Court Protects Directors from Penal Consequences Without Individual Fraud Declaration
In a pivotal ruling, the Bombay High Court has provided clarity on the implications of declaring a company as "fraud" under the Master Directions on Fraud Risk Management in Commercial Banks. The judgment, delivered by a division bench comprising Justices B.P. Colabawalla and Somasekhar Sundaresan, addressed the concerns of directors facing potential penal consequences due to their company's fraud designation amidst an ongoing Corporate Insolvency Resolution Process (CIRP).
The case, Narendra Rajani v. Axis Bank Ltd., revolved around a writ petition filed by the directors of a company undergoing CIRP. The petitioners challenged the declaration of their company as "fraud" by Axis Bank, fearing penal repercussions under the Fraud Master Circular of 2024, specifically Clause 4.4. They argued that such a declaration could unjustly impact them despite the company's management being under an Interim Resolution Professional.
The court, in its order dated August 5, 2026, clarified that merely declaring a company as "fraud" does not automatically impose penal consequences on its directors. The judges emphasized that directors can only face such consequences if they are individually declared as "fraudsters" following the due process outlined in the Fraud Master Circular of 2024.
The court further noted that the bank had already retracted the Fraud Monitoring Return (FMR) mentioning the petitioners and the company, thus alleviating the immediate apprehensions of the directors. The judges highlighted that any criminal proceedings against the directors would proceed independently and be decided based on their own merits, uninfluenced by the fraud declaration against the company.
Additionally, the court allowed the bank to report the company's fraud status to the Central Fraud Registry, provided the necessary procedures are followed. However, it firmly stated that the directors' names would not appear in the registry unless they are declared fraudsters through the proper channels.
This judgment reinforces the procedural safeguards for directors under the Fraud Master Circular and underscores the importance of following due process before imposing penal consequences.
Bottom line:-
Declaration of "fraud" under the Master Directions on Fraud Risk Management in Commercial Banks and its implications on directors of a company undergoing Corporate Insolvency Resolution Process (CIRP).
Statutory provision(s): Insolvency and Bankruptcy Code, 2016, Fraud Master Circular of 2024, Clause 4.4, Master Directions on Fraud Risk Management
Narendra Rajani v. Axis Bank Ltd., (Bombay)(DB) : Law Finder Doc id # 2960890
