Banks must provide a hearing and pass a reasoned order before classifying an account as fraudulent.

The petitioner was a registered valuer and had been engaged by Axis Bank as a service provider for valuation of non-agricultural properties under an agreement dated 30 May 2019, renewed in 2022.

Axis Bank terminated his engagement on 2 November 2023, alleging negligence and deficiency of service.

His savings bank account maintained with Axis Bank’s Dhubri Branch was thereafter made non-functional/frozen. Despite representations dated 1 May 2024, 11 June 2024 and 31 August 2024, the account was not restored.

The Bank informed him on 6 September 2024 that he should approach its Financial Crime Intelligence and Loan Centre, where he learned that a fraud report had been submitted to the Reserve Bank of India and registered as Fraud Case No. UTIB2402-10276.

The petitioner challenged the fraud report and freezing of his account, but expressly did not press the challenge to his termination in the writ proceedings.

1. Whether Axis Bank could classify/report the petitioner’s conduct as fraud to the Reserve Bank of India without issuing a show-cause notice and granting him an opportunity of hearing, particularly when such reporting entailed serious civil and commercial consequences.

2. Whether Axis Bank could unilaterally freeze the petitioner’s savings bank account without an order of a court or direction of a competent statutory authority.

3. Whether the fraud report and account freezing were liable to be quashed or interfered with, while preserving the Bank’s ability to initiate fresh proceedings in accordance with the RBI’s Master Circular dated 15 July 2024.

Clause 3.2.6 of the RBI Master Circular dated 1 July 2016 required a Flash Report to be submitted within one week where fraud of ₹50 million or above came to the Bank’s notice.

It applied the Supreme Court’s decision in State Bank of India v. Rajesh Agarwal, (2023) 6 SCC 1, particularly the holding that classification of an account as fraudulent has serious civil consequences and that the principles of audi alteram partem must be read into the RBI fraud directions; the affected person must receive notice, an opportunity to explain the forensic audit findings, and a reasoned decision before classification as fraud.

The RBI Master Circular dated 15 July 2024, which applies to persons and entities against whom fraud allegations are examined, requires a show-cause notice providing at least 21 days’ opportunity and a reasoned order.

A bank cannot unilaterally freeze a customer’s account without intervention of a court or an order of a competent authority.

Although the 2016 RBI Circular required prompt reporting through a Flash Report, the Court held that the fraud classification/reporting had consequences akin to blacklisting and therefore attracted constitutional requirements of fairness under Articles 14 and 21.

Axis Bank had made serious allegations against the petitioner and relied on an alleged confession, but the record did not show that he had been issued a show-cause notice or given an opportunity to respond before the fraud report was submitted.

Applying State Bank of India v. Rajesh Agarwal, the Court concluded that the absence of prior notice and hearing vitiated the initiation of the fraud case.

Independently, the Bank’s freezing of the savings account was held impermissible because it had been undertaken unilaterally, without a court order or direction from an empowered authority.

The Court clarified that quashing the report would not prevent the Bank from commencing fresh proceedings under the 15 July 2024 RBI framework.

The RBI and Axis Bank respondents were directed, jointly and severally, to remove the fraud report from the RBI’s website.

Axis Bank was directed to forthwith defreeze the petitioner’s savings bank account bearing No. 9200100534763571.

The Court permitted the Bank to initiate fresh fraud proceedings by issuing a show-cause notice under the RBI Master Circular dated 15 July 2024 and passing a reasoned order after hearing the petitioner.

The defreezing direction was made subject to any subsequent order of a competent court or authority, and the petitioner was granted liberty to challenge the termination notice dated 2 November 2023 before the competent civil court.