Bombay High Court Quashes Bank of India's "Fraud" Classification of Naresh Goyal ...
In a significant ruling, the Bombay High Court has quashed an order by the Bank of India classifying the account of petitioner Naresh Jagdishrai Goyal as "fraud," along with a related Show Cause Notice dated July 1, 2025. The court, presided over by Justices R.I. Chagla and Farhan P. Dubash, declared the bank's actions as violative of the principles of natural justice, particularly the rule of audi alteram partem (the right to be heard), as laid down by the Supreme Court in the landmark case State Bank of India v. Rajesh Agarwal (2023).The court's decision came in response to a Writ Petition (L) No. 26973 of 2025 filed by Goyal, who challenged the Bank of India's classification of his account as fraudulent and the subsequent issuance of the Show Cause Notice. The petitioner argued that the bank failed to provide him with a copy of the forensic audit report and an opportunity to respond before labeling his account as fraudulent, actions deemed arbitrary and contrary to established legal principles.
The ruling may prompt banks to re-evaluate their processes in these cases, potentially leading to challenges or reviews of fraud classifications, ensuring that business magnates are given a fair chance to contest allegations, which could reshape how banks handle high-stakes financial disputes with India’s corporate elite.
Key Points of the Court's Ruling
The Bombay High Court found that the Bank of India had not adhered to the Supreme Court's directives in Rajesh Agarwal, which mandate that banks provide borrowers an opportunity to explain findings in forensic audit reports and make representations before classifying an account as fraudulent under the Reserve Bank of India’s Master Directions on Frauds.
The court noted that two Show Cause Notices were issued to Goyal: one on December 30, 2024, without providing the forensic audit report, and a second on July 1, 2025, which included the report but still failed to grant Goyal an opportunity for representation. The court ruled that merely re-examining the earlier fraud classification did not fulfill the requirements of natural justice.
Consequently, the court:
Quashed the Bank of India’s order classifying Goyal’s account as fraudulent.
Set aside the Show Cause Notice dated July 1, 2025.
Granted the Bank of India liberty to issue a fresh Show Cause Notice, provided it is issued by a different committee and complies with principles of natural justice, including giving Goyal a fair opportunity to respond.
Clarified that it had not expressed any opinion on the merits of the case, keeping all rights and contentions of the parties open.
The court also recorded a statement from Dr. Abhinav Chandrachud, counsel for the Bank of India, assuring that the bank would not act on the earlier fraud classification or the quashed Show Cause Notice. The court accepted this undertaking and directed the bank to refrain from taking any further action based on the invalidated orders.Legal RepresentationThe petitioner was represented by Senior Counsel Sharan Jagtiani, along with advocates Ameet Naik, Abhishek Kale, Tushar Hathiramani, Shraddha Achliya, Pranjal Agarwal, Harish Khedkar, and Ronit Doshi from Naik Naik and Co.
The Bank of India was represented by Dr. Abhinav Chandrachud, along with advocates Rakesh Singh, Kedar Nayak, and S.D. Shetty from M.V. Kini and Co. Respondent No. 2 was represented by advocates Huzan Bhumgara, Pradeep Mane, and Shubhi Dotiya from Desai and Diwanji.
Implications of the Ruling
This ruling reinforces the judiciary’s commitment to upholding the principles of natural justice in financial disputes, particularly in cases involving serious allegations like fraud. Legal experts suggest that the decision will compel banks to ensure greater transparency and fairness when classifying accounts as fraudulent, aligning with the Supreme Court’s guidelines.
The Bank of India now has the option to issue a fresh Show Cause Notice, but it must adhere strictly to the procedural safeguards outlined by the court. This development is likely to have broader implications for how banks handle fraud classifications under the RBI’s Master Directions.
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