No Bank Can Unilaterally Declare Fraud Without Consortium Consensus: Delhi High Court

High Court stays IDBI Bank's fraud classification of Atul Punj, citing RBI guidelines on majority rule. The Delhi High Court has stayed the classification of Atul Punj, a promoter of Punj Lloyd Limited, as a fraud by IDBI Bank, citing procedural lapses and jurisdictional issues. The judgment, delivered by Justice Dharmesh Sharma, emphasized the importance of adhering to the Reserve Bank of India's (RBI) guidelines, which mandate a majority consensus among consortium banks before such a classification can be made.

Atul Punj, through his legal counsel, challenged the impugned order dated 05.07.2024 issued by IDBI Bank, which classified him as a fraud in relation to loans and financial transactions of Punj Lloyd Limited. The classification was purportedly made under the RBI Master Directions of 2017. Previously, a Show Cause Notice (SCN) issued by IDBI Bank was quashed by the High Court on 02.04.2024 for procedural deficiencies, including the lack of an opportunity for the petitioner to be heard and the non-provision of necessary documents.

The court observed that according to clauses 8.9.3 and 8.9.4 of the RBI Master Directions, a single bank does not have the unilateral authority to classify an account as fraud without the consent of at least 60% of the consortium banks. The court noted that IDBI Bank acted independently without adhering to the required majority rule among the consortium banks.

"An individual bank has no jurisdiction to unilaterally declare the account as ‘fraud’ in the absence of consent accorded by the member banks in the consortium who have given more than 60% of the lending," Justice Sharma stated.

The court found that IDBI Bank failed to provide Atul Punj an opportunity to be heard and did not consider the forensic audit reports adequately. These procedural lapses rendered the impugned order unsustainable.

Justice Sharma elaborated on the necessity of following due process and ensuring all stakeholders in a consortium agree before declaring an account fraudulent. The RBI guidelines clearly stipulate that any such decision must be taken collectively, ensuring that no single bank can impose its judgment unilaterally.

"The initial decision to classify any standard or NPA account as RFA or Fraud will be at the individual bank level... However, the final classification must be based on a majority rule of agreement among banks with at least 60% share in the total lending," the court emphasized, quoting the RBI directions.

Justice Sharma highlighted, "The issues raised by the learned counsels for the parties require deeper examination," underscoring the complexity and significance of the procedural adherence required in such cases.

The Delhi High Court's stay on the classification of Atul Punj as a fraud underscores the judiciary's commitment to ensuring procedural fairness and adherence to established guidelines. This decision is expected to have significant implications for future cases involving consortium lending and fraud classifications, reinforcing the necessity for majority consensus and thorough procedural compliance.

Date of Decision: July 16, 2024