Gatekeepers or Co-Conspirators? Redefining Professional Liability and Criminal Accountability in Bank Due Diligence

In the complex machinery of corporate lending, the integrity of a bank’s credit decision often rests upon the shoulders of external due diligence agencies. However, a significant legal boundary exists between a professional lapse and a criminal act. The case of Vikas Garg & Anr. vs. State Through CBI¹ highlights that while a simple error of judgment is a civil wrong, the deliberate recording of false facts to facilitate a fraudulent loan transcends mere negligence and enters the realm of criminal conspiracy.

The crisis began in 2013 when a fictitious entity, M/s Shree Balaji Overseas, secured a loan of Rs. 6 Crore from Corporation Bank using fabricated collateral. Central to this sanction was a favorable Due Diligence Report (DDR) submitted by empanelled professionals. While the report claimed that a physical verification had been conducted and original documents were inspected, subsequent investigations by the CBI revealed a startling reality: the “Finance Executive” had never visited the sites, and the photographs used in the report were recycled from an entirely different entity’s file.

The petitioners argued that they were merely professionals who relied on provided documents and that any failure was an internal lapse by an employee. The High Court of Delhi disagreed, focusing on the “positive duty” imposed on the agency to “weed out unscrupulous persons.” By affirmatively stating they had verified non-existent sites and documents, the agency provided the “factual foundation” for the court to frame charges under the modern legal framework.

While the case was originally filed under the Indian Penal Code (IPC), the principles now align with the Bharatiya Nyaya Sanhita (BNS), which governs such offenses today:

Section 61 BNS (formerly 120B IPC) – Criminal Conspiracy: The court inferred a meeting of minds between the agency and the borrower. Because the report verified “non-existent” facts, it was viewed as a coordinated tool to facilitate an illegal act.

Section 318 BNS (formerly 420 IPC) – Cheating: By submitting a report based on fictitious premises, the agency allegedly induced the bank to dishonestly deliver public funds it otherwise would have protected.

Section 336 BNS (formerly 468 IPC) – Forgery for Purpose of Cheating: The DDR, containing recycled photographs and false claims of inspection, was treated as a forged document created specifically to deceive the lender.

Section 340 BNS (formerly 471 IPC) – Using as Genuine a Forged Document: Presenting the falsified report to the bank as a “genuine” verification holds the author liable as if they had forged the records themselves.

To understand the evolution of this “grave suspicion” standard, we must look at how Indian courts have historically distinguished between an honest mistake and a criminal collusive act through a series of landmark judgments.

In the case of CBI v. K. Narayana Rao (2012)², the Supreme Court addressed the liability of a bank panel advocate. The court held that while a professional cannot be prosecuted merely for a wrong legal opinion, a crucial caveat exists: if evidence shows the professional was “active in the conspiracy” or intentionally provided a false report to aid fraudsters, the immunity of “professional opinion” vanishes. The court emphasized that a professional must exercise a “reasonable degree of care,” and a gross deviation from this standard suggests a meeting of minds with the main accused.

Similarly, in K. Ramaswamy v. State (CBI) (2020)³, the court dealt with an approved valuer who significantly inflated a property’s value to assist a borrower in obtaining a higher loan. The court ruled that when a valuer provides a “fanciful” valuation bearing no resemblance to market reality, the action ceases to be an error of judgment and becomes a deliberate act to facilitate cheating. This justifies charges of criminal conspiracy because the valuer’s expertise intended as the bank’s primary defense—was instead abused to commit a criminal breach of trust.

The scope of this accountability was further expanded in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. (2020)⁴. Although the case primarily focused on SARFAESI proceedings, the court touched upon the accountability of “gatekeepers” such as auditors, advocates, and valuers. It noted that professionals who provide false certificates or reports used to draw money from banks are liable for criminal prosecution if the “attendant circumstances” suggest they possessed knowledge that the documents were being used for an illegal end.

Under the legal principles established in Amit Kapoor v. Ramesh Chander⁵, the judiciary has clarified that at the stage of framing charges, the requirement is not proof beyond a reasonable doubt, but a “strong suspicion” that the accused committed the offense. These precedents collectively demonstrate that a “limited scope of work” is not a shield against material misrepresentations. When a due diligence report acts as the gateway for siphoning public funds, its authors must face the rigors of a criminal trial to test their involvement in the alleged conspiracy. Professional accountability, in the face of such “grave suspicion,” must give way to judicial scrutiny to prevent the miscarriage of justice.

Conclusion

Under the legal principles established in Amit Kapoor v. Ramesh Chander, the court noted that at the stage of framing charges, it is not looking for proof beyond a reasonable doubt, but for a “strong suspicion” that the accused committed the offense. These cases collectively demonstrate that a “limited scope of work” is not a shield against material misrepresentations.

When a due diligence report acts as the gateway for siphoning public funds, its authors must face the rigors of a criminal trial. Professional accountability, in the face of such “grave suspicion,” must give way to judicial scrutiny to prevent the miscarriage of justice..

Citations

1. Vikas Garg & Anr. vs. State Through CBI CRL.M.C. 6496/2022 ↩︎
2. CBI v. K. Narayana Rao (2012) 9 SCC 512 ↩︎
3. K. Ramaswamy v. State (CBI) Crl.O.P. No. 9397 of 2020 (Madras High Court) ↩︎
4. Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. (2020) 19 SCC 729/ [2020] 5 S.C.R. 1038 ↩︎
5. Amit Kapoor v. Ramesh Chander (2012) 9 SCC 460 ↩︎

Expositor(s): Adv. Archana Shukla