One-Time Settlement Of Loan Does Not Prevent Bank From Pursuing Fraud Classification Proceedings: Calcutta HC

The Calcutta High Court has upheld Axis Bank's decision to classify a borrower's account as fraudulent. It held that repayment of dues under a One-Time Settlement (OTS) does not prevent a bank from proceeding under the Reserve Bank of India's fraud framework, observing that repayment does not eclipse conduct that had jeopardised the bank's security.

A Division Bench of Justices Rajasekhar Mantha and Rai Chattopadhyay dismissed an appeal by Bhanu Properties and another appellant. The appeal challenged a Single Judge's refusal to interfere with the fraud classification of their loan account.

“Repayment of a banker's debt would not in any way extinguish an act on the part of a borrower in putting the Bank into financial risk jeopardising its security. Such actions as in the instant case could go both ways, i.e. leaving unpaid debts. Even if a debt is repaid, the fraudulent conduct of a borrower as found by the Bank in the instant case, would not get eclipsed. The OTS scheme was agreed upon by and between the Bank and the borrower, does not and cannot compel the bank against proceeding under the Master Circular of the RBI dated 1st July, 2016.”, the court observed.

"A show-cause notice was already issued. The OTS settlement between the appellants and the Bank is completely silent with regard to the proceedings under the aforesaid Master Circular of the RBI. It is quite possible in a given scenario that a Bank or financial institution may settle for loans. This cannot absolve the borrower from application of the consequences under the aforesaid Master Circular dated 1st July, 2016. The object and purpose of the Master Circular dated 1st July, 2016, inter alia, factors in a deterrence for recalcitrant borrowers from attempting to mislead Banks and financial institutions into lending and continuing to lend money", the court held.

The dispute traces back to a challenge mounted by the appellants against Axis Bank's declaration of their loan accounts as non-performing assets. They had also challenged a notice issued by the bank under the SARFAESI Act. That challenge was dismissed. The bank thereafter initiated proceedings to classify the account as fraudulent.

Axis Bank issued a show-cause notice on December 30, 2023. The notice was issued after the bank alleged serious misrepresentations in reports of stocks hypothecated to it. The bank relied on forensic audit reports. It ultimately declared the account fraudulent on March 5, 2024, after receiving no formal response from the appellants.

Before the Division Bench, the appellants contended that the bank's claim had been settled under an OTS. Against a claim of Rs. 3.72 crore, the account was settled for Rs. 2.40 crore. According to the appellants, that amount had been paid in full. They also relied on the issuance of a no-dues certificate. They argued that the fraud classification could not survive after repayment.

The appellants further alleged a violation of natural justice. They contended that a forensic stock audit report dated March 30, 2023, had not been supplied to them.

“The appellants have chosen not even to reply to the show-cause issued to them under the aforesaid Master Circular dated 1st July, 2016. The appellants, therefore, could not have been seriously prejudiced for non-supply of one forensic stock audit report dated 30th March, 2023 in the backdrop of having received a majority of such reports for the period from March 2018 till 30th April, 2022.”, the court observed.

The bench noted that the allegations were not confined to the March 2023 audit report. They related to misleading stock reports submitted between 2018 and April 2022. The court observed that the stock statements examined by the bank's forensic auditors had always been in the appellants' possession.

It also noted that the appellants had not formally sought documents or forensic audit reports and had not replied to the show-cause notice.

Rejecting the challenge, the court held that the appellants had failed to demonstrate any prejudice arising from the alleged non-supply of the March 2023 report.

The Bench also rejected the argument that repayment under the OTS wiped out the consequences flowing from the conduct found by the bank. It noted that the settlement agreement was silent on the fraud proceedings.

“The OTS scheme was agreed upon by and between the Bank and the borrower, does not and cannot compel the bank against proceeding under the Master Circular of the RBI dated 1st July, 2016.”, the court noted.

Finding no reason to interfere with the Single Judge's order, the Division Bench dismissed the appeal.

For Appellants: Senior Advocate Deepan Sarkar, Advocate Ramendu Agarwal, Advocate Dipti Priya, Advocate Tanish Ganeriwala.

For Respondent No. 1: Advocate Suchismita Ghosh, Advocate Aradhita Banerjee.

For Respondent No. 2: Advocate Soni Ojha, Advocate Pranit Biswas.