Corporate Successor’s Criminal Liability in Banking Sector: Supreme Court clarifies the law

Posted On - 16 October, 2023 • By - Renjith Nair

After a merger, successor corporations may find themselves liable for the criminal actions of their predecessors. This means that they might have to defend themselves against criminal charges related to transactions they were not directly part of, and this could occur years after the transactions took place. When these criminal charges are brought forward, the successor corporation’s ability to defend itself may be severely affected on account of changes in personnel and corporate restructuring that often accompany such mergers. Therefore, understanding the liability of a successor corporation for pre-merger crimes is a matter of utmost importance.

In this article, we examine the recent judgment of the Supreme Court in the case of Religare Finvest Ltd v. State of NCT of Delhi (Religare Judgment)The Supreme Court addressed the crucial question of whether a transferee bank in a merger can be held accountable for corporate criminal liability arising from offenses committed by officials of the transferor bank prior to the merger of the two entities.

Brief facts

In June 2018, Religare Finvest Limited (RFL) initiated a commercial suit against Laxmi Vilas Bank (LVB) to recover INR 7.91 billion. Subsequently, in September 2018, RFL also filed a criminal complaint against LVB officers, alleging a conspiracy involving these officials, RHC Holding Pvt. Ltd, and Ranchem Pvt. Ltd, to misappropriate fixed deposits provided by RFL to LVB. While a charge-sheet was filed against some LVB officers, the bank itself was not implicated.

In November 2020, the Government of India invoked Section 45 of the Banking Regulations Act, 1949, to order the non-voluntary amalgamation[i] of DBS Bank India Ltd. (DBS) with LVB as per a scheme of amalgamation, resulting in the cessation of LVB’s legal existence. In February 2021, a supplementary charge-sheet was filed, naming DBS in the criminal proceedings (as accused no. 12), alongside former LVB officials, RHC Holding Pvt. Ltd, and Ranchem Pvt. Ltd, and summons were issued to DBS.

Aggrieved, DBS approached the Delhi High Court to quash the supplementary charge-sheet on the ground that as the successor bank, DBS cannot be made responsible for the alleged offenses committed by the erstwhile LVB. The Delhi High Court declined this request, observing that quashing the summoning order against DBS at a preliminary stage may hamper the purpose of the scheme of amalgamation since there was no explicit provision for abating criminal proceedings against DBS in the scheme sanctioned by the RBI. However, the Delhi High Court stayed the summons issued to DBS. The Delhi High Court’s Order was challenged before the Supreme Court.

Arguments before the Supreme Court

RFL argued that criminal proceedings should not automatically abate following a company’s amalgamation. LVB benefited from the illegal transaction, and DBS inherited assets from LVB, including misappropriated funds from RFL’s fixed deposits. RFL also relied on Clause 3(3) of the scheme of amalgamation which provided that if there are any ongoing legal actions involving LVB in any court, tribunal, or authority, these proceedings will not be terminated or adversely affected. Instead, they will continue and be pursued by or against DBS.

On the other hand, DBS argued that the charge-sheet pertained to actions that occurred before the amalgamation date. Before the amalgamation, LVB and DBS were entirely separate entities with no affiliation and LVB ceased to exist post the amalgamation. DBS contended that only the actual wrongdoer can be held responsible for their actions, and vicarious criminal liability cannot be transferred to a transferee company. Furthermore, it was submitted that after the amalgamation, especially one mandated to protect public interests, LVB no longer existed, and criminal proceedings against DBS should cease.

DBS further argued that criminal proceedings cannot be transferred through contracts, statutes, or schemes, and submitted that where one branch of the Government represented by the RBI took proactive steps to safeguard LVB’s stakeholders, another branch, represented by the State of NCT Delhi, should not impose criminal liability on DBS for LVB’s past actions.

Supreme Court’s decision

The issue before the Supreme Court was whether a transferee entity (i.e., DBS) can be fastened with corporate criminal liability for the offences which the transferor entity (i.e., erstwhile LVB) is accused of. The Supreme Court analyzed the provisions of the scheme of amalgamation and noted that the provisio to Clause 3(3) of the scheme of amalgamation clarified that if a director, secretary, manager, officer, or employee of LVB violated any laws or faced criminal charges before the merger date, they would still be subject to legal proceedings and penalties as if LVB had not been dissolved.

Relying upon legal precedents, the Supreme court observed that:

·       Corporate criminal liability is recognized in India, when it can be attributed to individual acts of employees, directors, or officials[ii];

·       Conviction resulting in imprisonment is acknowledged[iii];

·       Criminal liability cannot be transferred unless it’s in penalty proceedings[iv];

·       Amalgamation destroys the corporate existence of the transferor company, ceasing its existence;

·       Legal proceedings are succeeded by the transferee company.

 In the context of the scheme of amalgamation, which aimed to recover LVB’s dues and protect its creditors, the Supreme Court noted that the proviso explicitly allows prosecutions and criminal proceedings to continue only against directors and certain individuals of LVB. Therefore, criminal liability cannot be attributed to DBS or its directors who came in after the amalgamation and were approved by the RBI.

The court also analyzed the charge-sheet and found that the criminal liability attributed to DBS was based on the actions of LVB officials. Their individual responsibility remains unaffected by the amalgamation, and there was no involvement of DBS as per the charge-sheet. Therefore, the Supreme Court set aside the High Court’s judgment and quashed the criminal proceedings against DBS.

Our thoughts

In India, the doctrine of successor criminal liability is firmly settled that corporate successors are liable for the crimes of their predecessors. The Religare Judgment deviates from this settled principle and provides valuable insights into the realm of corporate criminal liability in the context of mandatory bank mergers. While the Religare Judgment has significant implications, it must be understood within its specific context. The ruling primarily addresses mandatory mergers governed by the Banking Regulation Act, 1949 with a focus on compulsory merger scenarios. Additionally, the timing and nature of liabilities played pivotal roles. In the Religare Judgement, the absence of criminal proceedings against DBS at the time of the merger was a significant factor. If criminal proceedings had been ongoing during or before the merger, the situation might have been more complex.

Nevertheless, the Religare Judgment serves as a reminder of the complexities surrounding corporate criminal liability and underscores the need for adopting a tailored approach in every consensual merger. This approach should encompass a comprehensive framework of legal safeguards, regulatory scrutiny, and sector-specific considerations. Over the past year, companies have grappled with an array of challenges, including tightening monetary policies, escalating geopolitical tensions, labor shortages, extreme weather events, mounting biodiversity concerns, and the uncertainties surrounding generative artificial intelligence. In the midst of this landscape, it becomes paramount to shield the transferee party from any potential liabilities, assuming such party is independent of the past activities of the transferor entity.

In consensual mergers, transaction documents employ price adjustments and indemnity clauses to mitigate post-acquisition risks. Given that corporate successors in India may be liable for their predecessors’ actions, careful drafting of these documents is essential for risk mitigation and the success of the merged entity.

Authors: Renjith Nair and Altamash Qureshi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i]   Section 45(7) of the Banking Regulation Act, 1949.

[ii] Meridian Global Funds Management Asia Ltd v Securities Commission.

[iii] Iridium India Telecom v Motorola Inc.

[iv] McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri & Ors.