Banking & Financial Institution Litigation Legal Counsel | SARFAESI & PMLA | Advocate Ritik Khurana
Representing scheduled commercial banks, non-banking financial companies (NBFCs), private credit funds, corporate borrowers, and promoters in high-stakes financial litigation before High Courts, Commercial Benches, DRT, and appellate tribunals. Mastering Master Directions on Frauds challenges, Willful Defaulter writ petitions, forensic audit dispute resolution, and consortium disputes.
Banking and financial litigation in the Republic of India has expanded far beyond routine non-performing asset (NPA) recoveries into high-stakes regulatory battles involving fundamental corporate survival. When financial institutions initiate aggressive regulatory classifications—branding corporate borrowers as Willful Defaulters under RBI guidelines, unilaterally declaring borrowing accounts as Fraudulent under the RBI Master Directions on Frauds, or launching parallel proceedings before the Enforcement Directorate (ED) under the Prevention of Money Laundering Act, 2002 (PMLA)—the economic consequences are catastrophic. Governed by Reserve Bank of India (RBI) Regulations, the Banking Regulation Act, 1949, and constitutional administrative law, banking litigation requires defending corporate reputations, enforcing natural justice, and untangling multi-bank consortium disputes.
1. Challenging Willful Defaulter Classifications in High Courts
Under the RBI Master Circular on Wilful Defaulters, a borrower is declared a willful defaulter if it defaulted on debt despite having the capacity to pay, diverted funds for unauthorized purposes, siphoned funds without creating assets, or disposed of mortgaged securities without bank approval:
- Draconian Consequences: A willful defaulter classification bars the company and its promoter-directors from accessing any institutional credit from any bank or NBFC for five (5) years, mandates the debarment of promoters from floating new business ventures, triggers mandatory removal of directors, and requires criminal complaints under Section 406/420 of the IPC;
- Procedural Safeguards (Jah Developers Benchmark): In the landmark ruling of State Bank of India v. Jah Developers Pvt. Ltd. (2019), the Supreme Court established that the borrower must be served with a Show-Cause Notice by the Identification Committee detailing all underlying forensic findings; the borrower has the right to file written objections; and any order passed by the Review Committee must be reasoned and served on the borrower;
- Article 226 High Court Writs: Where banks violate natural justice, fail to provide underlying forensic audit reports, or deny personal hearings, borrowers challenge willful defaulter orders through constitutional writ petitions, obtaining stays on publication of names in newspapers.
2. The Frauds Master Directions Revolution: State Bank of India v. Rajesh Agarwal (2023)
In State Bank of India v. Rajesh Agarwal & Ors. (2023), the Supreme Court delivered a historic judgment invalidating the banking sector's practice of classifying accounts as "Fraud" behind the borrower's back:
Mandatory Natural Justice under RBI Frauds Master Directions
The Supreme Court held that classifying an account as fraud under the 2016 RBI Master Directions entails severe civil death—immediate freezing of banking lines, reporting to Central Fraud Registry (CFR), and mandatory referral to the CBI/police:
- The principles of natural justice (Audi Alteram Partem) must be read into the RBI Master Directions on Frauds;
- Banks are legally obligated to serve a detailed Show-Cause Notice containing the complete Forensic Audit Report and all adverse material upon the borrower;
- The borrower must be granted a reasonable opportunity to submit a written explanation and defend its business transactions;
- The Joint Lenders' Forum (JLF) must pass a reasoned speaking order addressing the borrower's objections before classifying the account as fraud or filing a police complaint.
Statutory & Regulatory Framework Matrix
| Governing Statute / Regulation | Regulatory Authority | Mandatory Compliance Obligation | Legal Enforcement & Remedy |
|---|---|---|---|
| Banking Regulation Act, 1949 & RBI Act, 1934 | Reserve Bank of India & Commercial Benches | Regulates licensing, management, lending guidelines, and statutory directions issued to scheduled commercial banks. | Challenging ultra vires bank circulars, penal interest levies, and administrative writ enforcement. |
| Reserve Bank of India (Frauds - Classification and Reporting) Master Directions, 2016/2024 | Joint Lenders' Forum (JLF) & High Courts | Governs classification and reporting of commercial frauds to the Central Fraud Registry (CFR) and CBI/SFIO. | Filing High Court Article 226 writs quashing unilateral fraud declarations under the Rajesh Agarwal precedent. |
| Prevention of Money Laundering Act, 2002 (PMLA) | Enforcement Directorate (ED) & PMLA Special Courts | Regulates attachment of 'proceeds of crime' derived from scheduled banking offenses (Section 420 IPC, Prevention of Corruption). | Section 5 provisional attachment defense, challenging ECIR proceedings, and bail applications under Section 45 PMLA. |
| Negotiable Instruments Act, 1881 (Sections 138 to 142) | Special Judicial Magistrates / Metropolitan Magistrates | Criminalizes dishonor of cheques for insufficiency of funds in commercial loan transactions. | Defending against Section 138 complaints, establishing security cheque status, and High Court Section 482 quashing. |
3. Forensic Audit Disputes & Challenging Biased Audit Reports
In almost every major corporate default, banks commission an external Forensic Audit by private accounting firms to search for diversion of funds, related-party siphoning, and fictitious billing under Sections 43, 45, and 66 of the IBC.
Forensic audits are frequently executed on superficial assumptions by auditors lacking industry knowledge. Our financial litigation practice mounts aggressive evidentiary challenges against defective forensic reports:
Scope of Engagement Violations
Demonstrating that the auditor exceeded the Terms of Reference (ToR) approved by the consortium or relied on unverified draft bank statements rather than authenticated books of accounts.
Management Response Suppression
Proving that the auditor suppressed or failed to incorporate management's documentary explanations and reconciliation invoices, violating professional ICAI forensic auditing standards.
Evidentiary Inadmissibility
Challenging the evidentiary value of unverified digital extractions under Section 65B of the Indian Evidence Act (Section 63 BSA 2023) in court proceedings.
4. Consortium Disputes & Inter-Creditor Agreement (ICA) Deadlocks
Large corporate infrastructure loans are advanced through multi-bank consortiums governed by an Inter-Creditor Agreement (ICA) under the RBI Prudential Framework for Resolution of Stressed Assets (June 7, 2019 Circular).
Litigation routinely erupts between majority lenders seeking an out-of-court restructuring or One-Time Settlement (OTS) and dissenting minority lenders (holding less than 25% of debt) who attempt to trigger unilateral insolvency proceedings before the NCLT. We represent lenders and borrowers in enforcing ICA voting thresholds (requiring 75% by value and 60% by number), holding dissenting lenders to standstill commitments, and defending against parallel conflicting recovery suits.
Frequently Asked Questions
Can a bank declare a company's account as fraud without giving a personal hearing?
No. Under the Supreme Court's landmark judgment in State Bank of India v. Rajesh Agarwal (2023), banks must adhere to the principles of natural justice before classifying any account as fraud. The bank must serve a complete copy of the forensic audit report, issue a show-cause notice, and provide the borrower an opportunity to submit a defense. An ex-parte fraud declaration is unconstitutional and void.
What is the difference between a Non-Performing Asset (NPA) and a Willful Defaulter?
An NPA is a commercial status occurring automatically when loan interest or principal remains overdue for more than 90 days due to economic downturn or business failure. A Willful Defaulter is a penal regulatory status requiring deliberate intent: defaulting despite having the financial capacity to pay, siphoning funds, falsifying records, or illegally disposing of mortgaged assets.
Can a borrower file a writ petition in the High Court against a private sector bank (e.g., ICICI, HDFC)?
While private banks are generally not 'State' under Article 12 of the Constitution, High Courts entertain Article 226 writ petitions against private banks when they perform public duties or when exercising statutory powers under RBI regulations or SARFAESI, particularly regarding willful defaulter or fraud declarations impacting constitutional rights under Article 19(1)(g) and Article 21.
How does an Inter-Creditor Agreement (ICA) bind dissenting lenders in a consortium?
Under the RBI June 7, 2019 Prudential Framework, if lenders representing 75% in value of total outstanding credit facilities and 60% of lenders by number approve a resolution plan, the decision is legally binding on all lenders who signed the ICA, and dissenting lenders are legally barred from initiating independent insolvency or recovery proceedings.
What happens if a bank files a Section 138 cheque bounce case for a security cheque?
In Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel (2022), the Supreme Court ruled that a cheque bounce complaint under Section 138 is maintainable only if the cheque represents a legally enforceable debt on the date of presentation. If a blank security cheque was issued at loan disbursement and the bank fills in the full unpaid amount without endorsing part-payments, the Section 138 prosecution is invalid.
Related Statutory Treatises & Practice Areas
Section 9 interim relief, Section 34 set-aside petitions, and Commercial Courts Act.
Mediation Act 2023 mandates, settlement execution, and court-annexed ADR.
Digital contract enforcement, specific performance, and damages calculation.
Advocate Ritik Khurana
Advocate enrolled with the Bar Council of Punjab & Haryana, practicing before the Punjab & Haryana High Court, Delhi High Court, and Supreme Court of India. Counsel at LLM Advocates, specializing in Aviation Law, DGCA Regulatory Inquiries, Cape Town Convention Enforcements, and High-Stakes Aerospace Transactions.