Calcutta High Court Quashes PNB Fraud Classification Based on Audit Report Discredited by Insolvency Tribunals

The Calcutta High Court has quashed the fraud classification proceedings initiated by Punjab National Bank against the promoters of a company undergoing liquidation, holding that the bank failed to comply with the principles of natural justice and improperly relied upon a transaction audit report that had already been discredited by insolvency tribunals. The bench of Justice Krishna Rao set aside both the show cause notice dated October 25, 2023 and the order dated August 9, 2024 through which the borrowers’ accounts had been reported as fraud to the Reserve Bank of India. The dispute arose from loans granted by a consortium of banks led by Punjab National Bank to M/s Visa Power Limited for establishing a thermal power project in Chhattisgarh. The project allegedly collapsed after cancellation of the company’s coal block allocation following orders of the Supreme Court in 2014, which resulted in stoppage of further disbursement of funds and eventual classification of the account as Non-Performing Asset on March 31, 2016. Subsequently, insolvency proceedings were initiated before the National Company Law Tribunal under the Insolvency and Bankruptcy Code. During liquidation, a transaction audit report was prepared by Deloitte Touche Tohmatsu India LLP alleging fraudulent, preferential and undervalued transactions. However, the NCLT rejected the allegations and held that the report did not establish fraudulent or undervalued transactions. The order was later affirmed by the National Company Law Appellate Tribunal. Buy Now: 50+ PMLA JUDGEMENTS : CASE LAWS Despite this, Punjab National Bank issued a fresh show cause notice in October 2023 alleging fraudulent conduct based on the same Deloitte transaction audit report. The petitioners argued that earlier wilful defaulter proceedings initiated by the bank itself had already been withdrawn in November 2022 after the bank acknowledged that the audit report alone could not justify adverse action. The petitioners further contended that the bank had relied upon a Joint Lenders Meeting where more than 60% of consortium lenders had allegedly classified the account as fraud, but no notice regarding such meeting or its proceedings was ever supplied to them. They argued that the action violated the Supreme Court’s ruling in State Bank of India vs Rajesh Agarwal, which mandates compliance with audi alteram partem principles before classifying an account as fraud. The bank defended its action by stating that the account conduct was unsatisfactory, that irregularities had been detected during monitoring of the loan account, and that the Deloitte report had pointed towards fraudulent activities including diversion and siphoning of funds. It also referred to a CBI FIR alleging criminal breach of trust and cheating involving loss of public money amounting to approximately ₹1,964 crore. However, the High Court observed that the FIR was never relied upon either in the show cause notice or in the final fraud classification order. The Court held that the bank could not subsequently justify its action on grounds not forming part of the impugned proceedings. The Court took note of the earlier findings of the NCLT and NCLAT that the Deloitte transaction audit report did not independently establish fraudulent or preferential transactions. It also referred to the bank’s own wilful defaulter committee order, which had accepted that no independent documentary evidence existed apart from the audit report. Justice Krishna Rao further held that the petitioners were denied an effective opportunity to respond to the findings emerging from the Joint Lenders Meeting because the details of such meeting were neither disclosed in the show cause notice nor supplied thereafter. The Court observed that the impugned fraud declaration order lacked independent findings and reasons and was passed merely on the basis of the transaction audit report and the Joint Lenders Meeting. Relying upon the Supreme Court judgments in State Bank of India vs Rajesh Agarwal and State Bank of India vs Amit Iron Private Limited, the High Court reiterated that borrowers must be supplied with forensic audit reports and given an adequate opportunity to explain before any fraud classification is undertaken by banks. Accordingly, the Court quashed the show cause notice and fraud declaration order. However, it clarified that the bank would still be at liberty to initiate fresh proceedings in accordance with law, RBI Master Directions, and the principles laid down by the Supreme Court. Case Details Case Title: Vishambhar Saran Vs. Punjab National Bank & Anr. Citation: JURISHOUR-1177-HC-2026(CAL) Case No.: W.P.O. No. 825 of 2024 Date: 07.05.2026 Counsel For Petitioner: Sabyasachi Chowdhury, Sr. Adv. Counsel For Respondent: Parna Roy Choudhury Click Here To Read Order Read More: CBIC Notifies Revised Customs Tariff Values for Edible Oils, Gold, Silver, Brass Scrap and Areca Nuts

Calcutta High Court Quashes PNB Fraud Classification Based on Audit Report Discredited by Insolvency Tribunals

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