HC: Union Bank’s fraud tag invalid without show cause notice

The case relates to allegations that Union Bank was cheated of ₹21.80 crore between 2008 and 2018. An FIR was registered against Kanungo, proprietor of M/s. Trison Impex, in May 2023

MUMBAI: The Bombay High Court has quashed Union Bank of India’s decision to classify the account of a Mumbai-based businessman Kamlesh Kanungo as “fraudulent,” holding that the bank violated principles of natural justice by failing to grant him a hearing before taking the action.

HC: Union Bank’s fraud tag invalid without show cause notice

A bench of Justices Bharati Dangre and Manjusha Deshpande, in an order passed on May 7, held that the bank’s action “cannot be sustained” as Kanungo was not issued a show-cause notice or given an opportunity to respond before declaring the account fraudulent on September 9, 2020.

The case relates to allegations that Union Bank was cheated of ₹21.80 crore between 2008 and 2018. An FIR was registered against Kanungo, proprietor of M/s. Trison Impex, in May 2023.

Trison Impex, established in 2001, dealt in steel scrap and finished steel products through M/s Sikkim Ferro Alloys Ltd, where Kanungo was one of the principal directors. The firm was granted a cash credit facility of ₹10 crore in October 2008, which was periodically renewed till March 2018. After the account turned a non-performing asset on October 31, 2018, Union Bank issued a recall notice and later classified it as a Red Flag Account in February 2019.

According to the bank, a forensic audit found that ₹9.46 crore was withdrawn through Kanungo’s personal account during 2016-17 and 2017-18, while more than 72% of the company’s turnover was routed through accounts in Yes Bank and Axis Bank instead of lender accounts.

The audit also flagged advances to suppliers without corresponding receipt of goods and an outstanding debit balance of ₹49.43 crore against M/s Trison Agencies.

Subsequently, Kanungo’s account was declared “fraudulent” in September 2020 during the course of the investigation.

Kanungo challenged the action before the high court, arguing that the bank wrongly applied the Reserve Bank of India’s directions on fraud classification and reporting. He relied on revised RBI guidelines issued on July 15, 2024, which make it mandatory for banks to provide notice and hearing before declaring an account as fraudulent.

The court said compliance with natural justice is compulsory before any adverse action is taken against a borrower, promoter or director. The court also said banks must provide complete details of transactions and allegations forming the basis of the proposed fraud classification.

While quashing the declaration, the court allowed Union Bank to initiate fresh proceedings under the revised RBI framework after following due process.