IMPORTANT POINT
The classification of borrowers as fraud must adhere to principles of natural justice, requiring a fair hearing and proper procedural compliance as mandated by law.

JUDGMENT :

The first petitioner is a firm and the petitioners 2 to 7 are its partners. The 1st petitioner is one of the units of M/s.Tip Top Furniture Group. The Group manufactures, trades, imports, and exports wooden and other allied furniture. The six units of the Group had availed financial assistance from the HDFC Bank, which was taken over by the 2nd respondent bank (‘Bank’, in short) in 2015. Since the petitioners defaulted in repaying some of the loans, the Bank initiated recovery proceedings, which are pending consideration before the Debt Recovery Tribunal - 1, Ernakulam. The Bank had also initiated proceedings for the liquidation of one of the Units of the Company under the Insolvency and Bankruptcy Code , 2016. The National Company Law Board, Kochi, had ordered the liquidation of the company, and the official liquidator conducted the sale of the company's assets in a public auction. The Group had submitted several one-time settlement proposals to the Bank, but they were all rejected. Surprisingly, the 1st petitioner was served with Ext.P5 show cause notice by the Bank stating that their competent authority had examined the utilisation of credit facilities by the petitioners and found that they had committed the acts of fraud in terms of Ext.P6 RBI Master Directions of Frauds issued by the Reserve Bank of India (RBI) ? the 1 ^st respondent. The main allegation in the show cause notice is that the petitioners had not conducted any Forensic Audit/Transaction Audit of the Group. Even though the names of petitioners 2 to 7 are mentioned in the show cause notice, no notice was served on them. The 1st petitioner had submitted Ext.P7 reply notice specifically requesting the Bank to provide the details of the audit report of the competent authority. Thereafter, nothing was heard from the Bank. While matters stood so, Exhibit.P6 Master Directions was superseded by Ext.P9 Master Directions of Frauds. Shockingly, the petitioners were served with Ext.P8 order passed by the 3rd respondent classifying the petitioners as fraud in terms of Ext.P.9 Master Directions. It is stated in Exhibit.P8 order that the Bank would be taking a further course of action to report the names of the petitioners as fraud to the RBI. Exhibit.P8 order has been passed, ignoring the valid contentions put forth by the petitioners. Moreover, the petitioners were denied an opportunity of being heard. The actions of the respondents are illegal, unjust and arbitrary.

2. The respondents 2 and 3 have filed a counter affidavit contending that the Group had availed various financial facilities from the Bank. The borrowers had committed default in repaying the loan, resulting in the loan accounts being classified as Non- Performing Assets. Further, O.A 148/2020 was filed to recover an amount of Rs.53,19,81,574.94 as on 01.02.2020. During the pendency of the O.A., the private limited company, Tip Top Furniture Pvt. Ltd., went into liquidation. The 1st petitioner approached the Bank for a one-time settlement. To consider the same, the Bank appointed M/s. T.G.Sukumaran & Co., Chartered Accountants, to conduct the forensic audit of the accounts of the Group, including that of the 1st petitioner, for the period from April 2021 to October 2023. In the forensic audit report, it was revealed that the petitioners had (i) overstated/understated their assets/liabilities and profits in financial statements, (ii) drawn from cash credit account by submitting wrongful stock statements, (iii) disposed of/removed assets hypothecated without knowledge of the bank, (iv) non-routed purchase/sales transactions in Bank CC account, (v) indulged in large cash transactions in receipts/payments, (vi) diverted funds etc. In the said circumstances, Ext.P5 show cause notice was issued to the petitioners to submit their response on why they should not be classified as fraud. In response to the same, Ext.P7 reply was issued by the 1 ^st petitioner,