No Violation Of Natural Justice If Borrower Fails To Produce Records Or Seek Personal Hearing: Calcutta High Court Upholds Bank's 'Fraud' Account Classification

Calcutta High Court, in a significant ruling delivered on August 12, 2026, held that a bank's decision to declare a borrower's account as fraud cannot be faulted for violating natural justice when the borrower was duly served a show-cause notice with the forensic audit report and chose neither to supply the requested financial documents nor to ask for a personal hearing. While dismissing a writ petition challenging Bank of India’s classification of a company's account as fraud, a single bench of Justice Krishna Rao observed that the lender had acted strictly in consonance with the Reserve Bank of India’s Master Directions.

Borrower Challenges Forensic Audit And Fraud Tag

The petitioner company, Natraj Rice Mill Private Limited, along with its directors, moved the High Court challenging a Forensic Audit Report dated November 22, 2025, a Show Cause Notice dated November 26, 2025, and a final order dated March 9, 2026, by which Bank of India classified its loan account as fraud. The credit facility was initially declared a Non-Performing Asset on June 24, 2025, with an outstanding default exceeding Rs. 19.30 Crores, following which the bank initiated recovery measures under Section 13(2) of the SARFAESI Act and appointed an independent forensic auditor.

The primary questions before the High Court were whether the forensic audit report relied upon by Bank of India was inconclusive and prepared in breach of the mandatory Reserve Bank of India Master Directions dated July 15, 2024. The Court was also called upon to determine whether the borrower was deprived of an adequate opportunity of hearing and natural justice prior to its account being classified as fraud.

Borrowers Must Avail Opportunity To Disclose Records

Addressing the petitioners' contention that the forensic audit was incomplete and inconclusive, the Court scrutinized the audit methodology and exchange of communications. The forensic auditor, M/s N H Agarwal and Associates, had sought critical records, including lists of major debtors, creditors, borrowers, and statutory filings, via email dated November 17, 2025.

The Court observed that the petitioners neither furnished the requested records to the forensic auditor nor sought an extension of time to produce them. The bench emphasized that the petitioners could not subsequently turn around and claim that the audit report was flawed when they had withheld the necessary financial materials during the examination process.

Borrower Failed To Produce Records Or Seek Personal Hearing

The Court highlighted that after receiving the forensic audit report, the bank served a comprehensive show-cause notice enclosing the entire audit report to the company. While the petitioners submitted a written response on December 11, 2025, they failed to place on record any documentary evidence or account details to rebut the auditor's findings of fund diversion.

The bench noted that the petitioners never requested a personal hearing before the bank passed the impugned classification order, nor was any grievance regarding the denial of an oral hearing raised in the writ pleadings.

Significant Financial Anomalies And Unreconciled Receivables

The Court took into account the alarming financial discrepancies highlighted in the audit, noting that the company’s receivables suddenly surged by 116 percent from Rs. 5.5 Crores to Rs. 11.73 Crores in Financial Year 2022–23, despite revenue growing by only 8 percent.

The audit had also revealed an unreconciled gap of Rs. 4.14 Crores in trade receivables extracted from stock statements, alongside the abrupt exit of company directors just before the account slipped into NPA. The Court found that these red flags and massive anomalies demonstrated a clear diversion of funds causing wrongful loss to the public sector lender.

Supreme Court Precedents On RBI Fraud Master Directions Followed - Compliance With Master Directions Satisfies Natural Justice

The High Court analyzed the seminal Supreme Court rulings in State Bank of India and Others v. Rajesh Agarwal and Others (2023) 6 SCC 1 and State Bank of India v. Amit Iron Private Limited and Others (2026 SCC OnLine SC 538) concerning the procedural fairness mandated before classifying loan accounts as fraud.

The Court noted that while Rajesh Agarwal mandates providing borrowers an adequate opportunity to submit a representation against forensic audit findings within the stipulated time frames, Amit Iron affirms that stray procedural variations cannot derail the legal framework where substantial fairness has been accorded. Justice Rao held that since Bank of India provided the full forensic audit report and considered the written representation, all procedural and constitutional safeguards stood fully satisfied.

Finding no procedural infirmity, arbitrariness, or violation of the RBI Master Directions dated July 15, 2024, the High Court held that the classification of the petitioner company's account as fraud was entirely lawful and justified. Consequently, the High Court dismissed the writ petition.

Date of Decision: 12 August 2026