Banks Move Bombay High Court Challenging Stay Of 'Fraud' Classification Proceedings Against Anil Ambani

In what could spell trouble for industrialist Anil Ambani, three banks - Bank of Baroda, Indian Overseas Bank and the IDBI Bank have moved the Bombay High Court challenging the order of a single-judge, who had stayed fraud classification proceedings initiated by the three banks, against the founder and chairman of the Reliance Group, after prima facie finding 'serious defects' in the forensic audit relied upon by the said banks.

Representing the three banks, Solicitor General Tushar Mehta appearing virtually before a division bench of Chief Justice Shree Chandrashekhar and Justice Gautam Ankhad, highlighted the fact that the forensic audit report dated October 15, 2020, based on which Ambani was categorised as 'fraud' was never challenged by him for the last five years and even in the suit in which single-judge Justice Milind Jadhav passed the impugned order, the industrialist had assailed the said report only on 'technical' grounds and not merits.

The Solicitor General pointed out that initially Ambani was served a show cause notice by the State Bank of India (SBI) and was subsequently classified as 'fraud' based on the audit report. The same was challenged on the ground that the bank did not follow the principles of natural justice as mandated by the Supreme Court and thereon, the Reserve Bank of India (RBI) issued a modified Master Circular in 2024 mandating personal hearing before classifying an account as fraud. 

"Plaintiff never challenged this audit report though in the meanwhile several proceedings took place .. neither any pleading nor prayer against the audit report...Fact remains that no challenge was to the audit report...After a period of 5 years the present suit is filed... Essentially the sole relief is challenging the audit report... It is not challenged on merits despite the report recording siphoning of funds, diverting (of funds) to purposes not contemplated and even misutilisation of funds..." Mehta pointed out. 

The SG pointed out that the 'technical' ground on which Ambani assailed the audit report for the first time in the instant suit was on the technical ground that the BDO LLP was not competent as provided under the Master Circular of 2024. 

"It is challenged on technical ground that the Master Circular 2024 requires audit be conducted by a Chartered Accountant, who can be a member of the Institution of Chartered Accountants (ICA)...They have now argued that the auditor was neither affiliated to ICA nor a member of the said institute and thus did not comply with the provisions of the Master circular," Mehta argued. 

It is the banks' contention that there is no mandate of the Circular that the auditor must be affiliated with the ICA. 

"The relief sought in the suit is basically a virtual restoring of the status quo ante... The finding of the single-judge that the audit report is not in consonance with the Master Circular 2024, is perverse and illegal... The consequence (of the order) is that the account as on today is not a fraudulent account and he can take credits now... In teeth of the fact that already two benches are yet to decide whether it is a fraud account or not..." the SG argued. 

Having heard brief arguments of the Solicitor General, the bench adjourned the matter for further hearing till January 14.

Notably, the single-judge in his January 24 order, held that appointment of BDO LLP as forensic auditor did not conform to the statutory qualification requirements applicable under the Companies Act. It further observed that such non compliance can have disastrous results.

“Appointment of Auditor, whether internal or external even under the 2016 RBI Master directions has to conform to the applicable / relevant statute namely the Companies Act. It will otherwise lead to a disastrous situation wherein there will be a clear dichotomy for appointment of statutory Internal Auditor and External Forensic Auditor as any unqualified person having vast experience can get appointed in that case at the discretion of the Bank. This is not permissible," it had said.