In interim relief to Anil Ambani, Bombay HC stays actions by 3 banks over declaring accounts fraudulent: ‘Woke from deep slumber’

The court granted relief to Ambani through an interim order in multiple suits filed against the consortium of banks with the State Bank of India (SBI) as a lead lender and BDO India LLP, claiming that their decision to classify his accounts related to RCom, which is under insolvency, as “fraudulent” was based on an illegal forensic report.

Ambani had challenged the show-cause notices and fraud-classification orders initiated by the consortium of banks. The Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions circular allows banks to classify any account as fraudulent and provides guidelines for the process.  The RBI had further instructed banks to establish their own policies.

The banks opposed the plea and claimed that the account of RCom was classified as fraudulent in December 2020, and Ambani had participated through correspondences, personal hearings and had also filed writ petitions without challenging the competence of the audit firm BDO LLP.

The banks claimed that the RBI master directions did not stipulate that the external or forensic auditor must be a chartered accountant.

‘Banks did not adhere to RBI-prescribed timelines’

“If Banks themselves do not follow the Rule of Law and timelines as prescribed under the RBI Master Directions, which is prima facie observed in the present case, and take action at the right time, it will affect the broader economy of the country.  This is a classic case where the Banks have woken up from their deep slumber seeking to conduct Forensic Audit for the period from Audit 2013 and 2017 in the year 2019 without adhering to any of the timelines prescribed under the 2016 RBI Master Directions,” the high court observed.

“There is absolutely no room for doubt and no matter whatsoever be concluded in the FAR, the FAR cannot be relied upon by the Banks before me to issue the Show Cause Notices and take steps in furtherance thereof… The Master Directions of RBI are not a mere paper tiger to enable the Banks to wake up from their deep slumber and initiate action according to their convenience,” Justice Jadhav noted.

“The consequences of allowing the Banks to proceed further and declaring the Plaintiff and Directors of the three Companies as fraud are virtually drastic and lead to disastrous consequences like being black listed, barred from new Bank loans/credit for years, criminal FIR filing, reputation damage, impacting fundamental rights to financial access and civil death,” the judge added.

“The Plaintiff has made out a reasonably strong case for trial. The balance of convenience therefore is in favour of Plaintiff. For grant of interim relief prima facie case and balance of convenience clearly shifts in favour of Plaintiff due to the frailty of the FAR and qualification of the Auditor as discussed above in fact and in law,” Justice Jadhav noted in his “prima facie” opinion.