The Bombay High Court has clarified an important legal position concerning the declaration of a company as “fraud” under the Reserve Bank of India’s Fraud Risk Management framework. The Court has held that directors cannot be subjected to the penal consequences prescribed under the RBI’s 2024 Fraud Master Circular merely because the company in which they serve as directors has been classified as “fraud”.
The Division Bench comprising Justice B.P. Colabawalla and Justice Somasekhar Sundaresan observed that the directors must themselves be declared “fraud” in accordance with the procedure prescribed under the applicable RBI Circular before the penal consequences under Clause 4.4 can operate against them.
Bombay High Court’s Key Finding on Fraud Classification
The ruling came in Narendra Rajani and Ors. v. Axis Bank Ltd. and Ors., Writ Petition No. 1580 of 2026.
The dispute concerned three directors of a company undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016. Since an Interim Resolution Professional had been appointed, the company’s Board of Directors stood suspended.
The directors challenged the action of Axis Bank in declaring their company as “fraud”. Their principal concern was that such a declaration could expose them personally to the consequences prescribed under the RBI’s Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions, dated July 15, 2024.
In particular, the directors relied upon Clause 4.4 of the Fraud Master Circular and contended that they could face adverse consequences merely because the company had been classified as fraudulent.
Directors Must Be Individually Declared “Fraud”
The Bombay High Court rejected this apprehension.
The Court clarified that the penal consequences contemplated under Clause 4.4 would arise against directors only when the directors themselves are declared “fraud” after following the procedure prescribed by the RBI framework.
The mere classification of the company as “fraud” does not automatically result in the directors being treated as “fraudsters”.
The Court observed that merely declaring the company as “fraud”, when the petitioners themselves had not been declared “fraud”, would not attract the penal consequences contemplated under Clause 4.4 of the 2024 Fraud Master Circular.
This distinction is significant because a corporate entity and its directors are legally distinct. A finding or classification concerning the company cannot, by itself, be treated as an automatic finding of fraud against every individual director.
Axis Bank’s Fraud Declaration and Central Fraud Registry
The proceedings also involved Axis Bank’s order dated October 23, 2024, declaring the company as “fraud”.
At an earlier stage, the Bombay High Court had directed Axis Bank not to act upon or further implement that order. Subsequently, Axis Bank retracted the Fraud Monitoring Return submitted to the RBI, although the Court noted that the bank was not required to take that step.
The Court was also informed that the names of the company and the directors were no longer appearing in the Central Fraud Registry.
In these circumstances, the Court concluded that the directors’ apprehension regarding the immediate application of penal consequences under Clause 4.4 was unfounded.
RBI’s Position Also Supported the Directors
An important aspect of the judgment was that the RBI itself took a position consistent with the Court’s interpretation.
The Court made it clear that the penal consequences under the Fraud Master Circular are attracted only in accordance with the procedure prescribed therein. Therefore, directors cannot be subjected to such consequences merely because the company associated with them has been classified as fraudulent.
At the same time, the Court did not permanently prevent Axis Bank from taking action against the directors.
The bank remains entitled to initiate proceedings under the Fraud Master Circular for declaring the directors themselves as “fraud”, provided it strictly follows the procedure prescribed by the RBI.
Criminal Proceedings Remain Unaffected
The Bombay High Court also carefully limited the scope of its ruling.
The judgment does not prevent or invalidate criminal proceedings already initiated by Axis Bank against the company or its directors. Such proceedings will continue to be considered independently on their own merits and in accordance with law.
The Court specifically clarified that its observations in the present writ petition should not influence the adjudication of those criminal proceedings.
Thus, the judgment distinguishes between criminal liability and the regulatory consequences arising from classification under the RBI Fraud Master Circular.
Company’s Fraud Classification Not Set Aside
Another important clarification is that the Bombay High Court did not set aside the company’s classification as “fraud”.
Axis Bank remains entitled to report the company’s account as “fraud” in the Central Fraud Registry, subject to compliance with the prescribed procedure.
However, the directors cannot have their names reflected in the Central Fraud Registry or before any other authority as “fraud” merely because the company has received such a classification.
For such action against individual directors, the prescribed procedure must first be followed and the directors must ultimately be declared “fraud”.
Significance of the Judgment
The judgment provides an important safeguard for directors of companies facing fraud classification by banks.
It reinforces the principle that corporate fraud classification does not automatically establish individual fraud or personal liability of directors. Regulatory consequences against individuals must be founded upon the procedure and requirements applicable to those individuals.
The ruling is particularly relevant for directors of companies undergoing insolvency proceedings, as well as cases involving bank fraud classifications, Central Fraud Registry reporting and RBI’s Fraud Risk Management framework.
The petition was accordingly disposed of, with no order as to costs.
Case: Narendra Rajani and Ors. v. Axis Bank Ltd. and Ors.
Case No.: Writ Petition No. 1580 of 2026
Court: Bombay High Court
Bench: Justice B.P. Colabawalla and Justice Somasekhar Sundaresan
Key Issue: Whether declaring a company “fraud” automatically exposes its directors to penal consequences under Clause 4.4 of the RBI Fraud Master Circular, 2024.
Key takeaway: A company’s classification as “fraud” does not, by itself, make its directors “fraudsters”. Individual directors can face the penal consequences under the RBI Fraud Master Circular only after they are themselves declared “fraud” following the prescribed procedure.