Court’s Decision
The Delhi High Court allowed the review petition and held that the earlier judgment dated 25.10.2024, declaring the petitioner’s account as ‘fraud’ by the Bank of Baroda, was liable to be reviewed. The Court corrected typographical errors and, more importantly, rendered detailed findings on each ground relied upon by the respondent bank for the fraud declaration. It held that:
“The same grounds or imputations cannot form the foundation for declaring a person’s or entity’s account as ‘fraud’, which requires a greater degree of proof to be established.”
The Court reaffirmed the earlier quashing of the fraud classification and declared the Show Cause Notice dated 20.06.2019 and all consequential actions as illegal, arbitrary, and unsustainable in law.
Facts
- The petitioner is the Chairman of Hindustan Power Group Pvt. Ltd., which supplies electricity to three states.
- In February 2023, he discovered that his name was included in the Central Fraud Registry (CFR) at the instance of the Bank of Baroda concerning the account of Moser Baer Solar Ltd. (MBSL), where he had earlier served as Executive Director.
- The petitioner resigned from MBSL effective 30.04.2012, which was formally recorded and communicated to the bank.
- MBSL had entered into a Corporate Debt Restructuring (CDR) scheme in 2012, which was approved by the lenders, including the respondent.
- In 2020, the petitioner was served with show cause notices (SCNs) alleging wilful default and fraud, which he challenged in separate writ petitions.
- He succeeded in challenging the ‘wilful defaulter’ classification in two previous writ petitions—W.P.(C) 4128/2023 and W.P.(C) 9491/2023.
Issues
- Whether the grounds relied upon by the respondent bank to classify the petitioner’s account as ‘fraud’ were sustainable.
- Whether these grounds could be re-used after being rejected for the ‘wilful defaulter’ classification.
- Whether the action of the respondent violated RBI’s Master Circulars and procedural requirements.
Petitioner’s Arguments
- All allegations were based on transactions or investments known to the lender banks for over a decade.
- Forensic Audit Reports (FAR) did not establish diversion of funds or fraud and were conducted after the petitioner’s resignation.
- Investments in subsidiaries were made from internal accruals or private equity, not from bank loans.
- The same grounds already held untenable in prior cases cannot be reused to declare ‘fraud’.
- Lease deposits and related party transactions were genuine, disclosed, and acknowledged during the CDR process.
- The petitioner had been discharged of related criminal charges by the CBI court.
Respondent’s Arguments
- Forensic audit revealed irregularities in MBSL’s financial transactions, including investments in group entities and lease arrangements with MBIL.
- The audit findings led to classification of MBSL and its directors as ‘fraud’ entities.
- SCNs were served in accordance with RBI circulars and based on material discovered post-facto.
Analysis of the Law
- Declaration of ‘fraud’ requires a higher degree of criminality and proof than that for ‘wilful default’.
- Circulars 8.9.4 and 8.9.5 of RBI mandate forensic audits and objective findings before fraud classification.
- The RBI Master Circular on Wilful Defaulters emphasizes the necessity of a link between borrowed funds and alleged misuse, which was absent here.
Precedent Analysis
- SBI v. Rajesh Aggarwal (2023) 6 SCC 1: Clarified procedural safeguards in classifying wilful defaulters.
- SBI v. Jah Developers (2019) 6 SCC 787: Cited with affirmation, holding banks must follow due process.
- Radha Raman Samanta v. Bank of India (2004) 1 SCC 605: High Court can infer from undisputed documents to determine legal status.
- W.P.(C) 4128/2023 & W.P.(C) 9491/2023: Earlier Delhi HC decisions quashing similar classifications on identical grounds.
Court’s Reasoning
- The bank was aware of the transactions and investments at all relevant times and did not object until a decade later.
- Forensic Audit did not trace the investments to borrowed funds, and CDR records showed lender banks’ acceptance.
- Allegations such as lease security deposits and inter-company transfers were already scrutinized and found to be strategic business decisions.
- The Classification Committee and Review Committee had themselves dropped certain allegations earlier.
- The respondent failed to produce any additional material beyond what was already rejected in the ‘wilful defaulter’ cases.
Conclusion
The Court held:
“Once the very substratum of the imputations is held to be unsustainable for lesser civil consequences… the same grounds or imputations cannot form the foundation for declaring a person’s or entity’s account as ‘fraud’, which requires a greater degree of proof.”
Thus, the declaration of the petitioner’s account as ‘fraud’ was set aside. The Show Cause Notice dated 20.06.2019 and all consequential actions were quashed.
Implications
- Reinforces the requirement for banks to adhere strictly to RBI circulars and legal standards before branding accounts as ‘fraud’.
- Prevents re-litigation or re-characterization of rejected allegations under different labels without fresh evidence.
- Strengthens procedural protections for individuals and entities wrongly accused of financial misconduct.
- May lead to cautious and legally rigorous approach by banks in future fraud and default classifications.