Banks Must Supply Forensic Audit Report Before Declaring Borrower a Fraud: Punjab & Haryana High Court Reaffirms Natural Justice

Case Name: M/s Surya Agro Foods & Others v. Reserve Bank of India & Another

Date of Judgment: 08 July 2026

Citation: CWP-15511-2026

Bench: Hon’ble Mr. Justice Jasgurpreet Singh Puri & Hon’ble Mr. Justice Sanjiv Berry

Held: The Punjab & Haryana High Court held that a borrower cannot be declared a fraud by a bank without first supplying the Forensic Audit Report and other material relied upon, affording a reasonable opportunity to submit a response, and granting a hearing in compliance with the principles of natural justice. The Court reiterated that the RBI’s Master Directions on fraud classification must be read in light of the Supreme Court’s decision in State Bank of India v. Rajesh Agarwal, making compliance with audi alteram partem mandatory before classifying a borrower’s account as fraud.

Summary: The petitioners challenged the show cause notice dated 15 May 2025 and the order dated 18 February 2026 whereby their loan account was classified as fraud by the respondent bank. They contended that the bank failed to furnish the Forensic Audit Report and other documents relied upon in the show cause notice and proceeded to declare the account fraudulent without granting them any effective opportunity of hearing. The petitioners argued that the entire exercise violated the RBI’s circular dated 15 July 2024 as well as the principles of natural justice recognised by the Supreme Court in State Bank of India v. Rajesh Agarwal.

During the proceedings, the respondent bank candidly admitted that the Forensic Audit Report had not been supplied to the petitioners before issuance of the impugned order. The principal defence raised by the bank was that it had experienced difficulty in serving certain petitioners because their addresses were unavailable, following which the petitioners furnished their updated contact particulars before the Court.

Relying upon the Supreme Court’s judgment in State Bank of India v. Rajesh Agarwal and an earlier decision of the Punjab & Haryana High Court in M/s Akshat Agro Foods v. Reserve Bank of India, the Court reiterated that before classifying a borrower’s account as fraud, the lender must provide the borrower with the Forensic Audit Report, all relevant documents relied upon, sufficient opportunity to submit objections, and a personal hearing. The Court observed that these safeguards are an integral part of the rule of audi alteram partem and cannot be bypassed by financial institutions.

Since the respondent bank admittedly failed to supply the audit report and denied the petitioners an opportunity of hearing before declaring the account fraudulent, the Court held that the impugned fraud classification order was legally unsustainable. However, recognising the bank’s statutory powers, the Court granted liberty to recommence the proceedings after supplying all relevant documents and strictly following the procedure mandated by the Supreme Court.

Decision: The Punjab & Haryana High Court quashed the order declaring the petitioners’ loan account as fraud, while granting liberty to the respondent bank to initiate fresh proceedings in accordance with law after supplying the Forensic Audit Report and all relied-upon documents, considering the petitioners’ response, and providing an opportunity of hearing in terms of State Bank of India v. Rajesh Agarwal.