Reliance on Discredited Audit Reports and Undisclosed Joint Lender Meetings Violates Principles of Natural Justice

The petitioners were directors of M/s Visa Power Limited, which availed loans from a consortium led by Punjab National Bank (PNB).

Following coal block de-allocation by the Supreme Court in 2014, the project stalled, and the account was declared an NPA in 2016.

Liquidation began in 2018, during which a Transaction Audit Report (TAR) by M/s Deloitte Touche Tohmatsu LLP was prepared.

The NCLT and NCLAT subsequently held that the TAR did not prove fraudulent or preferential transactions.

Consequently, PNB withdrew previous Wilful Defaulter proceedings against the petitioners in November 2022.

However, on 25th October 2023, PNB issued a fresh show-cause notice to classify the petitioners as 'fraud' based on the same TAR.

On 9th August 2024, the bank informed the petitioners it had reported the account as fraud to the RBI on 16th July 2024, citing that 60% of the consortium lenders agreed with the classification.

1. Whether the respondent bank’s action of declaring the petitioners' account as fraud based on a previously discredited audit report was legally sustainable.

2. Whether the bank violated the principles of natural justice by relying on Joint Lenders Meeting (JLM) proceedings and 60% lender consensus without prior disclosure to the petitioners.

The court primarily applied the principles of Audi Alteram Partem as interpreted by the Supreme Court in State Bank of India & Ors. v. Rajesh Agarwal & Ors. (2023), which mandates that borrowers must be served notice, provided the forensic audit report, and given an opportunity to represent before an account is classified as fraud.

It further referenced the RBI Master Directions on Fraud Risk Management (dated 15th July 2024), which superseded the 2016 Directions while maintaining the necessity of natural justice.

The court also noted the doctrine of estoppel regarding the bank's prior withdrawal of proceedings based on the same evidentiary material.

The court reasoned that the respondent bank could not unilaterally declare the account as fraud based on a Transaction Audit Report (TAR) that had already been judicially discredited by the NCLT and NCLAT.

The bank itself had acknowledged this finality when it dropped Wilful Defaulter proceedings in 2022.

Furthermore, the bank’s reliance on the Joint Lenders Meeting (JLM) and the 60% consensus among lenders in its final order constituted a procedural lapse; these facts were not mentioned in the show-cause notice, denying the petitioners an opportunity to challenge the basis of the decision.

The court found that the bank failed to record independent findings or reasons, essentially violating the mandatory "audi alteram partem" requirement established in Rajesh Agarwal.

The court quashed and set aside the classification of the petitioners' account as fraud; however, it granted the respondent bank liberty to initiate fresh proceedings in strict accordance with law, the latest RBI Master Circulars, and the procedural safeguards mandated by the Supreme Court.