Punjab & Haryana HC Quashes Canara Bank's Fraud Classification For Failure To Furnish Full Forensic Audit Report

The Punjab and Haryana High Court has set aside Canara Bank's order declaring the borrowers' account as fraudulent. The Court found that the bank had not supplied the complete forensic audit report on which the fraud classification was based.

It also found that the bank had not informed the borrowers that any portion of the report was being withheld due to third-party rights.

A division bench of Justice Alka Sarin and Justice Ramesh Chander Dimri observed that where a bank seeks to withhold any part of a forensic audit report on the ground that it affects third-party rights, it must communicate that position to the borrower.

The bench observed:

“As held by the Supreme Court in the judgment of State Bank of India (supra), in case any part of the forensic audit report affects third party rights in the opinion of the bank, the bank is to communicate that the disclosure of such part would affect third party rights.”

The borrowers had challenged a show-cause notice dated June 11, 2024 and a subsequent order dated November 7, 2024 by which their account was declared as fraud.

According to the borrowers, both the show-cause notice and the fraud declaration order were based on a forensic audit report that was never supplied to them in full. They contended that only excerpts of the report were reproduced in the fraud declaration order. The complete report, according to them, was never furnished.

Canara Bank contended before the Court that the complete forensic audit report had not been supplied because third-party rights were involved. However, the bank admitted that this reason did not find mention either in the show-cause notice or in the fraud declaration order.

Relying on the Supreme Court's decision in State Bank of India v. Amit Iron Private Limited, the High Court noted that the Supreme Court had held that supply of the forensic audit report is the rule. It further noted that where a bank considers any portion of the report to affect third-party rights, it must communicate that position to the borrower.

In the facts of the present case, the High Court observed that the bank had not stated in the show-cause notice that any portion of the report was being withheld on account of third-party rights. Nor had it stated so in the fraud declaration order.

The bench observed:

“In the absence of having stated so, it was incumbent on the respondent to have supplied the complete copy of the forensic audit report to the petitioners.”

The court therefore allowed the writ petition to the extent of setting aside the order dated November 7, 2024. It, however, granted liberty to the bank to proceed further in accordance with law. The Court also directed the bank to supply copies of all documents relied upon in the show-cause notice so as to provide the borrowers an opportunity to file their response.