Court Decision on Fraud May Establish New Standard for Insolvency Cases

Bank of Maharashtra has labeled Reliance Communications Ltd. (RCOM) as a fraudulent account, citing financial irregularities such as fund diversion and circular loan transactions involving the company and its subsidiaries. A forensic audit by the bank uncovered that RCOM utilized Letters of Credit (LCs) to transfer Rs 2,779.38 crores to affiliated entities, which the bank considers a criminal breach of trust. The issue has been reported to the Reserve Bank of India (RBI), and the bank intends to file complaints with the Central Bureau of Investigation (CBI) in line with regulatory requirements, as per a

RCOM has been undergoing the corporate insolvency resolution process (CIRP) since June 2019, and under the Insolvency and Bankruptcy Code (IBC), its liability for offenses committed before insolvency is limited. A resolution plan approved by creditors is currently awaiting final approval from the National Company Law Tribunal (NCLT). The company maintains that the disputed credit arrangements were established before the CIRP and will be addressed through the insolvency or liquidation process, according to an

The Bombay High Court recently dismissed Anil Ambani's petition contesting the fraud classification, stating that the petition lacked substance and supporting the Bank of Maharashtra's decision to notify the RBI. Ambani had requested a personal hearing and access to key documents, but the court determined that there was no breach of natural justice. This outcome differs from a previous instance where Canara Bank reversed a similar fraud label following Ambani's legal challenge, as previously noted by ScanX.

This situation further deepens RCOM's financial difficulties, which have been worsened by ongoing challenges in India's telecom industry. While the IBC provides RCOM with protection from lawsuits related to pre-CIRP offenses, being labeled as fraudulent may hinder its restructuring efforts. The company's share price has dropped significantly over the last year, highlighting investor doubts about its future.

This case underscores the growing vigilance of Indian banks and regulators regarding corporate debt. With RCOM's resolution plan still pending NCLT approval, the final decision could influence how fraud accusations are managed within the insolvency process.