2024 (2) TMI 364 - HC - Indian Laws

Declaring the account as Fraud - Violation of principles of natural justice (audi alteram partem) - Validity of decision of the respondent banks taken in the Joint Lenders Meeting dated 29.09.2020 declaring the account of M/s Syntex Industries Limited (Company) as fraud - opportunity to deal with the forensic audit report and/or the supplementary forensic audit report not provided - HELD THAT - Rule of audi alteram partem has been read into clauses 8.9.4 and 8.9.5 of the Master Directions of 2016 on frauds. The Apex Court in State Bank of India and Others v. Rajesh Agarwal and Others 2023 (3) TMI 1205 - SUPREME 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 petition stands partly allowed.

Summary

Issues Involved:
1. Declaration of the company's account as fraud by respondent banks.
2. Adherence to principles of natural justice, particularly the rule of audi alteram partem.

Summary:

Issue 1: Declaration of the Company's Account as Fraud
The petitioners, promoters, suspended directors, and shareholders of the company, challenged the decision of respondent banks taken in the Joint Lenders Meeting on 29.09.2020, declaring the account of M/s Syntex Industries Limited as fraud. The company was under the Corporate Insolvency Resolution Process (CIRP) as per the Insolvency and Bankruptcy Code, 2016. The decision was based on forensic audit reports dated 11.08.2020 and 18.09.2020, indicating breaches such as misfeasance, embezzlement, and siphoning off funds. The petitioners contended that the forensic audit reports were not provided to them, violating the principles of natural justice.

Issue 2: Adherence to Principles of Natural Justice
The petitioners argued that they were not given an opportunity to respond to the forensic audit reports, which is a mandate under the principles of natural justice as reinforced by the Supreme Court in State Bank of India and Others v. Rajesh Agarwal and Others (2023) 6 SCC 1. The Supreme Court held that the rule of audi alteram partem must be read into the Master Directions on Frauds to prevent arbitrariness. The lender banks must provide borrowers with audit reports and a reasonable opportunity to submit a representation before classifying accounts as fraud.

Judgment:
The High Court found that the respondent banks did not observe the principles of natural justice, particularly the rule of audi alteram partem, as the forensic audit reports were not provided to the petitioners. Consequently, the decision to declare the company's account as fraud was quashed and set aside. The matter was remitted to the respondent banks to furnish the forensic audit reports to the petitioners and allow them a reasonable opportunity to submit a representation. The banks were directed to complete this process and pass a reasoned order within six months, in conformity with the principles laid down by the Supreme Court. The court did not express any opinion on related criminal proceedings. The petition was partly allowed with no order as to costs.