The Supreme Court of India has quashed criminal defamation proceedings initiated against senior officials of the Bank of Baroda, ruling that the complaint was a “gross abuse of process of law.” The Court held that corporate officers cannot be held vicariously liable for offences under the Indian Penal Code in the absence of a specific statutory provision, and that the bank itself was not made an accused party. Furthermore, the Court found the officials were protected under the SARFAESI Act for actions taken in good faith.
The judgment was delivered by a bench comprising Justice Sanjay Karol and Justice Sandeep Mehta in criminal appeals filed by Dr. Anil Khandelwal, former Chairman and Managing Director of the Bank, and other senior managers.
Background of the Case
The case originated from a credit facility of Rs. 21.34 crores extended by the Bank of Baroda to M/s Phoenix India. The firm defaulted on its loan repayments starting from June 30, 2002, leading the Bank to classify the account as a non-performing asset (NPA) on December 31, 2002.
The Bank subsequently initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. On March 25, 2007, a notice under Section 13(2) of the Act was issued to the firm for outstanding dues amounting to Rs. 5,09,31,422/-.
When the firm failed to clear the dues, the Bank issued a possession notice on June 13, 2007, under Section 13(4) of the SARFAESI Act. However, due to what the Bank described as a clerical error, the outstanding amount in the notice was inadvertently mentioned as Rs. 56,15,9,294/- instead of the correct amount of Rs. 5,61,59,294/-.
Following this, Phoenix India filed a criminal complaint before the Judicial Magistrate First Class, Bhiwandi, alleging that the bank officials had committed offences of defamation under Sections 499, 500, and 501 of the Indian Penal Code, 1860, by publishing a notice with a fictitious and exaggerated demand. The Bank had issued a clarificatory letter on August 7, 2007, expressing regret for the error, but the firm proceeded with the complaint.
The Magistrate issued process against the bank officials on September 29, 2008. The officials’ application to quash the proceedings was rejected by the High Court of Judicature at Bombay on December 3, 2010, leading to the present appeals before the Supreme Court.
Supreme Court’s Analysis and Findings
The Supreme Court found that the continuation of the criminal complaint amounted to a gross abuse of the legal process. The Court’s decision was based on three primary legal grounds.
1. Prosecution Impermissible Without Impleading the Bank: The Court noted that the Bank of Baroda, a body corporate on whose behalf the notice was issued, was not arraigned as an accused in the complaint. The prosecution was launched only against its officers. The Court held this to be legally unsustainable. Relying on its precedent in Aneeta Hada v. Godfather Travels and Tours (P) Ltd. (2012), the Court observed, “it is a settled position of law that without impleading the company itself, the prosecution against directors or officers alone is impermissible.” The judgment stated that in the absence of the company being an accused, its directors cannot be fastened with vicarious liability.
2. No Concept of Vicarious Liability in the Indian Penal Code: The Court made a crucial distinction between special penal statutes and the Indian Penal Code. It observed that while laws like the Negotiable Instruments Act, 1881, contain specific provisions for the vicarious liability of directors, the IPC does not.
Quoting its decision in Maksud Saiyed v. State of Gujarat (2008), the Court reiterated:
“The Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company when the accused is the Company… Vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the statute.”
The Court emphasized that to prosecute an officer of a body corporate, the complainant must provide “unimpeachable material indicating the precise role of the officer in the commission of the alleged offence.” Mere bald assertions based on their official designation are insufficient.
3. Statutory Protection Under the SARFAESI Act: The Court found that the appellants were entitled to the protection granted by Section 32 of the SARFAESI Act, which bars legal proceedings against secured creditors or their officers for actions “done in good faith.”
The Court concluded that the possession notice was issued bona fide in the discharge of statutory duties. The error in the amount was clerical, and the Bank’s prompt issuance of a clarificatory letter demonstrated a lack of any “mala fide intention to defame.” Therefore, the prosecution initiated on the basis of this error was deemed “untenable both in facts as well as in law.”
Final Decision
In light of these findings, the Supreme Court allowed the appeals and quashed the criminal proceedings in their entirety. The order of the Bombay High Court dated December 3, 2010, and the Magistrate’s order issuing process dated September 29, 2008, were set aside. A connected appeal involving similar facts was also allowed, and the corresponding criminal complaint was quashed.
