Declaration of Account as Fraud Without Supplying Basis of Allegation Violates Audi Alteram Partem: Calcutta High Court Quashes

“Natural Justice Cannot Be Bypassed in the Name of Speed”, In a landmark decision reinforcing borrowers’ right to a fair hearing under RBI Master Directions on Frauds, the Calcutta High Court on February 10, 2026, quashed the fraud classification of Hemant Kanoria’s account by Indian Overseas Bank, citing gross violation of principles of natural justice, particularly non-supply of the Forensic Audit Report and underlying documents.

Justice Krishna Rao held that the bank acted arbitrarily in passing a fraud classification order on 15th January 2026, even after the hearing was concluded and the matter was reserved for judgment on 14th January 2026. The Court found that the bank had failed to furnish the documents requested by the petitioners—many of which formed the very basis of the allegations in the show cause notice dated 28th February 2025.

“Fraud Classification Procedure May Be Summary, But Cannot Sidestep Principles of Natural Justice”

At the heart of the case lay the petitioners’ repeated requests for access to critical material—especially the Forensic Audit Reports (FARs) of KPMG and Saxena & Saxena, and over 40 categories of supporting documents that allegedly formed the basis of the fraud allegations. The petitioners argued that without these, an effective reply to the show cause was impossible.

The Court agreed:

“Where the Forensic Audit Report forms the basis of the show cause, effective opportunity of reply requires supply of relevant documents sought. Non-supply renders subsequent declaration unsustainable.”
(Paras 4–9, 16–18)

“Issuance of Adverse Order After Matter Reserved for Judgment Is Arbitrary”

A particularly troubling aspect noted by the Court was the timing of the fraud declaration. The petition was heard and concluded on 14 January 2026, yet the bank declared the account as “fraud” the very next day, without waiting for the court’s decision:

“Passing adverse order during pendency of writ petition without addressing grievance regarding non-supply of documents amounts to arbitrary exercise of power.”
(Paras 1–2, 10, 17)

This, the Court held, vitiated the entire process and necessitated judicial intervention.

Court Relies on Earlier Kanoria Precedent and Bombay High Court Rulings

The judgment draws heavily from the earlier decision in Hemant Kanoria v. Bank of India (WPA No. 28329 of 2023, decided on 2nd February 2024), where a Coordinate Bench of the same court laid down a structured roadmap for fair and timely compliance with RBI Master Directions.

Quoting extensively from the precedent, Justice Rao observed:

“Although the process of fraud declaration is summary under the Master Directions, the principles of natural justice have to be read into it… These are the basic features of Rule of Law and cannot be short-shrifted.”
(Para 15, citing Hemant Kanoria, 2024)

The Court also relied on Milind Patel v. Union Bank of India, 2024 SCC OnLine Bom 745, wherein the Bombay High Court held that denial of access to the basis of allegations amounts to denial of a fair hearing.

Failure to Supply Forensic Audit Documents and Internal Bank Records Fatal to Process

The petitioners had furnished a comprehensive list of documents sought from the bank—including loan sanction files, internal credit committee minutes, audit records, KPMG working papers, related party disclosures, and other material referred to in the Forensic Audit Reports.

Despite repeated demands, the bank neither furnished nor allowed inspection of these documents. The Court found:

“The petitioners have specified the documents required to give proper reply… but without any reasons and without considering the request, the respondent passed the impugned orders.”
(Para 17)

Court Orders Bank to Restart Process After Full Disclosure

Quashing the letters dated 15 January 2026, the Court directed Indian Overseas Bank to:

Supply all requested documents as per paragraph 14 within two weeks, or permit inspection if the material is voluminous;

Permit the petitioners to submit their reply within two weeks after inspection/supply;

Thereafter, the bank must pass a fresh, reasoned order within two weeks of receiving the reply.

Thus, the entire fraud classification process must be redone in compliance with the procedural safeguards outlined.

“The impugned orders dated 15th January, 2026 are set aside and quashed.”
(Para 17)

In setting aside the fraud declaration by Indian Overseas Bank, the Calcutta High Court has issued a strong reminder to banks and financial institutions: fraud classification, though urgent and summary, cannot override basic fairness. By reiterating the mandate of natural justice and insisting on transparency, the judgment upholds the foundational principle of Audi Alteram Partem—hear the other side.

This decision provides binding procedural clarity on how banks must proceed before classifying an account as “fraud” under RBI Master Directions and affirms that judicial review remains a critical safeguard when regulatory zeal threatens procedural integrity.

Date of Decision: 10 February 2026