Failure to serve show cause notice vitiates classification of an account as fraud.

The Petitioner, a former key managerial personnel of M/s Reliance Commercial Finance Limited (RCFL), challenged the Master Directions on Fraud Risk Management issued by the RBI on 15th July 2024

He further challenged a Show Cause Notice (SCN) dated 29th October 2025 and a subsequent order dated 18th February 2026 issued by Punjab and Sind Bank (Respondent No. 2), which classified his accounts as "Fraud" involving a sum of Rs. 16,543.49 Crores

The Petitioner resigned from RCFL in December 2018

Several banks had previously classified RCFL's accounts as fraud under 2016 directions, leading to litigation and the eventual Supreme Court ruling in SBI v. Rajesh Agarwal

The Petitioner contended that the SCN was sent to an incorrect address and was never served upon him

The impugned order itself recorded that the SCN sent to the Petitioner was "returned back to the Bank with a remark that no such person reside"

The court primarily relied on the principles of natural justice (audi alteram partem) as interpreted by the Supreme Court in State Bank of India v. Rajesh Agarwal (2023) 6 SCC 1, which mandates that borrowers must be heard before being classified as fraudulent

The court also considered the RBI Master Directions on Fraud Risk Management (15th July 2024) issued under Section 35A of the Banking Regulation Act, 1949

Additionally, the court noted the precedent in IDBI Bank Ltd. v. Gaurav Goel (LPA 536/2024) regarding the requirement of a personal hearing

The Court observed that the Respondent Bank’s own records in the impugned order explicitly stated the SCN was returned unserved

Consequently, the Petitioner was denied a meaningful opportunity to file a reply, which is a mandatory procedural safeguard under the Rajesh Agarwal framework

While the Court noted that individuals have a duty to update their addresses with banks after loan disbursements, the admitted lack of service rendered the subsequent fraud classification order procedurally flawed

Regarding the Petitioner's request for a personal hearing, the Court noted conflicting views between various High Courts but recorded that Respondent No. 2 eventually consented to provide one

The Court determined that justice would be served by setting aside the order and restarting the adjudication process from the stage of service of the SCN

The Court directed the Bank to serve the SCN and relevant documents to the Petitioner via email and mobile

The Petitioner was granted two weeks to file a reply

The Court held that after the reply is filed, the Bank must grant the Petitioner a personal hearing before passing a fresh order in accordance with the 2024 Master Directions

The Petitioner was also directed to update his contact details and address with the Bank