Gujarat High Court observed that the bank's failure to provide petitioners with forensic audit reports violates natural justice, nullifying their decision to declare the borrower company's account fraudulent.
The Single-judge bench of Justice Sangeeta K. Vishen of Gujarat High Court was hearing a petition filed against the Reserve Bank of India and held that the bank's failure to provide petitioners with forensic audit reports violates natural justice especially the rule of audi alteram partem, nullifying their decision to declare the borrower company's account fraudulent.
The petitioners, who were promoters, suspended directors, and shareholders of M/s Syntex Industries Limited, contested the decision of respondent banks made during a Joint Lenders Meeting on September 29, 2020, declaring the company's account as fraudulent. The company entered the Corporate Insolvency Resolution Process (CIRP) on April 6, 2021, after learning about the South Indian Bank's actions to notify fraud in its loan account around July 4, 2020.
The petitioners argued that they were not provided with copies of the forensic audit reports dated August 11, 2020, and September 18, 2020, which formed the basis of declaring the account as fraudulent. They contended that principles of natural justice, especially the rule of audi alteram partem, were violated, citing a recent Supreme Court judgment.
In response, the respondent lender banks defended their actions, stating that the petitioners were present in various consortium meetings where the forensic audit reports were discussed. They argued that opportunities were provided for discussion, and the petitioners were aware of the agenda items, including the presentation on the forensic audit report.
The Asset Reconstruction Company, respondent no. 20, clarified its role, highlighting its agreement with the company in the CIRP to extinguish the remaining financial debt, thus indicating its disconnection from the lender-borrower relationship.
The Reserve Bank of India (RBI) reiterated its limited role and emphasized that the Master Directions of 2021 would not apply to transactions governed by the Insolvency and Bankruptcy Code of 2016.
After hearing the arguments, the High Court ruled in favour of the petitioners, noting the failure of the respondent banks to adhere to the principles of natural justice. It quashed the decision to declare the company's account as fraudulent and instructed the banks to furnish copies of the forensic audit reports to the petitioners. The banks were directed to provide a reasonable opportunity for the petitioners to submit representations before concluding the proceedings, in line with the Supreme Court's guidelines in the case of State Bank of India and Others v. Rajesh Agarwal and Others, REED 2023 SC 03002. The court refrained from commenting on any potential criminal proceedings.
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