A prior declaration of fraud by a bank may become redundant if procedural fairness is not adhered to; banks must allow explanations from borrowers before finalizing fraud classifications.

ORDER

This writ petition has been filed challenging the proceedings of the 1st respondent dated 29.09.2021 classifying the loan account of the petitioners as fraud.

2. When the writ petition came up for hearing on 22.07.2025, this Court passed the following orders:

“Mr.M.L.Ganesh, learned Standing Counsel, takes notice for first respondent.

2. Mr.T.Poornam, learned Standing Counsel, takes notice for second respondent.

3. The main grievance expressed by the petitioners is that the first respondent has unilaterally reported the loan amount that was held in the name of the first petitioner as fraud to the Reserve Bank of India on 29.09.2021 without providing an opportunity of personal hearing. That apart, the first respondent has also proceeded to auction the properties belonging to the petitioners and the petitioners came to know of the same only after verification of the encumbrance certificate. The petitioners had offered for OTS multiple times and ultimately, since nothing fructified, the petitioners filed W.P.No.14003 of 2024. This writ petition was disposed of by this Court on

10.06.2024 in the following terms:

“2. The petitioners have challenged the sale notice dated 01.05.2024 issued by the first respondent Bank. This Court, while entertaining the writ petition, granted an order of stay and hence the sale had not taken place as per schedule. Since the petitioners have challenged the sale notice and the sale had not taken place pursuant to the interim order, the prayer in the writ petition has now become infructuous.

3. The learned counsel appearing for the petitioners, however, states that the petitioners have given a proposal to the first respondent Bank for one time settlement on 06.06.2024 and hence he pleads that the first respondent may be directed to consider the representation on the one time settlement proposal. 4. Considering the submission of the learned counsel for petitioners that the petitioners have so far repaid a sum of Rs.28.50 Crores, out of the loan amount, which was just Rs.19.50 Crores and that the other properties of the petitioners have already been sold for a sum of Rs.13.75 Crores, this Court is inclined to dispose of the writ petition with a direction to the first respondent Bank to consider the one time settlement proposal submitted by the petitioners on 06.06.2024 in accordance with law and the Reserve Bank of India guidelines and communicate the decision thereof to the petitioners within a period of twelve weeks from the date of receipt of a copy of this order. Till such time the first respondent takes a decision on the one time settlement proposal submitted by the petitioners, the first respondent Bank shall not proceed further with the sale.”

4. The petitioners came to know for the first time that the first respondent has unilaterally declared the loan amount as fraud on 29.09.2021 after receiving the copy of the First Information Report registered on 08.05.2024. That apart, a show cause notice dated 15.04.2025 was issued by the first respondent to the petitioner for the very same cause of action alleging fraud. A reply has been given to this show cause notice by the petitioners on 07.05.2025. It is under these circumstances, the present writ petition has been filed before this Court challenging the impugned classification made by the first respondent classifying the loan amount as fraud dated

29.09.2021.

5. Learned counsel for petitioners is directed to serve notice and also the papers on Mr.T.Poornam, learned Standing Counsel, appearing for second respondent.

Post this writ petition under the caption 'for orders' on 05.08.2025.”

3. The matter was again listed for hearing on 05.08