The classification of a loan account as fraudulent by a bank does not require an independent committee if the bank follows its internal policies and guidelines as per RBI regulations.

ORDER :

This Writ Petition is filed to call for the records pertaining to the communication dated 17.02.2025 issued by the respondent and to quash the same.

2. Heard M/s.K.R.Ananda Gomathy, the learned counsel appearing on behalf of the petitioners and Mr.Shivakumar, the learned counsel appearing on behalf of the respondent Bank.

3. The learned counsel for the petitioners taking this Court through the show cause notice would contend that in this case the allegation is made only because a sister concern was permitted to use the same premises. The same does not in any manner would amount to fraud. When the show cause notice was received, a legal notice was issued seeking for particulars including whether any special audit that is done. Without furnishing the said particulars and grant of proper opportunity to the petitioners straight away the account has been declared as fraudulent, aggrieved by which, the petitioners are before this Court. The learned counsel would submit that firstly, as per the Clause 2.1.3 of the circular belonging to the Reserve Bank of India dated 15.07.2024 that governs the issue, a Committee should have been constituted with at least two independent Directors.

4. A perusal of the impugned order would reveal that there are no such independent Directors involved in the entire exercise. Secondly, the learned counsel would submit that as per Chapter IV Clause 4, the Credit Facility/Loan Account classified as Red-flagged Account is to be audited either by using an external audit or an internal audit as per the Board approved policy. Inspite of a specific stand taken in the legal notice the respondents have not mentioned about any external audit or a special internal audit that is being done.

5. As a matter of fact, even the impugned order does not speak of any internal or external audit and it is passed merely on their presumption and assumptions. A mere utilization of the premises of the petitioner by yet another sister concern by itself would not amount to fraud and that is why the bank, without even undertaking any proper audit, had issued the order. As a matter of fact, even on the earlier occasion with reference to the classifying the account as a willful defaulter, the bank indulged in exercises and published the photographs and one of the partners also passed away unable to bear the pressure. Therefore, in this case, the action of the bank is unfair. Out of the Rs.32 Crores loan that is availed, already Rs.18 Crores have been repaid. Therefore, this Court should interfere in the impugned order.

6. Per Contra, Mr.Shivakumar, the learned counsel appearing on behalf of the Respondent bank would submit that as far as the earlier round relating to willful default is concerned, the action was challenged by way of WP.No.31299 of 2023 and only after the Court ordered notice and no interim order was granted, the publication was made and further proceedings were undertaken. As as far as the present exercise of power is concerned, the learned counsel would submit that when the entire facility belongs to the petitioner herein and the machineries were all hypothecated to the bank, instead of carrying out the transaction in the name of the petitioner, another corporate entity was floated by the same partners and the corporate entity was doing the very same business using the very same brand and the machinery of the petitioner herein. Therefore, on the face of it, the actions of the petitioner amount to fraud.

7. As far as the procedures laid down by the RBI is concerned, he would submit that the procedure for classification as fraud, is laid down in Clause 2.1 and Clause 2.1.3 relates only for monitoring and following up. Therefore for taking action there need not be any committee with independent members. As far as the other allegation is concerned, the learned counsel would submit that due show cause notice has been given and the issue has been decided.

8. I have considered the rival submissions made on either side and pe