In a significant ruling on the interplay between the IBC framework and the RBI’s Fraud Master Directions, the Bombay High Court has disposed of the petition filed by three directors of a company under CIRP, holding that the penal consequences under the Master Directions on Fraud Risk Management in Commercial Banks and All India Financial Institutions dated 15th July 2024 (Fraud Master Circular of 2024) cannot be visited upon directors unless they are individually declared as “fraud” by strictly following the procedure prescribed under the said Circular.
The Court further held that the Bank retains the liberty to initiate proceedings under the Fraud Master Circular of 2024 against the Petitioners for declaring them as “fraud”, provided it adheres to the procedure laid down therein. The Court made it clear that it had not set aside the “fraud” declaration against the company, and the Bank remains free to report the account of the company as “fraud” in the Central Fraud Registry by following the necessary procedure.
The Division Bench comprising Justice B. P. Colabawalla and Justice Somasekhar Sundaresan noted that after the 18th November 2024 order, Axis Bank, though not legally required to do so, retracted the Fraud Monitoring Return filed with the RBI, both in respect of the Petitioners and the company. As on date, the names of the Petitioners and the company were not even reflecting in the Central Fraud Registry. In light of these facts, the Court observed that the apprehension of the Petitioners was wholly unfounded.
The Court emphasised that penal consequences would only arise if the Petitioners themselves were declared as “fraud” by the Bank, and that merely declaring the company as “fraud” without declaring the directors as “fraudsters” would not attract the penal consequences under Clause 4.4 of the Fraud Master Circular of 2024. The RBI also confirmed this stand. The Court clarified that its observations would not impact any criminal proceedings initiated by the Bank against the company and the Petitioners in their capacity as Directors, which would be decided on their own merits in accordance with law.
Briefly, three individuals, who are the Directors of a company currently undergoing Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016, filed a petition challenging the declaration of “fraud” made against their company by Axis Bank. The company is presently under the control of an Interim Resolution Professional, and its Board of Directors stands suspended. The Petitioners’ grievance was that although the company is now under IRP control, the “fraud” declaration would visit penal consequences upon them under the Master Directions on Fraud Risk Management in Commercial Banks dated 15th July 2024, particularly Clause 4.4 of the said Circular. Earlier, on 18th November 2024, the Court had granted ad-interim relief directing Axis Bank not to act in furtherance of the impugned order dated 23rd October 2024 declaring the company as “fraud”.
