Fraud Classification by Bank Valid Where Forensic Audit Report Is Supplied, Detailed Reply Considered and Reasoned Order Passed: Punjab & Haryana High Court Upholds SBI Action Against Borrower’s Account

Case Name: Rakesh Nayyar v. State Bank of India and Others

Date of Judgment: 24 September 2026

Citation: CWP-20643-2026

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

Held: The Punjab and Haryana High Court held that classification of a borrower’s account as “fraud” is legally sustainable where the lender bank has complied with the requirements of audi alteram partem by supplying a comprehensive show-cause notice, furnishing the forensic audit report relied upon, permitting the borrower to submit a response, considering that response on the merits, and thereafter passing a reasoned order.

Relying upon the Supreme Court’s decision in State Bank of India & Ors. v. Rajesh Aggarwal & Ors., (2023) 6 SCC 1, the Court reiterated that the principles of natural justice must be read into the RBI Master Directions on fraud classification. Before an account is classified as fraud, the borrower must be informed of the allegations, supplied with the relevant audit material, granted a reasonable opportunity to explain the forensic findings, and the final decision must be supported by reasons.

The High Court, however, found that these safeguards had in fact been complied with in the present case. SBI had issued a detailed show-cause notice identifying various alleged fraud angles, including misappropriation of funds, manipulation of books through fictitious accounts, overstatement of assets and other irregularities, and had supplied the entire 157-page forensic audit report to the petitioner.

The Court further noted that the petitioner submitted a point-by-point reply, which was considered by the Review Committee. Significantly, one of the five allegations concerning multiple cash credit facilities was dropped after consideration of the petitioner’s explanation. According to the Court, this demonstrated that the Committee had not acted mechanically but had actually examined the objections raised before reaching its conclusion on the remaining allegations.

The Court therefore held that there was no violation of natural justice and no legal infirmity in SBI’s decision to classify the account as fraud.

Summary: The petitioner, Rakesh Nayyar, was a Director of Woolways India Limited, which had availed credit facilities from a consortium of banks including Standard Chartered Bank and State Bank of India. In 2018, proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 were initiated before the National Company Law Tribunal, New Delhi Bench. Following commencement of the Corporate Insolvency Resolution Process, the company’s management, assets and records came under the custody and control of the Interim Resolution Professional, who was subsequently appointed as liquidator.

SBI subsequently issued a show-cause notice dated 02.12.2025 proposing classification of the account and the petitioner’s name as fraud under the RBI guidelines. Five allegations were raised on the basis of a forensic audit report dated 25.03.2019. The petitioner responded by filing a reply dated 18.12.2025. Thereafter, the Fraud Identification Committee passed an order dated 21.02.2026, which was communicated on 11.03.2026, classifying the company’s loan account as fraud and deciding to report the company and its directors to the Reserve Bank of India.

The petitioner argued that he had not been given a meaningful opportunity of hearing because the company’s records had been in the custody of the insolvency professional/liquidator and he could not effectively answer complex financial allegations, including an alleged raw-material mismatch running into approximately ₹17.08 crore. He also relied upon the subsequent repayment plan/settlement and contended that proceeding with fraud classification despite the settlement and lack of effective access to records was arbitrary and contrary to natural justice.

SBI, on the other hand, argued that fraud classification under the RBI framework is an independent regulatory exercise and that completion of insolvency proceedings or a settlement does not erase or immunise past fraudulent conduct discovered through a forensic audit. The Bank maintained that the petitioner had been supplied with the relevant forensic audit material and had been given adequate opportunity to respond.

The High Court examined the law laid down in Rajesh Aggarwal, where the Supreme Court held that classification of an account as fraud has serious civil consequences and is akin, in certain respects, to blacklisting. Therefore, borrowers must be given notice, a copy of the forensic audit report, an opportunity to explain its conclusions, and the eventual fraud-classification decision must be reasoned.

Applying those principles, the High Court found that SBI had substantially followed the required procedure. The show-cause notice specifically identified the alleged irregularities, the forensic audit report had been supplied, and the petitioner had filed a detailed reply. The Review Committee considered that reply allegation by allegation and even dropped one charge after accepting the petitioner’s explanation. The Court regarded this as strong evidence that the objections had been meaningfully considered rather than mechanically rejected.

The Court also rejected the petitioner’s contention that he was prejudiced because relevant company records were with the NCLT/liquidator. It observed that there was nothing on record to show that the petitioner had specifically sought to produce or obtain particular records from the NCLT custody which he was prevented from accessing. On the material before it, the Court found that every contention raised by the petitioner had been dealt with by the Review Committee.

The High Court therefore concluded that the safeguards mandated by Rajesh Aggarwal had been complied with and that the Bank’s decision-making process did not suffer from breach of natural justice.

Decision: The writ petition was dismissed. The High Court held that SBI had adhered to the principle of audi alteram partem and had complied with the requirements laid down by the Supreme Court in State Bank of India v. Rajesh Aggarwal before classifying the account as fraud.