The Bombay High Court has cancelled Union Bank of India’s decision to classify the account of Mumbai-based businessman Kamlesh Kanungo as “fraudulent.”
The court said the bank violated the principles of natural justice because it did not give Kanungo a chance to explain his side before taking the action.
A bench of Justices Bharati Dangre and Manjusha Deshpande passed the order on May 7. The court said the bank’s action could not be sustained because Kanungo was neither issued a show-cause notice nor given an opportunity to respond before his account was declared fraudulent on September 9, 2020.
The case is related to allegations that Union Bank suffered a loss of Rs 21.80 crore between 2008 and 2018. An FIR was later registered against Kanungo, proprietor of M/s Trison Impex, in May 2023.
The firm – Trison Impex was established in 2001 and dealt in steel scrap and finished steel products through M/s Sikkim Ferro Alloys Ltd, where Kanungo was one of the main directors.
The company received a cash credit facility of Rs 10 crore in October 2008, which was renewed from time to time till March 2018. However, the account became a non-performing asset (NPA) on October 31, 2018.
After this, Union Bank issued a recall notice and later classified the account as a Red Flag Account in February 2019.
According to the bank, a forensic audit found that Rs 9.46 crore was withdrawn through Kanungo’s personal account during 2016-17 and 2017-18. The audit also found that more than 72 percent of the company’s turnover was routed through accounts in Yes Bank and Axis Bank instead of the lender bank accounts.
The audit further alleged that advances were made to suppliers without receiving goods and showed an outstanding debit balance of Rs 49.43 crore against M/s Trison Agencies.
Later, in September 2020, Kanungo’s account was declared “fraudulent” during the investigation.
Kanungo challenged this decision before the Bombay High Court. He argued that the bank wrongly applied the Reserve Bank of India’s guidelines related to fraud classification and reporting.
He relied on revised RBI guidelines issued on July 15, 2024, which make it compulsory for banks to issue notice and provide a hearing before declaring any account as fraudulent.
The Bombay High Court said that following the principles of natural justice is mandatory before taking any adverse action against a borrower, promoter, or director.
The court also said that banks must provide full details of the transactions and allegations on the basis of which they plan to classify an account as fraudulent.
While cancelling the fraud declaration, the court allowed Union Bank to start fresh proceedings under the revised RBI guidelines after following proper legal procedure.
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