Recently, in a case testing the intersection of banking regulation and criminal liability, the Delhi High Court examined whether the act of banks declaring a borrower’s account as fraudulent, pursuant to regulatory obligations under the RBI Master Directions, could amount to defamation under the Indian Penal Code, 1860. The controversy arose from a criminal complaint accusing senior bank officials of conspiring to malign a company’s reputation by reporting its account as fraudulent. Read on to know how the Court interpreted the limits of criminal defamation when actions are taken in discharge of statutory and regulatory duties.
Brief facts:
The case stemmed from a criminal defamation complaint filed by a company engaged in business operations against senior officials of several banks under Sections 500 read with 34 of the Indian Penal Code (IPC). The dispute arose after the company, which had availed a consortium credit facility of Rs. 250 crores, was subjected to forensic audits and internal reviews initiated by the lending banks following certain investigative actions by external agencies. Although the joint lenders’ forum found no conclusive evidence of fraud, the banks proceeded to classify the account as fraudulent, reported it to regulatory authorities, including the RBI and the Fraud Monitoring Group, and one of the banks lodged a complaint with the CBI, citing irregularities in transaction documents. Alleging that these steps were taken with malice to coerce repayment and tarnish its reputation, the company filed a defamation complaint, prompting the accused bank officials to approach the High Court under Section 482 of the Cr.P.C. seeking quashing of the proceedings.
Contentions of the Petitioner:
The Petitioners, who were senior officials of the lending banks, contended that the classification of the borrower’s account as fraudulent and its subsequent reporting to regulatory authorities was a statutory obligation mandated under the RBI Master Directions on Frauds, prompted by the detection of prima facie early warning signals such as forged transaction documents. They maintained that the action was undertaken in good faith, solely to protect the integrity of the banking system, and not with any intent to defame. It was further argued that no specific defamatory act was attributable to any petitioner individually, that vicarious liability could not be imposed in criminal law, and that the communications made were privileged in nature. Consequently, the complaint, according to them, disclosed no cognizable offence and constituted an abuse of the process of law, thereby justifying intervention under Section 482 of the Cr.P.C.
Contentions of Respondent:
The Respondent company contended that no fraud was ever established, as the forensic audit remained inconclusive and the joint lenders’ forum had unanimously recorded the absence of any material suspicion or fraudulent conduct. Despite this internal consensus, the lending banks allegedly acted arbitrarily and with malice in declaring the account fraudulent, purportedly to exert pressure for recovery of dues and thereby inflict severe reputational and commercial damage. It was further alleged that the complaint lodged with the CBI was founded on false and unsubstantiated allegations of forged documents and was filed with the intent to pre-empt judicial scrutiny of the borrower’s challenge to the fraud declaration. The company accused the bank officials of acting in concert with a dishonest and common intention under Sections 120B and 34 of the IPC, amounting to criminal breach of trust, cheating, and defamation through the alleged dissemination of false information to regulatory and investigative authorities.
Observation of the Court:
The Court observed that “The entire case of the Complainant rests on the averment that the act of Banks in declaring the Complainant Company as fraud, has defamed it. that Pertinently, certain alleged frauds were noticed in the Accounts of the Complainant’s Company, which prompted CBI and RBI, to conduct further enquiry in the Accounts of the Company…… The internal audit and enquiries were conducted by the Banks and found that there were material irregularities and thus, declared the Account fraud, in accordance with the Rules and provisions of law. Such act of the Banks, was in good faith. There is nothing on record to show it was done by the Banks intentionally, in order to cause loss of reputation and thereby defame the Complainant’s Company.”
The Bench further remarked that “even if all the averments made in the Complaint, are admitted to be correct and true, they do not constitute any act which can be termed as defamatory.” It emphasized that “the act of declaring the Complainant’s Company as fraud, was not a personal vendetta of the Banks or intended to bring disrepute or to defame the Complainant in any manner; rather, it was an informed decision taken by the Banks, in their interest and in accordance with law. Such proceedings cannot be termed as defamation or as lowering the reputation of the Complainant in the eyes of the general public.”
Addressing the issue of corporate liability, the Court held that a Company, being an artificial or juristic person, does not possess such intention or mens rea. It therefore, is concluded that the Bank cannot be summoned as an accused for the offence of Defamation. It further added that “there is no defamatory act attributed to the Petitioners in the entire Complaint which refers only to the act of the Banks declaring the Complainant Company fraud. The Petitioners cannot be held to have committed the offence of defamation.”
Concluding its findings, the Court stated that “the continuation of the criminal proceedings against the Petitioners, would be an abuse of the process of the Court.”
The decision of the Court:
In light of the foregoing discussion, the Court, after examining the allegations and the legal position in detail, allowed all five connected petitions and quashed the criminal defamation complaint, the summoning order, and all consequential proceedings arising therefrom. The Court held that continuation of such proceedings would amount to an abuse of process and, accordingly, disposed of the petitions along with all pending applications.
Case Title: P S Jayakumar and Anr. Vs. State and Anr.
Case No: CRL.M.C. 1197/2017 & CRL.M.A. 4891/2017
Coram: Hon’ble Justice Neena Bansal Krishna
Advocate for Appellant: Sr. Adv. Kunal Tandon, Advs. Kapil Arora, Palak Nagar and Natasha
Advocate for Respondent: APP Shoaib Haider, Advs. Manohar Malik and Astha Gumber
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