The Gujarat High Court recently observed that the lender banks to provide audit reports to borrowers to allow representation before classification of accounts as fraud.
It is the case of the petitioners that meetings were convened on 18.08.2020 and 29.09.2020 and during that period, forensic audit reports dated 11.08.2020 and 18.09.2020 were discussed. Also, issues were discussed including the issue about the account being declared as a fraud by the South Indian Bank.
In the meeting dated 29.09.2020 on the basis of the forensic audit report dated 11.08.2020 and supplementary forensic audit report dated 18.09.2020, the account of the company was declared as fraud illegally. Moreover, the petitioners have learnt about the said declaration of fraud by the Punjab National Bank, Punjab & Sind Bank, Karnataka Bank Limited on 30.09.2020, 24.12.2020 and 09.10.2020 respectively.
The counsel for the petitioners submitted that in the consortium meeting held on 18.08.2020, the petitioner no.1 being the promoter and director was present, followed by the meeting dated 29.09.2020. It is submitted that the draft forensic audit report and supplementary forensic audit report were discussed with the member banks and they were of the view that the account of the company, shall be declared as a fraud on the basis of finding and opinion of the forensic auditor.
It was therefore submitted that admittedly and undisputedly, the principles of natural justice and more particularly, the rule of audi alteram parterm, has not been observed in the present case. It is therefore submitted that on this limited ground, the decision of the respondent banks deserves to be quashed and set aside.
A Single Bench of Justice Sangeeta K Vishen observed that “The Apex Court has also directed that consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud coupled with passing of a reasoned order on the objections addressed by the borrower.”
“Undisputedly, in the present case, no such steps have been taken by the respondent lender banks and therefore, on this limited ground of violation of principles of natural justice, the decision of the respondent banks declaring the account of the company as fraud is hereby quashed and set aside. The matter is remitted and let the respondents concerned, after furnishing the copies of the forensic audit report and supplementary forensic audit report so also reasonable opportunity to the petitioners to submit the representation, complete the proceedings by passing order” the Court noted.
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