The Supreme Court has held that DBS Bank cannot be held responsible for any of the criminal acts committed by the former employees of the Lakshmi Vilas Bank prior to amalgamation.

The Court further held that as per Clause 3(3) of the amalgamation scheme (scheme), only directors and other individuals could face criminal proceedings, not DBS Bank India Limited (DBS) or its directors appointed after the amalgamation process for criminal acts committed by the former employee of Lakshmi Vilas Bank.

The Court dismissed the Criminal Appeal filed by Religare Finvest Limited (RFL) against the order of the Delhi High Court, whereby RFL contended that the High Court should not have deferred the issue for consideration by RBI

The Bench comprising Justice S. Ravindra Bhat and Justice Aravind Kumar noted, “It is, therefore, clear that the criminal liability of the individuals now attributed to DBS are actions of (1) Anjani Kumar Verma, (2) S. Venkatesh, (3) Pradeep Kumar and (4) Parthsarathi Mukherjee. They were all officials of LVB. Their individual responsibility and accountability in criminal law, is and remains unaffected by the amalgamation. Therefore, there is in fact, no involvement of DBS Bank, revealed in the charge sheet filed by the Delhi Police”.

In the present context, the public’s confidence in the banking industry was at stake, when RBI stepped in, imposed the moratorium and asked DBS to take over the entire functioning, management assets and liabilities of the erstwhile LVB. To permit prosecution of DBS for the acts of LVB officials (who are in fact, facing criminal charges) would result in travesty of justice”, the Bench observed.

Senior Advocate Rana Mukherjee appeared for the Appellants, and Senior Advocates Mukul Rohatgi and Jayant Bhushan appeared for the Respondent.

RFL filed a commercial suit against Laxmi Vilas Bank (LVB) to recover Rs. 791 Crores. Later, an FIR was registered by the Economic Offences Wing under Sections 409 and 120B of the Indian Penal Code, 1860 (IPC), based on RFL's criminal complaint. The FIR alleged that LVB had extended short-term loans to RHC Holding and Ranchem against four FDs worth Rs. 750 Crores submitted as security by RFL. When the companies failed to repay their loans, LVB debited Rs. 723.71 crores from RFL's current account without authorisation.

The Reserve Bank of India (RBI) placed LVB under “Prompt Corrective Action”, and ten LVB officials were charged in a chargesheet, but the bank itself was not implicated. The RBI imposed a moratorium on LVB under the Banking Regulation Act (BR Act) and directed DBS to amalgamate with LVB. A supplementary chargesheet was filed against LVB and other parties, accusing them of siphoning off funds belonging to RFL. DBS was also included in the summons against LVB and its officials as it was amalgamated. However, DBS filed an appeal seeking to quash the chargesheet and summoning order. The High Court stayed the summoning order against DBS and directed the parties to seek clarification regarding the interpretation of the amalgamation scheme. A Set of Criminal Appeals were filed by the Respondent and the Appellant, challenging the judgment of the Delhi High Court, whereby the Court rejected a petition filed by the Respondents for quashing criminal proceedings. DBS appealed the decision, while RFL appealed the deferral of the issue.

The court noted that the issue to ascertain was “whether a transferee entity (here, a successor bank- DBS) can be fastened with corporate criminal liability for the offences which the amalgamating entity- the erstwhile LVB is accused of

The Court referred to the cases of Tesco Supermarkets Ltd. v Nattrass [1971 (2) All ER 127], Meridian Global Funds Management Asia Ltd v Securities Commission [[1995] 3 All ER 918], Standard Chartered Bank v Directorate of Enforcement [2005 [Supp] (1) SCR 49], Iridium India Telecom v Motorola Inc [(2010) 14 (ADDL.) SCR 591] and McLeod Russel India Limited v Regional Provident Fund Commissioner, Jalpaiguri & Ors [2014 (9) SCR 162]. The Bench noted that if any company employees, directors, or officials commit illegal acts, the company can be held criminally responsible. The Court has also stated that a company may face imprisonment due to such actions. However, the transfer of criminal liability cannot be automatically transferred unless it is considered a penalty proceeding. Moreover, when two companies merge, the legal existence of the transferor company is terminated, and it ceases to exist. The Bench noted that only specific legal procedures can be continued by the transferee company, which is DBS Bank under Section 233 (9) of the Companies Act, 2013 (Act, 2013).

It is, therefore, noticeable that the criminal liability of a company (a) is recognized where it can be attributable to individual acts of employees, directors or officials of a company or juristic persons (Tesco, Meridian Global Funds, Standard Chartered Bank, and Iridium) (b) recognized even if its conviction results in a term of imprisonment (Meridian, Iridium); (c) cannot be transferred ipso facto, except when it is in the nature of penalty proceeding (McLeod Russel) (d) the legal effect of amalgamation of two companies is the destruction of the corporate existence of the transferor company (in this case, LVB); it ceases to exist. (e) that apart, only defined legal proceedings, are succeeded to by the transferee company, which, in this case, is the DBS Bank”, the Bench noted.

The Court has recognised that the process of amalgamation is a legal procedure authorized by the BA Act in order to protect the interests of depositors, creditors, and the general public. The Court underlined the importance of safeguarding these stakeholders and ensuring the overall health of the banking industry. The Bench observed that timely intervention in a bank's affairs is crucial to prevent a loss of trust in the banking system, which can have serious consequences.

The Bench observed, “Every scheme of amalgamation is statutory and sanctioned under the Banking Act. 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. It aims at securing larger public interest and health of the banking industry. Late intervention into the affairs of a bank can result in a “run” on it, resulting in serious loss of confidence in the intricately woven banking and financial system. If one sees this and the overall objective of the scheme, it is to ensure recovery of what are the bank’s dues and ensuring protection of the creditors. Clause 3 (3) of the scheme, therefore, has to be considered from this backdrop. In this context, 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”.

Furthermore, the Court held that the High Court erred and decided the case superficially. The Court emphasized that the power to quash criminal investigations or proceedings should not be used lightly, but failure to do so in cases that require it amounts to a lack of justice. In this case, prosecuting DBS for the actions of LVB officials would be a miscarriage of justice and would damage public confidence in the banking industry.

Therefore, the Court quashed the pending criminal proceedings against DBS.

Accordingly, the Court allowed the Appeal by DBS, dismissed the Appeal by RFL, and set aside the impugned judgment.

Cause Title: Religare Finvest Limited v State of NCT of Delhi & Anr (2023 INSC 819)

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