Natural justice in fraud classification requires supply of forensic reports, a fair hearing, and a reasoned decision before declaration.

Classification of a company account as fraud under the RBI Master Directions on Frauds, 2016 must comply with natural justice because it carries serious civil consequences. The Gujarat High Court read audi alteram partem into Clauses 8.9.4 and 8.9.5, holding that the lender must supply the forensic audit material, give a reasonable opportunity to respond, and consider objections through a reasoned order. Mere participation in meetings or awareness of a draft report was insufficient. As the forensic audit report and supplementary report were not furnished and no effective hearing was granted, the fraud declaration was quashed and the matter remitted for fresh consideration.

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Issues: Whether the decision classifying the company's account as fraud could be sustained when the forensic audit reports were not furnished to the borrowers and no effective opportunity was given to submit a representation before the fraud declaration.

Analysis: The decision to classify an account as fraud under the Reserve Bank of India Master Directions on Frauds, 2016 carries serious civil consequences and must conform to natural justice. The rule of audi alteram partem is read into Clauses 8.9.4 and 8.9.5, requiring the lender banks to furnish the forensic audit material, afford a reasonable opportunity to reply, and pass a reasoned order on objections. Mere participation in meetings or awareness of a draft report does not satisfy this requirement. On the admitted facts, the forensic audit report and supplementary report were not supplied and no effective hearing was granted before the fraud classification.

Conclusion: The fraud declaration could not be sustained and was liable to be quashed for breach of natural justice. The matter was remitted for fresh consideration after supplying the reports and granting an opportunity to represent.

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