The Calcutta High Court has upheld Axis Bank’s decision to classify a borrower’s loan account as fraudulent. The court said that repayment of dues through a One-Time Settlement (OTS) does not stop a bank from taking action under the Reserve Bank of India’s (RBI) fraud framework. The court observed that repaying a loan does not erase fraudulent actions that put the bank’s money and security at risk.
OTS (One Time Settlement) Loan Scheme is a facility offered by banks and financial institutions to borrowers who are unable to repay their loans in full. Under this scheme, the bank may agree to accept a reduced amount as full and final settlement of the loan account.
A Division Bench of Justices Rajasekhar Mantha and Rai Chattopadhyay dismissed an appeal filed by Bhanu Properties and another appellant. The appeal challenged an earlier order of a Single Judge who had refused to interfere with the bank’s decision to classify the loan account as fraudulent.
The court stated that repayment of a bank loan does not remove the consequences of actions that exposed the bank to financial risk. It said that even if a borrower later repays the debt, fraudulent conduct found by the bank does not disappear. The judges also noted that the OTS agreement between the bank and the borrower cannot prevent the bank from proceeding under the RBI Master Circular on fraud dated July 1, 2016.
The court further observed that a show-cause notice had already been issued to the borrowers. The OTS agreement did not contain any clause regarding the fraud proceedings. According to the court, banks may settle loans for various reasons, but such settlements do not protect borrowers from the consequences provided under the RBI’s fraud guidelines. The court said that the purpose of the RBI circular is to discourage borrowers from misleading banks and financial institutions while obtaining loans.
The dispute began when the appellants challenged Axis Bank’s decision to classify their loan accounts as Non-Performing Assets (NPAs). They had also challenged a notice issued under the SARFAESI Act. However, that challenge was rejected. After that, the bank started proceedings to classify the account as fraudulent.
Axis Bank issued a show-cause notice on December 30, 2023. The bank alleged that the borrowers had made serious misrepresentations regarding stocks that were pledged to the bank as security. The allegations were based on forensic audit reports. Since the borrowers did not submit any formal reply, the bank declared the account fraudulent on March 5, 2024.
Before the Division Bench, the appellants argued that the bank’s claim had already been settled through an OTS. They pointed out that against the bank’s claim of Rs. 3.72 crore, they had settled the account for Rs. 2.40 crore and had paid the full amount. They also relied on a no-dues certificate issued by the bank. According to them, the fraud classification should not continue after repayment of the loan.
The appellants also claimed that the principles of natural justice had been violated because a forensic stock audit report dated March 30, 2023, was not provided to them.
However, the court noted that the borrowers had not even replied to the show-cause notice issued under the RBI Master Circular. Therefore, they could not claim serious prejudice due to the non-supply of one audit report, especially when they had already received most of the forensic audit reports covering the period from March 2018 to April 2022.
The bench further observed that the allegations were not based only on the March 2023 audit report. The allegations related to misleading stock statements submitted between 2018 and April 2022. The court pointed out that these stock statements were originally prepared and submitted by the borrowers themselves and were always in their possession.
The court also noted that the appellants had neither formally requested the forensic audit reports nor replied to the show-cause notice. Therefore, they failed to prove that they suffered any prejudice because of the alleged non-supply of the March 2023 report.
Rejecting all the arguments of the appellants, the court held that repayment under the OTS did not wipe out the consequences of the conduct identified by the bank. The judges emphasized that the settlement agreement was completely silent on the issue of fraud proceedings.
Finding no reason to interfere with the earlier order of the Single Judge, the Division Bench dismissed the appeal and upheld Axis Bank’s decision to classify the loan account as fraudulent.
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