Supreme Court quashes criminal proceedings against DBS Bank in Religare Finvest case: 2023 INSC 819 (11 September 2023)

Introduction

Date of the Judgment: 11 September 2023
Citation: 2023 INSC 819
Judges: S. Ravindra Bhat, J., Aravind Kumar, J.
Can a bank be held criminally liable for the actions of another bank after a forced merger? The Supreme Court of India recently addressed this crucial question in a case involving Religare Finvest Limited (RFL) and DBS Bank India Limited (DBS). The core issue revolved around whether DBS, as the transferee bank, could be prosecuted for the alleged criminal acts of the erstwhile Laxmi Vilas Bank (LVB) following their amalgamation. The judgment was delivered by a two-judge bench comprising Justice S. Ravindra Bhat and Justice Aravind Kumar, with Justice Bhat authoring the opinion.

Case Background

Religare Finvest Limited (RFL) initiated a commercial suit against the erstwhile Laxmi Vilas Bank (LVB) seeking to recover ₹791 Crores, alleging that LVB had misappropriated fixed deposits (FDs) provided as security for short-term loans. The FDs were furnished by RFL and its group companies, RHC Holding Pvt. Ltd. and Ranchem Pvt. Ltd.

On 23 September 2019, RFL filed a criminal complaint, alleging that LVB officials conspired with RHC Holding and Ranchem. This led to the registration of FIR No. 189/2019 by the Economic Offences Wing, under Sections 409 and 120B of the Indian Penal Code, 1860 (IPC). The FIR stated that RFL had placed four FDs worth ₹750 Crores as security for loans. LVB then extended loans to RHC Holding and Ranchem, using these FDs as security. When RHC Holding and Ranchem defaulted, LVB debited ₹723.71 crores from RFL’s account without authorization.

Due to financial instability, the Reserve Bank of India (RBI) placed LVB under “Prompt Corrective Action.” A chargesheet was filed against ten LVB officials, but LVB itself was not initially named as an accused. The Chief Metropolitan Magistrate took cognizance of the offenses on 17 September 2020.

On 17 November 2020, RBI imposed a moratorium on LVB under Section 45(2) of the Banking Regulation Act, 1949. On 25 November 2020, the Central Government directed LVB’s non-voluntary amalgamation with DBS Bank India Limited due to LVB’s unstable financial condition.

A supplementary chargesheet was filed on 12 February 2021, impleading LVB (now DBS after amalgamation) as an accused, along with bank officials and RHC Holding and Ranchem. It was alleged that LVB conspired to divert funds belonging to RFL. LVB had obtained the FDs at a 4.5% interest rate and lent the money at 10% p.a. The investigation revealed that LVB acted on the premise that RFL, RHC Holding, and Ranchem were group companies, and the loans were ultimately used by RHC Holding. When RHC Holding failed to repay, LVB adjusted RFL’s FDs against the outstanding amounts, benefiting RHC Holding with ₹729.13 Crores. It was alleged that LVB facilitated the diversion of funds for the promoter’s personal gain and also earned ₹115 crores in interest.

Summons were issued to DBS on 16 February 2021. DBS then filed a Criminal Miscellaneous Case before the Delhi High Court seeking to quash the supplementary chargesheet and summoning order, arguing that LVB had ceased to exist and that DBS should not be prosecuted for the actions of LVB. The High Court refused to quash the proceedings and directed the parties to seek clarification from RBI regarding the interpretation of Clause 3(3) of the amalgamation scheme. DBS appealed to the Supreme Court against the refusal to quash the criminal proceedings; RFL appealed against the stay of the summoning order.

Timeline

Course of Proceedings

The Delhi High Court, in its impugned order, observed that quashing the 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 the DBS bank in the scheme sanctioned by the RBI. The court directed the involved parties to seek clarification regarding the interpretation of Clause 3(3) of the scheme in respect of criminal proceedings constituted against transferor bank if be carried forward to transferee bank or not after the amalgamation from RBI. Additionally, the court stayed the summoning order issued on February 16, 2021, against DBS Bank till clarification was issued by RBI. DBS appealed to the Supreme Court, aggrieved by the refusal to quash criminal proceedings by the impugned order; RFL’s appeal is limited to the point that the court ought not to have deferred the issue, for consideration by RBI and should have dismissed the request for quashing, simpliciter and ought not to have indefinitely stayed the summoning order.

Legal Framework

The case involves the interpretation of Section 45 of the Banking Regulation Act, 1949 and Clause 3(3) of the amalgamation scheme. Section 45(5)(e) of the Banking Regulation Act, 1949, states:

“45. Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstruction or amalgamation. —
(1) Notwithstanding anything contained in the foregoing provisions of this Part or in any other law or [any agreement or other instrument], for the time being in force, where it appears to the Reserve Bank that there is good reason so to do, the Reserve Bank may apply to the Central Government for an order of moratorium in respect of [a banking company].
(2) to ( 4) xxx
(5) The scheme aforesaid may contain provisions for all or any of the following matters, namely: —
(e) subject to the provisions of the scheme, the continuation by or against the banking company on its reconstruction or, as the case may be, the transferee bank, of any actions or proceedings pending against the banking company immediately before the [reconstruction or amalgamation]”

Clause 3(3) of the amalgamation scheme reads:

“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.”

Clause 13 of the Amalgamation scheme states:

“13. Interpretation of provisions of this Scheme . – If any doubt arises in the interpretation of the provisions of this Scheme, the matter shall be referred to the Reserve Bank and its views on the issue shall be final and binding on all concerned.”

Arguments

Arguments of RFL:

• RFL contended that the High Court should not have indefinitely stayed the summoning order, especially after observing that quashing the order against DBS would not be in the public interest.
• The direction to approach RBI for clarification was beyond the scope of the original petition, as DBS did not seek such relief. If the High Court deemed it necessary, it should have impleaded RBI as a party.
• The High Court failed to consider its own interpretation of Clause 3(3) of the amalgamation scheme, which suggests no impediment to prosecuting the transferee company.
• Criminal proceedings do not automatically abate upon the amalgamation of a company. LVB benefited from the illegal transaction, and DBS now benefits from LVB’s assets, including the misappropriated funds.
• Clause 3(3) of the scheme incorporates criminal accountability, and there is no bar on transferring criminal liability to the transferee bank.
• The High Court’s decision denies the petitioner the chance to pursue the case on merits and necessitates involving an external body to interpret the amalgamation scheme.
• An indefinite stay will further delay the trial process, especially since the trial is in its early stages.

Arguments of DBS:

• The acts outlined in the chargesheet occurred before the appointed date of the amalgamation (27 November 2020). LVB was not implicated as an accused before this date and was only added in the supplementary chargesheet.
• LVB was a distinct entity and not associated with DBS before the amalgamation. It ceased to exist under Clause 7(2) of the scheme.
• Only the actual wrongdoer can be punished, and no vicarious criminal liability can be inherited by a transferee company. Reliance was placed on Sham Sunder & Others v. State of Haryana [(1989) 4 SCC 630] and McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri & Ors. [2014 (9) SCR 162].
• The High Court ignored a binding judgment in Nicholas Piramal India Limited v. S. Sundaranayagam, which held that no vicarious criminal liability transfers to the transferee company in an amalgamation.
• After the non-voluntary amalgamation, LVB ceased to exist, and criminal proceedings against it should abate. The transfer pertained to civil liability, with no provision for continuation of criminal proceedings.
• Criminal proceedings cannot be transferred through a contract or statute. Reliance was placed on M. Abbas Haji v. T. N. Channakeshava [(2019) 9 SCC 606] to argue that criminal proceedings do not pass on to legal heirs.
• Foreign cases relied upon by the High Court are based on legal interpretations distinct from those in India.
• While the RBI and the Central Government took measures to safeguard the interests of LVB’s stakeholders, another arm of the Government cannot impose criminal liability against DBS for LVB’s past actions.
• RFL itself argued before the High Court that an interpretation from the RBI was necessary, as per Clause 13 of the Scheme of amalgamation.
• RBI clarified through a letter dated 14 June 2023, that criminal proceedings against officials of the transferor bank do not get carried forward to the transferee.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether a transferee entity (here, a successor bank) can be fastened with corporate criminal liability for the offences which the amalgamating entity – the erstwhile LVB is accused of.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

On Corporate Criminal Liability:

• Tesco Supermarkets Ltd. v. Nattrass [1971 (2) All ER 127]: The court discussed the attribution of criminal responsibility to a company through its decision-makers. (House of Lords)
• Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918: This case provided a nuanced approach to attributing acts and states of mind to a company. (Privy Council)
• Iridium India Telecom v Motorola Inc [2010) 14 (ADDL.) SCR 591]: The Supreme Court of India held that a corporation could be convicted of common law and statutory offenses, including those requiring mens rea. (Supreme Court of India)
• Standard Chartered Bank v Directorate of Enforcement [2005 [Supp ] (1) SCR 49]: The Supreme Court of India held that corporate bodies can be prosecuted for offenses committed by them. (Supreme Court of India)

On Amalgamation:

• Walker’s Settlement [1935 (1) Ch. D. 567]: Defined amalgamation as the joining of two companies to form a third entity or the absorption of one company into another. (Chancery Division)
• Re: Skinner [1958 (3) All E.R 273]: Discussed the transfer of rights, powers, and duties through amalgamation schemes. (Court of Appeal)
• M/s. General Radio & Appliances Co. Ltd. vs. M.A. Khader (dead) by LR’s [1986 (2) SCR 607]: The Supreme Court of India held that the transferor company ceases to exist after amalgamation. (Supreme Court of India)
• Saraswati Industrial Syndicate Ltd. vs. CIT, Haryana, H.P. & Delhi [1990 Supp (1) SCR 332]: The Supreme Court of India reiterated that the transferor company loses its entity after amalgamation. (Supreme Court of India)

On Transfer of Liability:

• McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri & Ors. [2014 (9) SCR 162]: The Supreme Court of India held that criminal liability cannot be transferred, but penalties can be imposed on a successor. (Supreme Court of India)
• Sham Sunder v State of Haryana [(1989) 4 SCC 630]: The Supreme Court of India stated that there is no vicarious liability in criminal law unless the statute provides for it. (Supreme Court of India)
• M. Abbas Haji v. T. N. Channakeshava [(2019) 9 SCC 606]: The Supreme Court of India held that criminal proceedings do not pass on to legal heirs upon the demise of an accused person. (Supreme Court of India)

On Interpretation of Amalgamation Schemes:

• Nicholas Piramal India Limited v. S. Sundaranayagam: The Delhi High Court held that no vicarious criminal liability was being passed on to the transferee company in an amalgamation. (Delhi High Court)

Judgment

How each authority was viewed by the Court?

• The Court relied on Tesco Supermarkets Ltd. v. Nattrass [1971 (2) All ER 127]* and Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918* to discuss the attribution of criminal responsibility to a company through its decision-makers.
• The Court followed Iridium India Telecom v Motorola Inc [2010) 14 (ADDL.) SCR 591]* and Standard Chartered Bank v Directorate of Enforcement [2005 [Supp ] (1) SCR 49]* to reiterate that corporate bodies can be prosecuted for offenses committed by them.
• The Court cited Walker’s Settlement [1935 (1) Ch. D. 567]*, Re: Skinner [1958 (3) All E.R 273]*, M/s. General Radio & Appliances Co. Ltd. vs. M.A. Khader (dead) by LR’s [1986 (2) SCR 607]*, and Saraswati Industrial Syndicate Ltd. vs. CIT, Haryana, H.P. & Delhi [1990 Supp (1) SCR 332]* to discuss the effect of amalgamation on the transferor company’s existence.
• The Court relied on McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri & Ors. [2014 (9) SCR 162]*, Sham Sunder v State of Haryana [(1989) 4 SCC 630]*, and M. Abbas Haji v. T. N. Channakeshava [(2019) 9 SCC 606]* to hold that criminal liability cannot be transferred.
• The Court followed the ruling in Nicholas Piramal India Limited v. S. Sundaranayagam*, stating that the High Court should not have ignored the judgment.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the principle that criminal liability is personal and cannot be transferred to a transferee company. The Court emphasized that the proviso to Clause 3(3) of the amalgamation scheme specifies that only the directors, officers, etc., of the transferor bank are liable for criminal proceedings. The Court also noted that the amalgamation was a non-voluntary measure to protect public interest and that prosecuting DBS for the actions of LVB officials would be a travesty of justice. The Court also considered the fact that the charge sheet did not reveal any involvement of DBS Bank, as the actions were attributed to the officials of the erstwhile LVB.

Logical Reasoning:

The Court considered alternative interpretations but rejected them, emphasizing that the criminal liability of LVB’s officials cannot be transferred to DBS. The Court’s decision was based on the principle that criminal liability is personal and cannot be transferred to a transferee company, especially in a non-voluntary amalgamation. The Court also considered the intent and purpose of such schemes, which is to protect public interest and ensure the stability of the banking system.

The Supreme Court held that:

• Criminal liability is personal and cannot be transferred to a transferee company.
• The proviso to Clause 3(3) of the amalgamation scheme specifies that only the directors, officers, etc., of the transferor bank are liable for criminal proceedings.
• The amalgamation was a non-voluntary measure to protect public interest.

Decision

The Supreme Court allowed the appeal of DBS, quashed the criminal proceedings against DBS, and set aside the impugned order of the High Court. RFL’s appeal was dismissed. The Supreme Court held that a transferee bank cannot be held criminally liable for the offences of the transferor bank, especially in a non-voluntary amalgamation. The Court reasoned that criminal liability is personal and cannot be transferred. The proviso to Clause 3(3) of the amalgamation scheme specifies that only the directors, officers, etc. of the transferor bank are liable for criminal proceedings. The Court also noted that the amalgamation was a non-voluntary measure to protect public interest and that prosecuting DBS for the actions of LVB officials would be a travesty of justice.

Implications

This judgment has significant implications for future cases involving bank amalgamations and criminal liability. The Supreme Court has clarified that in cases of non-voluntary amalgamation, the transferee bank cannot be held criminally liable for the actions of the transferor bank. The criminal liability remains with the officials of the transferor bank. This decision provides clarity and legal certainty for banks involved in non-voluntary mergers and acquisitions. It also reinforces the principle that criminal liability is personal and cannot be transferred to a successor entity. This judgment will help protect the interests of banks that are forced to take over other banks for public interest purposes.