Setback For Anil Ambani: Bombay High Court Sets Aside Interim Order Restraining "Fraud Classification" Proceedings

The Bombay High Court on Monday allowed the appeals preferred by three banks - Bank of Baroda, Indian Overseas Bank and the IDBI Bank challenging the order of a single-judge, who had stayed fraud classification proceedings initiated by them against Anil Ambani, the founder and chairman of the Reliance Group, after prima facie finding 'serious defects' in the forensic audit relied upon by the said banks.

A division bench of Chief Justice Shree Chandrashekhar and Justice Gautam Ankhad, pronounced the judgment but a detailed copy of the order is yet to be made available.

Representing the three banks, Solicitor General Tushar Mehta had 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 had 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.

The SG had 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 was the banks' contention that there is no mandate of the Circular that the auditor must be affiliated with the ICA.

On the other hand, Senior Advocate Gaurav Joshi appeared on behalf of Ambani and had told the judges that the fraud proceedings initiated against his client based on the audit report resulted in his client's 'civil death' as he could not then borrow money or conduct his business.

The senior counsel argued that the audit report, if read is nothing but "inconclusive, incomplete and error-ridden."

In his submissions, Joshi had pointed out that the audit was carried out after his client's company underwent Insolvency proceedings and a Resolution Professional was appointed.

Further, Joshi had emphasised that the audit carried out by BDO LLP was not a 'forensic' audit but an 'accounts' audit as it did not follow the auditing standards.

In his submissions, Joshi had also pointed out that Reliance Communications (RCom) had some other subsidiaries which are 'single economic unit' and yet the BDO LLP in its report, treated the the mere transfer of funds within different entities belonging to same economic unit as "diverging of funds."

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.