P&H HC: a bank must give a director a real hearing before branding him a 'fraud' to RBI

The Punjab and Haryana High Court upheld the State Bank of India's classification of a former company director as a fraud account, but only after confirming that the bank had actually given him a fair hearing first, a requirement it read into RBI's Master Directions on fraud classification even though those Directions do not expressly mention one. The petitioner, a 68-year-old former director of a company that had gone through the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, with a resolution plan approved in November 2025 with SBI's consent, was served a show-cause notice in December 2025 based on a 2019 forensic audit alleging fraud, and the bank reported his name to the Reserve Bank of India as a fraud account in March 2026. He argued this violated the principle of audi alteram partem, partly because his company's records were now with the insolvency liquidator.

Justices Jasgurpreet Singh Puri and Sanjiv Berry, applying the Supreme Court's ruling in State Bank of India v. Rajesh Aggarwal, held that natural justice must be read into the Master Directions' fraud-classification clauses even though they are silent on a hearing, requiring the bank to share the forensic audit report and pass a reasoned order after considering the director's reply. Since SBI had done exactly that, even dropping one of five charges after his reply, the classification was upheld.