Bombay High Court Upholds Natural Justice in Banking Fraud Classifications: A Landmark Ruling

Introduction

In a significant judgment on September 25, 2025, the Bombay High Court, comprising Justices R.I. Chagla and Farhan P. Dubash, quashed the Bank of India’s classification of Naresh Jagdishrai Goyal’s loan account as ‘fraud’. The court emphasized the necessity of adhering to the principles of natural justice, particularly the rule of audi alteram partem (hear the other side), before such classifications are made. This decision aligns with the Supreme Court’s 2023 ruling in State Bank of India v. Rajesh Agarwal, which mandated that borrowers must be given an opportunity to be heard before their accounts are labeled as fraudulent under the Reserve Bank of India’s (RBI) Master Directions on Frauds.

Case Background

Naresh Goyal, the founder of Jet Airways, challenged the Bank of India’s decision to classify his loan account as ‘fraud’. He contended that the bank had failed to serve him with any formal order or show-cause notice regarding the classification, thereby depriving him of the opportunity to contest the decision. The bank had issued a show-cause notice on July 1, 2025, but it was found to be procedurally flawed, lacking adequate information and access to the forensic audit report on which the fraud classification was based.

Court’s Analysis

The Bombay High Court scrutinized the procedural aspects of the fraud classification process. It observed that the bank’s actions were in violation of the principles of natural justice, as the petitioner was not provided with a meaningful opportunity to present his case. The court highlighted that the RBI’s Master Directions on Frauds, while not explicitly mentioning the requirement for a hearing, must be interpreted in a manner that upholds constitutional guarantees of fairness and due process.

Legal Precedents

The Supreme Court’s decision in State Bank of India v. Rajesh Agarwal serves as a cornerstone in this context. The Court held that the classification of an account as fraudulent entails serious civil consequences for the borrower, including reputational damage and potential denial of future credit. Therefore, such administrative actions must be accompanied by procedural fairness, including the right to be heard.

Furthermore, the Delhi High Court, in a 2025 ruling, reaffirmed the necessity of a personal hearing when requested by the borrower, emphasizing that the principles of natural justice are not mere formalities but essential safeguards against arbitrary administrative actions.

Broader Implications

This judgment has far-reaching implications for the banking sector in India. It sets a precedent that banks must adhere to principles of natural justice when classifying accounts as fraudulent. Financial institutions are now required to provide borrowers with access to relevant documents, such as forensic audit reports, and offer them a fair opportunity to respond before making adverse decisions. This ensures transparency and accountability in the banking system, fostering trust among borrowers and the public.

Conclusion

The Bombay High Court’s decision highlights the judiciary’s commitment to upholding constitutional principles in administrative actions. By reinforcing the necessity of procedural fairness in banking fraud classifications, the court has set a precedent that protects the rights of borrowers and ensures the integrity of the financial system. This ruling serves as a reminder to financial institutions of their obligation to act within the bounds of the law and respect the rights of individuals in their administrative processes.