A Bank’s Post-Merger Liability for Pre-Merger Crimes

Earlier this month, the Supreme Court in Religare Finvest Limited v. State of NCT of Delhi (2023INSC819) considered the question whether the transferee bank in a merger can be fastened with corporate criminal liability for offences committed by the officials of the transferor bank prior to a merger of the two entities. The Court answered in the negative given the specific facts and circumstances of the case.

Background and Decision

Religare Finvest Limited (RFL) had filed a commercial suit against the erstwhile Laxmi Vilas Bank (LVB) for recovery of a sum of INR 791 crores. Subsequently, in September 2018, RFL also filed a criminal complaint alleging that certain officials of LVB conspired with two companies, RHC Holding Pvt. Ltd and Ranchem Pvt. Ltd, to misappropriate fixed deposits that were furnished by RFL with LVB. Although a chargesheet was filed against some officers of LVB, the banking company itself was not implicated as an accused. In November 2020, due to the unstable financial condition of LVB, the Reserve Bank of India (RBI) imposed a moratorium on the bank under section 45(2) of the Banking Regulation Act, 1949 and subsequently effected a compulsory amalgamation of LVB with DBS Bank India Limited under the same legislation. The business of the erstwhile LVB was taken over by DBS under the amalgamation, following which LVB ceased to exist as a legal entity.

Thereafter, in February 2021, a supplementary charge sheet was filed to implicate DBS in the criminal proceedings along with the erstwhile officials of LVB as well as RHC Holding and Ranchem. Aggrieved by this, DBS filed a petition before the Delhi High Court seeking to quash the supplementary charge sheet against it. Since the Delhi High Court refused to oblige its request, DBS filed an appeal before the Supreme Court.

The Supreme Court analyzed the provisions of the scheme of amalgamation. Clause 3(3) provided that any proceedings pending against LVB “shall not abate, be discontinued or be ill [sic] any way prejudicially affected, but shall … be prosecuted and enforced by or against” DBS. However, more significantly, the clause contained a proviso which clarified that any criminal proceeding instituted against an officer or employee of LVB before the appointed date of the amalgamation shall be proceeded against such person under law as if LVB had not been dissolved.

At the outset, the Supreme Court ruled that the aforementioned clause in the scheme must be interpreted in the backdrop of the context of the scheme of amalgamation, which was essentially to ensure recovery of LVB’s dues (as a result of its financial instability) and for the protection of its creditors. If therefore noted that:

the express mention of directors and such other individuals in the proviso means that it is to that extent only that prosecutions or other criminal proceedings can continue; in the ordinary sense, criminal liability can neither be attributed to DBS nor its directors, brought in after the amalgamation, whose appointments were approved by the RBI.

Since the original liability (if proven) was only those of the officials of the erstwhile LVB, the Court asserted that it remained unaffected by the amalgamation of LVB into DBS. Accordingly, it found no involvement of DBS, which is therefore devoid of any liability. The Court’s interpretation also seems heavily driven by the context of the amalgamation in which DBS effectively rescued the business of LVB which had become financially unviable. It also noted that “the public’s confidence in the banking industry was at stake”, and that to “permit prosecution of DBS for the acts of LVB officials … would result in travesty of justice.” In that sense, imposing liability on a successor bank would disincentivise white knights (such as DBS) from rescuing failing banks. Hence, the Supreme Court quashed the criminal proceedings against DBS.

Analysis and Conclusion

While the Supreme Court’s conclusion is understandable, the precedential value of the ruling is arguably limited, as it was confined to the specific facts and circumstances of the case. First, this involved a merger of two banks under the Banking Regulation Act rather than any other types of companies, whose merger would typically be governed by the Companies Act, 2013. Under section 242(3)(c) of the Companies Act, “the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer” would be determined by the order of the National Company Law Tribunal. However, under section 245(5)(e) of the Banking Regulation Act, the scheme of amalgamation prepared by the RBI can provide for the manner in, and extent to, which pending proceedings are continued against the transferee bank. This distinction is somewhat insignificant because, even in the case of non-banking companies, parties can effectively include the terms of dealing with legal proceedings in the scheme document which, if approved, by the tribunal would determine the nature of proceedings continued against the transferee company.

Second, the fact that the LVB-DBS transaction was a compulsory merger rather than a consensual one seems to have mattered considerably. This had a significant bearing on how the Supreme Court interpreted the clauses in the scheme in the light of the concomitant provisions in the Banking Regulation Act. The public interest element involved in saving the depositors of LVB and preserving the credibility of the Indian banking industry militate against imposing fresh liabilities on the rescuer transferee entity. Perhaps a similar analysis may likely be inapplicable in the case of typical consensual merger, whether or two banking entities or other companies.

Third, the timing of the liability matters substantially. In the present case, no criminal proceedings initiated by RFL were pending against LVB at the time the amalgamation came into effect, which was 27 November 2020. The proceedings were only against its officers. Hence, even the main prong of clause 3(3) (discussed earlier) states that only proceedings that are pending as on the appointed date would continue against the transferee bank, i.e., DBS. In the present case, since the supplementary proceedings were initiated against DBS only subsequent to the date of effectiveness of the amalgamation and no proceedings were pending against LVB prior to that date, the Court’s conclusion is somewhat more straightforward. If indeed criminal proceedings were to have been pending at the time of the amalgamation, the outcome may not have been so clearcut.

Finally, the present case involved a criminal proceeding where the burden to impose the liability on a transferee company is justifiably high. However, the scenario may not be altogether similar if the proceedings in question led to civil liability.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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