CLASSIFICATION OF BORROWER AND GUARANTOR AS FRAUD BY A BANK

In M/s. Kirubha Exports Versus Reserve Bank of India and Others - 2025 (9) TMI 55 - MADRAS HIGH COURT, Madurai Bench of Madras High Court, decided on 13.08.2025, the petitioner is engaged in the cashew processing unit. Due to Customs duty, demonetisation of currency in 2016 and global resistances lead the petitioner suffered a great loss. Therefore, the petitioner took loan from the respondents viz, Tamil Nad Mercantile Bank (‘Bank’ for short). The petitioner did not repay any loan amount. the Thalakulam Branch of the bank classified the petitioner and the guarantor as fraudulent, vide their order dated 05.04.2025. In the said order it was mentioned that the petitioner did not file any reply to the notice of the bank, proposing to classify the accounts of the petitioner as fraud. The petitioner did not avail the personal hearing offered to it. Therefore, in view of the RBI circular and order of Madras High Court dated 19.12.2023 determined the petitioner, its proprietrix Smt. V.T.Kirubha and the guarantor Shri Vimal Kumar as frauds. Further the bank proceeded to initiated the proceedings under SARFAESI Act.

Against the said order the petitioner filed a writ petition before the High Court. The petitioner submitted the following before the High Court-

• The declaration of the petitioner’s account as fraud by the bank is contrary to MSME Notification dated 29.05.2025.
• In the above said notification a method has been prescribed for taking corrective action plan to be taken by the Committee at the instance of the creditor.
• The steps given in the said notification has not been followed by the bank. Therefore, the impugned communication of the bank ought to be quashed.
• The assets of the petitioner were sought to be auctioned for the second time on 05.08.2025.
• No bidders were there and therefore a fresh auction should be conducted.
• A show cause notice dated 16.09.2023 was issued to the petitioner for which the petitioner filed reply on 15.11.2023.
• The said show cause notice was issued by the bank based in its order dated 22.02.2023 in which it was indicated that the petitioner was an MSME. Therefore, the respondent ought to comply with the framework, dated 29.05.2015 by the Ministry of MSME.
• Since the bank failed to comply with the above the action taken by the bank declaring the accounts of the petitioners as fraud is to be held as arbitrary.

The respondents submitted the following before the High Court-

• The declaration of the petitioner’s account and the guarantors account as fraudulent is in accordance with the circular of Reserve Bank of India dated 15.07.2024.
• The petitioner is in arrears to the tune of Rs. 18.66 crores and therefore the petitioner did not deserve for sympathy.
• Once the proceedings have reached up to the issuance of demand notice and if the borrower fails to give an application for rehabilitation under the frame work, the question of giving any further relief to the borrower would not arise.
• If the petitioner, in response to the demand notice, asserted that it is an MSME and claimed the benefit with affidavits, then the respondent bank ought to look into such claiming, keeping the actions under SARFAESI in abeyance.
• The account of the petitioner was declared as NPA and the demand notice was issued to the petitioner under Section 13(2) of the SARFAESI on 08.12.2022.
• The possession notice was issued on 14.02.2023 under Section 13(4) of SARFAESI.
• Vide sale Notice dated 12.07.2024 it was proposed to auction the properties on 16.08.2024.
• No auction took place on that date and it was proposed to cause second auction vide notice dated 01.07.2025, in which the auction was proposed to be held on 05.08.2025.
• The second auction did not fructify.

The High Court considered the submissions of the petitioner and the respondent bank and RBI. The High Court held that the impugned order of the respondent bank is in consonance with reference to RBI circular dated 15.07.2024, no remedy is available to the petitioner. The petitioner is to pay the outstanding dues and seek relief as it may require. If the petitioner is aggrieved, then he ought to challenge the CRBI circular. As long as the RBI circular is in force the petitioner cannot have any question to question the declaration of the petitioner’s account as fraudulent by the respondent bank. The purpose of the said circular is for prevention, early detection and timely report of the incidents of fraud to law enforcement agencies, RBI and NABARD and dissemination of information by RBI and matters connected therewith or incidental thereto.

Therefore, the High Court dismissed the writ petition filed by the petitioner. The High Court, however, gave liberty to the petitioner to pay the amount to stop the immediate auction by the respondent bank and work out the remedy as provided under the provisions of law.