Bank Not Bound To Grant Endless Extensions For Replying To Fraud Show Cause Notice When Material Facts Were Known For Months: Bombay High Court

"Although the Order declaring a person as fraud must be reasoned, the reasons to be recorded need not be placed on the same pedestal as a Judgment of a Court. The reasons may be brief but they must comport with fairness by indicating a due application of mind." Bombay High Court, in a significant ruling, held that a borrower cannot claim violation of natural justice for denial of a time extension when they had prior knowledge of audit findings for months, while dismissing a challenge against the classification of a corporate account as fraud under RBI guidelines.

A division bench of Justices B.P. Colabawalla and Firdosh P. Pooniwalla observed that the principles of natural justice cannot be weaponized to stall statutory mechanisms when a delinquent promoter deliberately evades opportunities to provide clarifications.

The case arose from a writ petition filed by Anil Khemani and another, erstwhile directors of a company, challenging a show cause notice and an ensuing order passed by Axis Bank Ltd. declaring the company's account as fraudulent. The bank had taken over credit facilities of over 23 crores, which subsequently turned into a non-performing asset and was admitted into corporate insolvency resolution under the Insolvency and Bankruptcy Code. Following a transaction audit report that revealed the clandestine operation of an undisclosed bank account to divert funds, the bank issued a show cause notice and eventually classified the account as fraud.

The primary question before the court was whether the order declaring the company's account as fraud was unreasoned and passed in violation of the principles of natural justice. The court was also called upon to determine whether the refusal by the bank to grant an extended window to reply to the show cause notice warranted judicial interference under Article 226 of the Constitution of India.

Court Rejects Plea Of Unreasoned Order

Addressing the challenge that the fraud identification order lacked reasons, the court relied on the Supreme Court precedent in State Bank of India v. Rajesh Agarwal (2023) 6 SCC 1 to evaluate the threshold of adequacy for administrative orders. The bench noted that while an order classifying an account as fraud must reflect a due application of mind, it is not required to match the elaborate structure of a judicial judgment.

"Reasons Need Not Be Like Judicial Judgments"

The judges observed that Schedule I, Part B, and Schedule III of the impugned order explicitly incorporated the adverse findings of the transaction audit report, detailing diversion of funds through an undisclosed bank account maintained with Nashik Merchant Co-operative Bank and unverified related-party transactions. The court held that incorporating these specific statutory findings satisfies the legal mandate of recording brief yet substantive reasons.

"No Violation Of Natural Justice When Borrower Had Prior Notice"

Rejecting the plea regarding the breach of natural justice, the high court detailed how the petitioners had been cognizant of the audit findings since the meetings of the Committee of Creditors held months prior to the issuance of the formal show cause notice. The court noted that petitioner no. 1 had been furnished with the draft transaction audit report and had even failed to utilize office access granted by the resolution professional to reconcile the accounts.

"Vague Medical Grounds Do Not Justify Delay"

The bench observed that the bank was fully justified in declining a four-week extension requested on the eve of the deadline by citing vague family issues and medical emergencies, particularly when the core allegation regarding the undisclosed bank account remained fundamentally unrefuted. The court underscored that a statutory show cause notice under the RBI Master Directions on Fraud Risk Management grants a 21-day window, which cannot be indefinitely stretched through dilatory tactics.

"No Sustainance For Challenge By Suspended Directors"

The court also noted at the outset that the impugned order had strictly classified the corporate entity as fraud rather than naming the individual petitioners personally, raising serious maintainability concerns over whether the erstwhile directors could maintain the petition. Nonetheless, having examined the matter comprehensively on merits to foreclose any procedural grievances, the court found the challenge devoid of legal foundation.

Concluding that the classification of the account was backed by robust transaction audit disclosures and fair opportunity, the high court dismissed the writ petition. The bench held that proactive measures by financial institutions to unearth clandestine diversion of funds through secret bank accounts must not be stymied by procedural technicalities raised by defaulting promoters.

Date of Decision: 06 August 2026