Key outcome: The Punjab and Haryana High Court dismissed the writ petition on 24 September 2026, holding that SBI had complied with the principles of natural justice by issuing a show-cause notice, supplying the forensic audit report, considering the petitioner’s reply, and passing a reasoned order.
Punjab and Haryana High Court Upholds SBI’s Fraud Classification of Woolways India Limited’s Loan Account in Bank Showcause Notice Challenged case.
Key Grounds for Bank Showcause Notice Challenged
- Lack of Jurisdiction or Proper Committee Composition: Notices issued by committees lacking the mandatory representation (such as required Whole-Time Director, CEO, or proper quorum under RBI Master Directions) are legally vulnerable. [1]
- Non-Compliance with RBI Timelines & Procedures: Under RBI Master Directions (and Supreme Court rulings in State Bank of India v. Rajesh Agarwal and subsequent clarifications like State Bank of India v. Amit Iron Private Limited), banks must provide a reasonable response time—typically not less than 21 days—and cannot unilaterally skip due process
Judicial Stance
- Intervention at Notice Stage: While courts generally discourage premature challenges to a mere show-cause notice, they will step in and quash the notice or subsequent classification order if the bank acts without jurisdiction, breaches mandatory RBI guidelines, or denies core evidentiary material. [1, 2, 3, 4]
- Remedy: When high courts set aside a defective notice, they often grant the bank liberty to issue a fresh, compliant show-cause notice accompanied by the complete set of relied-upon documents
Introduction
Before classifying a borrower’s loan account as fraudulent, banks must follow the applicable regulatory framework and comply with the principles of natural justice. The borrower must be given a meaningful opportunity to respond to the allegations, including an opportunity to explain the conclusions of the forensic audit report.
In Rakesh Nayyar v. The State Bank of India and Others, the Punjab and Haryana High Court examined whether the State Bank of India (SBI) had followed the required procedure before classifying the loan account of Woolways India Limited as “fraud” and reporting the petitioner’s name to the Reserve Bank of India (RBI).
In its judgment dated 24 September 2026, a Division Bench comprising Justice Sanjiv Berry and Justice Jasgurpreet Singh Puri dismissed the writ petition. The Court held that SBI had issued a comprehensive show-cause notice, supplied the forensic audit report, considered the petitioner’s reply, and passed a reasoned order. It therefore found no violation of the principles of natural justice warranting judicial interference.
The judgment discusses the application of the Supreme Court’s ruling in State Bank of India v. Rajesh Aggarwal and illustrates how procedural fairness is assessed in bank fraud-classification proceedings.
Case Details
- Case Title: Rakesh Nayyar v. The State Bank of India and Others
- Case Number: CWP-20643-2026 (O&M)
- Court: Punjab and Haryana High Court, Chandigarh
- Date of Judgment: 24 September 2026
- Bench: Justice Sanjiv Berry and Justice Jasgurpreet Singh Puri
- Jurisdiction: Articles 226 and 227 of the Constitution of India
- Respondent Bank: State Bank of India
- Company Involved: Woolways India Limited
- Final Outcome: Writ petition dismissed.
Background of the Case
The petitioner, Rakesh Nayyar, was a director of Woolways India Limited, a company engaged in manufacturing hosiery and textile products.
The company had availed credit facilities from a consortium of banks, including Standard Chartered Bank and SBI.
In 2018, Standard Chartered Bank initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, before the National Company Law Tribunal (NCLT), New Delhi Bench.
By an order dated 10 May 2018, the NCLT admitted the petition and initiated the Corporate Insolvency Resolution Process (CIRP). Subsequently, the company’s management, assets, and operational records were taken over by the Interim Resolution Professional, who was later appointed as the Liquidator.
The company’s insolvency proceedings and the subsequent handling of its records formed part of the factual background of the dispute.
SBI Issues Show-Cause Notice Based on Forensic Audit
On 2 December 2025, SBI issued a show-cause notice to the petitioner, asking why the account and his name should not be categorised and reported as fraudulent under the applicable RBI guidelines.
The notice contained five allegations based on a forensic audit report dated 25 March 2019, prepared by M/s Ravin Rajan & Co., Chartered Accountants. The report comprised 157 pages.
As recorded in the judgment, the allegations included matters concerning:
- Alleged misappropriation of funds and criminal breach of trust.
- Alleged manipulation of books of account through fictitious accounts.
- Alleged conversion of property.
- Alleged availing of credit facilities by overstating assets.
- Other financial discrepancies, including issues relating to cash-credit facilities and banking transactions.
These were allegations considered during the bank’s fraud-classification proceedings; they should not be confused with criminal findings of guilt.
The petitioner submitted a reply to the show-cause notice on 18 December 2025.
Petitioner’s Arguments Before the High Court
The petitioner challenged the bank’s decisions dated 21 February 2026 and 11 March 2026, contending that the classification of the loan account as “fraud” and the reporting of his name to the RBI were unlawful.
His counsel raised several arguments.
1. Inadequate Opportunity to Defend the Allegations
The petitioner contended that the financial allegations involved complex accounting matters, including an alleged ₹17.08 crore mismatch in raw-material entries and discrepancies in gate-out registers.
According to his submissions, the relevant company records had been placed under the custody and control of the insolvency professional or Liquidator. He argued that this restricted his ability to produce the necessary material to answer the allegations.
2. Effect of the Resolution Process
The petitioner also relied on a repayment plan dated 23 September 2025, which, according to his submissions, involved repayment of ₹15.1067 crore and was approved on 10 November 2025 with SBI’s consent.
He argued that the bank’s subsequent adverse action was not sustainable in the circumstances.
3. Reliance on Supreme Court Precedent
The petitioner relied on the Supreme Court’s decision in State Bank of India v. Rajesh Aggarwal, reported in (2023) 6 SCC 1, to contend that the bank was required to comply with the principles of natural justice before classifying the account as fraudulent.
He therefore sought the quashing of the impugned orders.
SBI’s Defence
SBI opposed the writ petition and argued that fraud-classification proceedings under the applicable RBI directions were independent of the insolvency resolution process.
The bank contended that the completion of a resolution plan or settlement did not automatically prevent it from examining suspected past irregularities identified through a forensic audit.
SBI further submitted that:
- The show-cause notice dated 2 December 2025 had been served on the petitioner.
- The forensic audit report had been supplied with the notice.
- The petitioner had submitted a detailed reply dated 18 December 2025.
- The Review Committee had considered the reply and relevant documents.
- One of the five allegations had been dropped after consideration of the petitioner’s response.
- The decision to classify the account as fraudulent was supported by the committee’s recorded reasoning.
On this basis, SBI maintained that the petitioner had received a fair opportunity to respond and that the challenged orders did not violate the principles of natural justice.
Supreme Court’s Ruling in Rajesh Aggarwal: The Legal Framework
An important aspect of the judgment is its discussion of the Supreme Court’s decision in State Bank of India v. Rajesh Aggarwal.
The Supreme Court had explained that the principles of natural justice apply to proceedings for classifying a borrower’s account as fraudulent under the relevant RBI Master Directions on Frauds.
The requirements identified in the judgment include:
- Notice of allegations: The borrower must be informed of the allegations forming the basis of the proposed fraud classification.
- Access to the forensic audit report: The borrower must be furnished with the relevant report so that its conclusions can be addressed.
- Opportunity to submit a representation: The borrower must have a reasonable opportunity to explain the findings and respond to the allegations.
- Consideration of the response: The bank must genuinely consider the objections and material submitted by the borrower.
- A reasoned decision: The final classification must be supported by an order that addresses the objections raised.
These safeguards reflect the principle of audi alteram partem—the requirement that a person affected by an adverse decision should have an opportunity to be heard.
The High Court applied this framework to assess whether SBI had complied with the required procedure in the case before it.
Why Did the High Court Dismiss the Petition?
After examining the record, the High Court found that SBI had followed the procedure required by the principles of natural justice.
1. The Forensic Audit Report Was Supplied
The Court noted that the show-cause notice dated 2 December 2025 was accompanied by the 157-page forensic audit report.
The petitioner had therefore been provided with the report on which the bank’s allegations were based.
2. The Petitioner Submitted a Detailed Reply
The petitioner responded to the notice on 18 December 2025, addressing the allegations point by point.
The Court examined whether the bank had considered this response before making its decision.
3. The Review Committee Considered the Objections
The Court observed that the Review Committee for Identification of Account as Fraud considered the petitioner’s reply and the relevant material.
Significantly, the committee dropped one of the five allegations concerning the company’s maintenance of current accounts with other banks and routing transactions through them without the lender bank’s permission.
The Court treated this as an indication that the committee had considered the petitioner’s objections rather than simply rejecting the reply without examination.
The remaining allegations were considered in light of the forensic auditor’s findings and the petitioner’s response.
4. The Petitioner Did Not Establish That Relevant Records Had Been Requested but Withheld
The Court also noted that there was nothing pleaded on record to suggest that the petitioner had sought to produce particular records that were in the custody of the NCLT at the relevant time.
In the circumstances of the case, the Court was not persuaded that the alleged lack of access to records established a violation of natural justice.
5. The Bank Passed a Reasoned Order
After examining the show-cause notice, the reply, and the Review Committee’s proceedings, the Court concluded that SBI had considered the petitioner’s objections and passed a reasoned decision.
It held that the bank had complied with the principles of natural justice and the requirements discussed in Rajesh Aggarwal.
The Court consequently found no illegality or infirmity in the impugned orders warranting interference.
Final Decision of the Punjab and Haryana High Court
The Division Bench dismissed the writ petition, finding no merit in the challenge to SBI’s fraud-classification decision.
The Court held that the bank had acted in accordance with law and had not violated the principles of natural justice in the process followed.
Accordingly, the orders dated 21 February 2026 and 11 March 2026 were not set aside.
The judgment’s central conclusion was that the procedural safeguards recognised in Rajesh Aggarwal had been complied with in the facts of this case.
Legal Significance of the Judgment
1. Natural Justice Requires a Meaningful Opportunity, Not Merely a Formal Notice
The judgment demonstrates the importance of examining the complete procedure followed by a bank. The existence of a show-cause notice alone may not resolve the issue; the notice, supporting material, consideration of the response, and reasoning behind the final decision must be examined.
In this case, the Court relied on the combined effect of these steps.
2. The Borrower’s Reply Must Be Considered
The dropping of one allegation was an important factual consideration in the Court’s assessment of the Review Committee’s process.
It indicated that the committee had examined the response and modified its position on at least one issue.
3. Insolvency Proceedings Do Not Automatically End Fraud-Classification Proceedings
SBI argued that fraud classification was independent of the resolution process. The Court ultimately upheld the bank’s decision on the basis of its compliance with the applicable procedure.
The judgment should not be read as establishing that every fraud-classification action following an insolvency resolution is automatically valid. The applicable law and the facts of each case remain relevant.
4. Compliance With Procedure Was Central to the Outcome
The judgment turned on whether the bank had followed the safeguards identified by the Supreme Court.
The Court found that the forensic audit report had been supplied, the petitioner had been heard through his written representation, the objections had been considered, and a reasoned order had been passed.
5. Fraud Classification and Criminal Guilt Are Different Questions
The judgment concerned the legality of the bank’s administrative and regulatory decision to classify the account as fraudulent.
It did not determine criminal guilt in a prosecution. The legal consequences of fraud classification under banking regulations should therefore be distinguished from a criminal court’s determination of whether an offence has been proved.
Practical Takeaways for Borrowers and Company Directors
Borrowers and directors facing proposed fraud classification may consider the following steps:
- Carefully examine the show-cause notice and identify each allegation.
- Obtain and review the forensic audit report and the material relied upon by the bank.
- Submit a timely, point-by-point reply supported by relevant documentary evidence.
- Identify specific records that are unavailable and explain why they are necessary to answer the allegations.
- Request access to relevant material where legally appropriate and maintain records of such requests.
- Address each allegation separately instead of relying solely on general denials.
- Review the bank’s final order to determine whether the objections and evidence have been considered.
- Obtain legal advice on available remedies if the applicable procedure or principles of natural justice have not been followed.
These are general informational suggestions and do not guarantee any particular outcome in a fraud-classification proceeding.
Frequently Asked Questions (FAQs)
1. What was the decision in Rakesh Nayyar v. State Bank of India?
The Punjab and Haryana High Court dismissed the writ petition on 24 September 2026 and upheld SBI’s challenged fraud-classification orders.
2. Why did Rakesh Nayyar challenge SBI’s decision?
He challenged the classification of Woolways India Limited’s loan account as fraudulent and the reporting of his name to the RBI, alleging that the bank had violated the principles of natural justice.
3. What role did the forensic audit report play?
The bank’s five allegations were based on a forensic audit report dated 25 March 2019. The High Court noted that the report had been supplied with the show-cause notice.
4. What is the principle of audi alteram partem?
It is a principle of natural justice requiring that a person affected by an adverse decision be given a meaningful opportunity to respond before the decision is made.
5. What did the Supreme Court decide in Rajesh Aggarwal?
As discussed in the judgment, the Supreme Court held that borrowers must receive an opportunity to address the forensic audit findings before their accounts are classified as fraudulent. The bank must consider their representations and issue a reasoned order.
6. Did SBI drop any allegations against the petitioner?
Yes. The Review Committee dropped one of the five allegations relating to the company’s maintenance of current accounts with other banks and the routing of transactions through those accounts without the lender bank’s permission.
7. Why did the High Court find no violation of natural justice?
The Court found that the petitioner had received the show-cause notice and forensic audit report, had submitted a reply, and that the Review Committee had considered the response before passing a reasoned decision.
8. Does the judgment establish that the petitioner was criminally guilty of fraud?
No. The judgment concerned the validity of the bank’s fraud-classification decision. It was not a criminal conviction.
Conclusion
The judgment in Rakesh Nayyar v. The State Bank of India and Others reinforces the importance of procedural fairness in bank fraud-classification proceedings while demonstrating that the legality of such a decision depends on the facts and record of the individual case.
Applying the principles recognised by the Supreme Court in State Bank of India v. Rajesh Aggarwal, the Punjab and Haryana High Court found that SBI had supplied the forensic audit report, considered the petitioner’s response, dropped one allegation, and passed a reasoned order.
The Court therefore dismissed the writ petition and declined to interfere with the bank’s classification of Woolways India Limited’s loan account as fraudulent.
For borrowers and company directors, the decision underscores the importance of engaging meaningfully with the allegations, producing relevant evidence, and examining whether the bank has complied with the applicable procedural safeguards.
Source: Rakesh Nayyar v. The State Bank of India and Others, CWP-20643-2026 (O&M), decided on 24 September 2026, Punjab and Haryana High Court at Chandigarh.
Disclaimer: This article is for general legal information and educational purposes. It is based on the uploaded judgment and does not constitute legal advice. The applicable regulatory directions and the facts of each matter should be examined before drawing conclusions about any individual fraud-classification proceeding.
by Satish Mishra Adv (99888-17966)
