural lapses in PNB’s actions, underscoring the necessity for banks to follow Reserve Bank of India (RBI) Master Directions and Supreme Court judgments to ensure fairness and transparency. The court reiterated that banks must serve notice, provide audit reports, and allow borrowers a chance to counter allegations before a fraud classification.
Legal experts have hailed the judgment as a reinforcement of due process in banking fraud cases, ensuring that borrowers are not unfairly penalized without substantial evidence and proper opportunity to defend themselves.
The Calcutta High Court’s decision sets a precedent for financial institutions to adhere strictly to procedural norms and natural justice principles when dealing with fraud allegations, thereby protecting borrowers from arbitrary and unilateral decisions.
Bottom line:-
Bank cannot rely solely on a Transaction Audit Report deemed non-substantive by National Company Law Tribunal and Appellate Tribunal for declaring an account as fraud. Principles of natural justice must be adhered to, including serving notice, providing audit reports, and offering an opportunity to the borrower to respond before classifying an account as fraud.
Statutory provision(s): Indian Penal Code, 1860, Prevention of Corruption Act, 1988, Reserve Bank of India Master Directions on Fraud Risk Management, Civil Procedure Code, 1908
Vishambhar Saran v. Punjab National Bank, (Calcutta) : Law Finder Doc id # 2894603
