Recently, the Hon’ble Supreme Court in Religare Finvest Limited Vs. State of NCT of Delhi¹ considered the question whether the transferee bank in a merger can be fastened with criminal liability for the offences committed by the officials of the transferor bank prior to an amalgamation of the two entities.

Background
The Appeals arise from an order passed by the Hon’ble Delhi High Court rejecting a petition for quashing criminal proceedings, filed by the DBS Bank India Limited (second Respondent in the first Appeal/ Appellant in second Appeal) (“DBS”). In the two appeals, Religare Finvest Limited (“RFL”) and DBS have challenged the said order.

RFL filed a commercial suit seeking to recover Rs. 791 Crores from Laxmi Vilas Bank. This claim was based on the allegations that that Laxmi Vilas Bank had misappropriated Fixed Deposits furnished as security by RFL and its group companies to secure short- term loans.

Subsequently, in September 2018, RFL lodged a Complaint alleging that the officials of Laxmi Vilas Bank had conspired with two companies namely, RHC Holding Pvt. Ltd. and Ramchem Pvt. Ltd. This led to the registration of FIR by the Economic Offences Wing under Sections 409 and 120B of the Indian Penal Code, 1860. The contents of the FIR alleged that RFL had placed four Fixed Deposits with a combined value of Rs. 750 Crores as security for short term loans. Laxmi Vilas Bank then extended loans to RHC Holding and Ranchem, utilizing the said Fixed Deposits as security. When RHC Holding and Ranchem defaulted on their loan payments, Laxmi Vilas Bank then debited an amount of Rs.723.71 crores from RFL’s current account without obtaining proper authorization or prior notice.

Meanwhile, due to the unsteady financial conditions of the Laxmi Vilas Bank, the Reserve Bank of India placed Laxmi Vilas Bank under “Prompt Corrective Action”.

A chargesheet was filed against ten bank officials of Laxmi Vilas Bank, however, Laxmi Vilas Bank was not implicated as an accused. In November, 2020, the Reserve Bank of India imposed a moratorium dated 17.11.2020 on Laxmi Vilas Bank in terms of Section 45 (2) of the Banking Regulation Act, 1949 (hereinafter referred as “the Banking Act”). Section 45 (2) of the Banking Regulation Act is reproduced hereinunder:

“45. Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation.-

(2) The Central Government, after considering the application made by the Reserve Bank under sub-section (1), may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper and may from time to time extend the period so however that the total period of moratorium shall not exceed six months.”

In November 2020, due to Laxmi Vilas Bank’s unstable financial condition, the Central Government directed its non-voluntary amalgamation with DBS following which Laxmi Vilas Bank ceased to exist as a legal entity.

Thereafter, a supplementary chargesheet was filed to implead Laxmi Vilas Bank along with the bank officials and the companies RHC Holding and Ramchem and summons were issued to DBS in 2021.

Aggrieved by this, DBS filed a Criminal Miscellaneous Application before the Delhi High Court, seeking to quash the supplementary chargesheet and summoning order contending that Laxmi Vilas Bank had ceased to exist due to the non-voluntary amalgamation scheme and that DBS should not face prosecution for the acts of the entity which it merged with.

Observations made by the Hon’ble Delhi Court
The Hon’ble Delhi High Court observed that the quashing of summoning order against DBS at this stage may hamper the purpose of the scheme since there was no explicit provision for abatement of criminal proceedings against DBS in the scheme sanctioned by the Reserve Bank of India. The Hon’ble High Court therefore directed the parties to seek clarification regarding the interpretation of Clause 3 (3) of the scheme in respect of criminal proceedings constituted against transferor bank if it can be carried forward to transferee bank or not after the amalgamation from the Reserve Bank of India. The Hon’ble High Court stayed the summoning order against DBS till clarification was issued by the Reserve Bank of India.

Therefore, DBS filed an appeal before the Hon’ble Apex Court after being aggrieved by the refusal to quash the criminal proceedings. RFL’s appeal was limited to the point that the Hon’ble High Court ought not to have deferred the issue for consideration by the Reserve Bank of India and should have dismissed the request for quashing simpliciter and ought not to have indefinitely stayed the summoning order.

BEFORE THE HON’BLE APEX COURT

Contentions of RFL
The Learned Senior Counsel for RFL contended that if the Hon’ble High Court deemed it necessary to seek the Reserve Bank of India’s view, it should have ideally impleaded Reserve Bank of India as a necessary party. The Learned Counsel further argued that the criminal proceedings do not automatically abate upon the amalgamation of a company. He further contended that Laxmi Vilas Bank gained from the illegal transactions and DBS benefited from the assets of Laxmi Vilas Bank which also included misappropriated funds obtained from RFL’s fixed deposits. Thereafter the Learned Counsel drew the Hon’ble Bench’s attention to clause 3 (3) of the scheme which incorporates the notion of criminal accountability and that there is no such bar on transferring criminal liability onto the transferee company.

Contentions of DBS
The Learned Senior Counsel argued that the acts outlined in the chargesheet occurred well before the appointed date of amalgamation. He argued that Laxmi Vilas Bank was not implicated as an accused prior to the amalgamation and was only added in the supplementary chargesheet. Further, before the amalgamation, Laxmi Vilas Bank had no ties with DBS and that Laxmi Vilas Bank existed as a distinct and separate entity without being a part of the same group or in any manner was not associated with DBS.

Further, it was contended that only the actual wrong doer can only be punished for its wrongdoings, and no vicarious criminal liability can be inherited by a transferee company.

The Learned Counsel placed reliance on Sham Sunder & Ors Vs. State of Haryana² and McLeod Russel India Limited Vs. Regional Provident Fund Commissioner, Jalpaiguri & Ors.³

It was further contended that the Hon’ble High Court had wrongly ignored/rejected a binding judgment passed by a coordinate bench of the same High Court in Nicholas Piramal India Limited Vs. S. Sundaranayagam⁴ passed in similar circumstances, wherein it was held that no vicarious liability was being passed on to the transferee company in an amalgamation where the relevant Clause of the scheme was more or less identical.

Similarly, reliance was placed on M. Abbas Haji Vs. T.N. Channakeshava⁵ to submit that even in the case of a natural person where upon the demise of an accused person, criminal proceedings do not pass on to the legal heirs or successors. Furthermore, it was highlighted that RFL itself argued before the Hon’ble High Court that an interpretation from the Reserve Bank of India was necessary and the Court should not make a determination on this matter.

Lastly, it was submitted that subsequent to the Order passed by the Hon’ble Delhi High Court, the Reserve Bank of India through its letter dated 14.06.2023, provided clarification that criminal proceedings against the officials of the transferor bank do not get carried forward to the transferee bank.

Observations made by the Hon’ble Supreme Court:
The Hon’ble Supreme Court before dealing with the rival submissions, extracted the provisions of the scheme of amalgamation published by the Reserve Bank of India which is reproduced hereinunder:

“3. Transfer of assets and liabilities and general effect thereof. -
(1)-(2) xxxxxxx
(3) If on the appointed date, any cause of action, suit, decrees, recovery certificates, appeals or other proceedings of whatever nature is pending by or against the transferor bank before any court or tribunal or any other authority (including for the avoidance of doubt, an arbitral tribunal), the same shall not abate, be discontinued or be ill any way prejudicially affected, but shall, subject to the other provisions of this Scheme, be prosecuted and enforced by or against the transferee bank: Provided that where a contravention of any of the provision of any statute or of any rule, regulation, direction or order made thereunder has been committed by or any proceeding for a criminal offence has been instituted against, a director or secretary, manager, officer or other employee of the transferor bank before the appointed date, such director, secretary, manager, officer or other employee shall, without prejudice to the application of section 6 of the General Clauses Act, 1897 (10 of 1897), be liable to be proceeded against under such law and punished accordingly, as if the transferor bank, being a banking company had not been dissolved.”

The Hon’ble Supreme Court observed that every scheme of amalgamation is statutory and sanctioned under the Banking Act. The Hon’ble Bench observed that such amalgamation is to ensure that the interests of the depositors, the creditors and others who had invested, or given credit to in the erstwhile bank, before its sickness, and that the general public are protected. The Hon’ble Bench while analysing the provisions of the scheme of amalgamation observed that the clause contained a proviso which clarified that any criminal proceeding instituted against an officer or employee of Laxmi Vilas Bank before the appointed date of amalgamation shall be proceeded against such person under law as if Laxmi Vilas Bank had not been dissolved.

The Hon’ble Bench amongst others, referred to its own judgment in M/s. General Radio & Appliances Co. Ltd Vs. M.A. Khader⁶ wherein the effect of amalgamation of two companies was considered. It was held that after the amalgamation of two companies, the transferor company ceases to have any entity, and the amalgamated company acquires a new status, and it is not possible to treat the two companies as partners or jointly liable in respect of their liabilities and assets.

To summarize, the Hon’ble Apex 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 Laxmi Vilas’s dues and for the protection of its creditors. The Hon’ble Bench 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.”

The Hon’ble Bench asserted that the since the original liability was only on the officials of the erstwhile Laxmi Vilas Bank, it remained unaffected by the amalgamation of Laxmi Vilas Bank and DBS. Accordingly, the Hon’ble Bench did not find any involvement of DBS. 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 the officials of Laxmi Vilas Bank would result in travesty of justice”.

The Hon’ble Supreme Court, therefore, taking this into consideration, quashed the criminal proceedings to the extent it involved DBS and all the consequent proceedings arising therefrom.

By - Soumya Kamat