Bombay High Court: While deciding whether a company’s account can be classified as “fraudulent” and the Directors’ names can be entered in the Central Fraud Registry without giving them any opportunity to show cause, the Division Bench of Suman Shyam and Shyam C. Chandak, JJ., held that in view of SBI v. Rajesh Agarwal, (2023) 6 SCC 1, the principles of audi alteram partem must necessarily be complied with before making a fraud declaration and entering Directors’ names in Central Fraud Registry. Consequently, the Court interdicted the impugned classification and granted liberty to Respondent 2 (Bank) to proceed afresh after issuing proper show-cause notices.
Background
A writ petition was filed by three former Directors of a company that had gone into liquidation, and whose corporate insolvency resolution process (CIRP) stood finalised, alleging that the Bank had classified the relevant account as fraud and included their names in the Central Fraud Registry without providing them any opportunity to show cause.
The petitioners’ counsel argued that after the Supreme Court’s ruling in Rajesh Agarwal (supra), the law is clear that no fraud declaration is permissible without serving prior show-cause notice and giving an opportunity of being heard to the affected party. He submitted that several fraud classifications had been interdicted by the courts based on the decision, and the present case warranted a similar relief. However, the Bank’s counsel contended that the petitioners did not take any action since 2018, when the process started, and therefore could not be permitted to take advantage of Rajesh Agarwal (supra) at this stage.
Analysis and Decision
The Court noted that it was neither concerned with the recovery of any money due and payable by the petitioners nor with the intricacies of the CIRP. The Court observed that the only question for determination was whether the account could have been classified as “fraudulent” and the Directors’ names be entered in the Central Fraud Registry without giving them an opportunity to show cause.
The Court referred to Rajesh Agarwal (supra) and highlighted that the principles of audi alteram partem must be complied with before a fraud declaration is made. The Court agreed with the petitioners’ submission that the impugned classification deserved to be set aside and observed that banks are required to issue prior notice and provide a hearing to affected parties before proceeding with fraud classification.
Accordingly, the Court interdicted the classification of fraud and the consequential incorporation of the petitioners’ names in the Central Fraud Registry. At the same time, the Bank was granted the liberty to proceed afresh, with such proceedings to be initiated within 6 months, by serving prior show-cause notices upon each petitioner and affording them proper opportunity of being heard.
[Nayan Thakarshi Shah v. RBI, Writ Petition No. 2517 of 2024, decided on 16-3-2026]
Advocates who appeared in this case :
For the Petitioners: Pranjit Bhattacharya with Sejal Joshi, Avdhoot Prabhu i/b Lex Services.
For the Respondents: Rathina Maravarman with Asma Batatawala, Advocates.