Introduction:
In Bank of Baroda & Ors. v. Anil Ambani (order pronounced by a Division Bench of the Bombay High Court; detailed judgment awaited), the Bombay High Court allowed appeals filed by Bank of Baroda, Indian Overseas Bank, and IDBI Bank, setting aside the order of a Single Judge that had stayed fraud classification proceedings initiated against industrialist Anil Ambani.
The Division Bench comprising Chief Justice Alok Aradhe and Justice Gautam Ankhad overturned the interim protection earlier granted by Justice Milind Jadhav, who had prima facie found serious defects in the forensic audit report relied upon by the banks. The impugned order had questioned the appointment and qualification of BDO LLP as a forensic auditor under the applicable regulatory framework.
The controversy centers around the classification of loan accounts of entities connected to the Reliance Group as “fraud” based on a forensic audit report dated October 15, 2020. The classification carries severe civil and financial consequences, including reputational damage and restrictions on borrowing.
The appeals raised significant questions about the scope of judicial interference in fraud classification proceedings, the binding nature of Reserve Bank of India Master Circulars, the applicability of Companies Act qualifications to forensic auditors, and the doctrine of natural justice in banking actions.
Arguments on Behalf of the Appellant Banks:
The three banks, represented by Solicitor General Tushar Mehta, mounted a robust challenge to the Single Judge’s interim order.
1. Delay in Challenging the Forensic Audit
A central plank of the banks’ argument was that the forensic audit report dated October 15, 2020 had remained unchallenged for nearly five years.
It was contended that the industrialist had not questioned the audit findings on merits during this period and had only raised objections at a belated stage in the suit leading to the impugned order.
According to the banks, such delay undermined the credibility of the challenge and indicated an attempt to stall regulatory action rather than genuinely contest the audit’s substance.
2. Challenge on Technical Grounds Only
The Solicitor General emphasized that the suit before the Single Judge did not assail the audit report on substantive grounds but merely on technical objections.
The primary objection was that BDO LLP was allegedly not competent under the Reserve Bank of India’s 2024 Master Circular governing fraud classification procedures.
The banks argued that the Master Circular did not mandate that the forensic auditor must be affiliated with the Institute of Chartered Accountants of India (ICAI). Therefore, the Single Judge’s finding regarding lack of statutory qualification was erroneous.
3. Compliance with Natural Justice After RBI Circular
The banks submitted that initially, State Bank of India had issued a show cause notice and classified the account as fraud. This classification was challenged on grounds of violation of principles of natural justice as mandated by Supreme Court jurisprudence.
Subsequently, the RBI issued a modified Master Circular in 2024, mandating personal hearings prior to fraud classification.
The banks contended that they were proceeding in accordance with the revised framework, and the Single Judge’s stay interfered prematurely with an ongoing regulatory process.
4. Scope of Judicial Interference
It was argued that fraud classification is part of a statutory and regulatory mechanism governed by RBI directions. Judicial interference at an interim stage, particularly on disputed technical issues, would hamper banking discipline and regulatory oversight.
The Solicitor General urged that the Single Judge’s findings on the Companies Act qualification requirements were misplaced, as the appointment of a forensic auditor under RBI guidelines is distinct from statutory auditors under the Companies Act.
Arguments on Behalf of the Respondent Industrialist:
Senior Advocate Gaurav Joshi, appearing for the industrialist, presented a detailed rebuttal.
1. Consequences Amounting to “Civil Death”
The respondent argued that fraud classification has devastating consequences. Once an account is labeled as fraud, the borrower is effectively barred from accessing institutional credit and conducting normal business operations.
Joshi described this as resulting in “civil death,” emphasizing the reputational and financial stigma attached to such classification.
Given these severe consequences, strict adherence to procedural safeguards and statutory compliance was necessary.
2. Audit Report Allegedly Defective
The senior counsel submitted that the forensic audit report was inconclusive, incomplete, and error-ridden.
It was argued that the report failed to meet recognized auditing standards and did not qualify as a genuine forensic audit.
According to the respondent, the audit conducted by BDO LLP was more in the nature of an accounts audit rather than a forensic examination involving detailed investigation into fraud indicators.
3. Audit Conducted Post-Insolvency
Another significant contention was that the audit was conducted after insolvency proceedings had commenced and a Resolution Professional had been appointed.
This, according to the respondent, raised questions regarding jurisdiction and propriety of parallel investigative exercises.
4. Treatment of Inter-Entity Transfers
The respondent emphasized that Reliance Communications and its subsidiaries functioned as a single economic unit.
Transfers of funds between group entities were characterized in the audit as diversion of funds.
However, it was argued that such intra-group transfers within a single economic unit cannot automatically be equated with diversion or misappropriation.
5. Qualification of Auditor Under Companies Act
The Single Judge had found that appointment of BDO LLP did not conform to statutory qualification requirements under the Companies Act.
The respondent supported this reasoning, arguing that allowing banks to appoint unqualified forensic auditors would create a dichotomy between statutory internal auditors and external forensic auditors.
It was contended that such appointments must conform to statutory norms to prevent arbitrary discretion.
The Single Judge’s Findings:
Justice Milind Jadhav, in his January 24 order, had granted interim protection.
The Single Judge held that the appointment of BDO LLP as forensic auditor did not conform to statutory qualification requirements under the Companies Act.
The order warned of a potentially disastrous situation if banks were permitted to appoint unqualified persons as forensic auditors at their discretion.
The Single Judge observed that such non-compliance could undermine regulatory safeguards and lead to arbitrary action.
Based on these prima facie findings, the fraud classification proceedings were stayed.
Division Bench Judgment:
The Division Bench comprising Chief Justice Alok Aradhe and Justice Gautam Ankhad allowed the appeals filed by the three banks.
Although the detailed judgment is awaited, the Bench set aside the interim order of the Single Judge, thereby permitting the banks to proceed with fraud classification proceedings.
1. Restoration of Regulatory Process
By lifting the stay, the Division Bench restored the banks’ authority to continue proceedings under the RBI framework.
The Bench appears to have accepted the argument that technical objections regarding auditor qualifications did not justify halting the entire process.
2. Emphasis on Regulatory Discipline
The decision reflects judicial deference to the statutory and regulatory scheme governing banking fraud.
Fraud classification mechanisms are designed to protect financial institutions and ensure accountability.
Interference at preliminary stages may disrupt this objective.
3. Implicit Rejection of Prima Facie Defects
While detailed reasoning is awaited, the Division Bench’s order indicates disagreement with the Single Judge’s prima facie conclusion regarding statutory non-compliance.
The Bench’s decision suggests that the Companies Act qualification requirements may not strictly apply to forensic auditors appointed under RBI Master Directions.