Dodging Criminal Liability Through Mergers & Amalgamations

[Suraj Chaudhary and Ravishekhar Pandey are practising advocates at the Bombay High Court, and specialise in commercial disputes]

Netflix’s Railway Men this November has refreshed the public memory of the Bhopal Gas Tragedy in 1984. In March this year, given its limited curative jurisdiction, the Supreme Court had no choice but to reject the application for enhancement of compensation to the victims. Next year will be the 40^th anniversary of that tragedy, while another tragedy may soon unfold in respect of the ongoing attempts to hold a criminal trial against the parent company by referring to ‘successor’ liability post a supposed ‘merger’. The trial court has kept that matter for January 6, 2024.  

So, does Indian law recognize criminal successor liability of a company following a ‘merger’? This year, the Supreme Court in Religare Finvest Ltd. v State of NCT (discussed here) answered this question in the negative, and held that DBS bank could not be held criminally charged for the alleged acts of the erstwhile merged Laxmi Vilas Bank. It primarily held that criminal liability is incapable of being transferred ipso facto on merger either by contract or even by ‘statute’ & that clause 3(3) of the amalgamation scheme only provided for the continuation of the liability against the officers of the erstwhile bank.

It is not just the Bhopal gas case but, given the wider implications of its judgment, it is quite possible to defeat a multitude of laws simply by a ‘merger’. For instance, companies may evade environmental laws by simply merging the company following an environmental disaster, defeat money laundering laws and abate proceedings to disgorge ‘proceeds of crime’ as was held by the Appellate Tribunal under Prevention of Money Laundering Act in Joint Director Directorate of Enforcement, Hyderabad v M/S. Embassy Property Developments Pvt. Ltd, or defeat criminal proceedings launched by the state police or regulators like the Securities and Exchange Board of India by the device of ‘merger’.

Furthermore, if the successor cannot be criminally liable for actions of the merged company, there is no reason to allow it to maintain criminal actions filed by the merged company, as the successor company was never the victim of those acts. Examples include cheque bouncing complaints filed by the erstwhile company. This rule that mergers and amalgamation do not transfer criminal liability, which is personal to the corporate offender who ceases to exist, is certainly capable of misuse and perpetrating manifest injustice in this day and age.

The appeal in Religare Finvest arose from the decision of the Delhi High Court in DBS Bank India Ltd. v State of NCT, where it refused to follow the earlier law laid down in Nicholas Piramal India Ltd v S Sundaranayagam, which was based on an age-old judgment of the US Supreme Court in Oklahoma Natural Gas Co. v. State of Oklahoma, holding that in case of dissolution the Oklahoma State Company Law provided for appointment of trustees and hence the dissolved company could only be represented by such trustees in pending legal proceedings and not by another company which bought over its assets in dissolution.

The problem with this approach is that an assumption of rights and liabilities contractually or by a stake sale is distinguishable from a ‘merger’. Furthermore, US law is at variance with Indian law on the topic where we have a singular Companies Act, 2013; in USA the corporate law is state-wise. Thus, in United States v. United States Vanadium Corp., the US Court of Appeals dealt with a merger of three subsidiaries with their parent -Union Carbide and Carbon Corporation. These subsidiaries were governed by Delaware, West Virginia and New York State Company laws. The Court held that the New York company law permitted criminal liability to be transmitted to the successor corporation, whereas in the case of subsidiaries governed by the Delaware and West Virginia laws it was the opposite. Such a construction is possible because New York law provides for the transfer of ‘liabilities, obligations and penalties. . . .’ to the successor company.

Section 232 of the Indian Companies Act, 2013 and rule 20 of Company Rules provide for similar transfer of ‘rights and liabilities’ to the successor company and the ‘continuation of legal proceedings’, which is more akin to the New York law. Unlike Delaware or West Virginia laws where a formal dissolution occurs with the appointment of ‘trustees’; whereas rights and assets of the company are transferred to a different company in such dissolution, no such mechanism is found in the Indian law of merger of companies.

Quite recently in 2020, even the Criminal Chamber of the French Supreme Court, the Court of Cassation, had overturned its long-standing case law and held that in case of mergers and amalgamation the criminal liability of the merged company, Intradis, also stood transferred to the successor company, Iron Mountain of France. The French Supreme Court relied upon the provisions of the Commercial Code which provided for the assets and liabilities of the acquired company to be universally passed to the acquiring company. The French Supreme Court was persuaded by earlier decisions of the European Court of Justice arising from Portugal in Modelo Continente Hipermercados SA v Autoridade para as Condições de Trabalho holding that ‘merger by acquisition’ ipso jure results in the transfer to the acquiring company of the obligation to pay a criminal fine imposed by final decision adopted after the merger by acquisition for infringements of employment law committed by the acquired company prior to that merger

These approaches did not find favour with the Supreme Court of India in Religare Finvest; its decision was based on its earlier ruling in McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri, which dealt with imposition of civil damages under section 14-B of the Employees Provident Fund Act and, while not called upon to deal with criminal charges, it observed that ‘criminal liability … cannot be transferred …even by statute’. This obiter was made without examination of the relevant provision of transfer of ‘rights and liabilities’ under Companies Act and should be relooked at. Similarly, the other notable ruling referred to was of General Radio and Appliances Co. Ltd. v M. A Khader, where it had held that a voluntary amalgamation resulted in transfer of the tenancy held by the merged company to the successor company which was a violation of the State enactment prohibiting transfers to the tenancy, which is factually distinguishable from transfer of criminal liability to successor company.

The final reference was to clause 3(3) of the relevant scheme of the Reserve Bank of India (RBI) notified under section 45 of the Banking Regulation Act. Clause 3(3) specifically provided that ‘other proceedings of whatever nature …  shall not abate, … but shall,…. be prosecuted and enforced by or against the transferee bank’. These words are certainly wide enough to encompass criminal proceedings to be continued by and against the transferee bank. Interestingly clause 3(1), which transferred ‘all borrowings, liabilities, duties and obligations of whatever kind’, was never pointed out by the parties.

Instead, the Court referred to the proviso to clause 3(3) of the scheme to construe that since it expressly permitted continuation of criminal proceedings against the officers of the erstwhile merged company, by implication it excluded criminal prosecution of the successor company; else, the same would also have been expressly provided for. The provisoessentially only provides what section 240 of the Companies Act, 2013 provides in relation to general mergers and amalgamations. Such provisions are necessary due to the law laid down by the Supreme Court in P. Mohanraj’s v. Shah Brothers Ispat Pvt. Ltd., which states that a criminal complaint under statutes permitting vicarious criminal liability on employees for acts of the corporate employer cannot be proceeded with without making the corporate employer as accused, except where it is not possible to make the erstwhile corporate employer an accused. Since the corporate employer has ceased to exist and the erstwhile employees were not ‘employees’ in the successor corporation at the relevant time, such a proviso becomes necessary. The interpretation now placed on the proviso to clause 3(3) certainly does not seem to align with any legislative intent.  Rather its construction made clause 3(3) otiose. Hopefully, the issue will be reconsidered in the near future.

– Chaudhary Suraj & Ravishekhar Pandey