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Corporate Criminal Liability in Post-Merger Scenarios: Critical Analysis and Implication

Author: Pranav Gupta

First-year law student at Rajiv Gandhi National University of Law, Punjab

 

I. Introduction


In the recent judgement passed by the Supreme Court in the matter of Religare Finvest Limited v. State of NCT of Delhi, “("the case)” the criminal proceedings passed against the DBS Bank India Limited “(DBS)” for the pre-merger misappropriation of the fund by the officials of the Laxmi Vilas Bank “(LVB)” have been stayed. A merger between DBS and LVB was required by Section 45(7) of the Banking Regulation Act 1949 “(Banking Act)” due to LVB's unstable financial situation.  Furthermore, the Delhi High Court's ruling declared that the criminal actions against DBS Bank related to the theft of particular fixed deposits will not be discontinued.


As per the Delhi High Court's order, the main objective of the Lakshmi Vilas Bank Ltd. (Amalgamation with DBS Bank India Limited) Scheme 2020(Scheme)” was safeguarding the interests of the general public, particularly depositors. The court had emphasized that the plan's basic purpose would be jeopardized if summons order against DBS were to be overturned. The court had instructed the parties to contact the Reserve Bank of India “(RBI)” regarding the interpretation of Clause 3(3) and the possibility of transferring criminal proceedings against the transferor bank to the transferee bank following the amalgamation, given that the Scheme did not specify the termination of criminal proceedings against DBS. 


Brief Facts and Analysis of the case before the Supreme Court


Complaints were filed by Religare Finvert Limited “(RFL)” against several LVB employees under Sections 409 and 120B of the Indian Penal Code, 1860. These allegations stated that LVB conspired to steal fixed deposits “(FD)” that RFL and LVB had supplied with two of its affiliated companies, RHC Holding Pvt. Ltd. and Ranchem Pvt. Ltd.

 

Due to LVB's unsustainable financial state, the RBI imposed a moratorium in November 2020 in accordance with Section 45(2) of the Banking Act. Later, as a result of an RBI-mandated compelled merger, DBS acquired LVB's business.

 

In February 2021, a supplemental charge sheet was submitted in which some bank officials, the corporations RHC Holding and Ranchem, and LVB—which is now represented by DBS post-amalgamation—were named as defendants. According to these accusations, LVB and other parties planned to steal money that was loaned to RFL. DBS petitioned the Delhi High Court to have the additional charge sheet against it dropped. DBS appealed to the Supreme Court after the Delhi High Court turned down its bid for relief.

 

The main question before the Supreme Court was whether the transferee entity, in this case DBS, may be held criminally accountable for the acts for which the amalgamating business, the old LVB, was accused. The precedent established by decisions in Tesco Supermarkets Ltd. v. Nattrass, Standard Chartered Bank v. Directorate of Enforcement, and other constitutional bench decisions was cited by the Supreme Court. It came to the conclusion that criminal liability of a business is established when it can be connected to the specific acts of its officials, directors, or employees, or to the acts of legal experts. The proviso to Clause 3(3) of the Scheme, which stated that criminal proceedings commenced against an officer or employee of LVB prior to the amalgamation's appointed date should proceed as though LVB had not been dissolved, was also taken into consideration by the Court. This clause released DBS from all criminal responsibility. The circumstances of the merger, in which DBS essentially saved LVB's business from going bankrupt, appears to have also had a significant influence on the Court's interpretation.

 

II. Corporate liability after post-merger for pre-criminal responsibility


Considering the seminal ruling in Iridium India Telecom Ltd v. Motorola Incorporated Co, the following factors would be considered in determining whether to bring criminal charges against a company (in this situation, the transferee company):

a. The allegedly illegal act must have taken place while the employee was performing their duties.

b. Either directly or indirectly, the conduct must help the business.

c. The alleged illegal act must be accompanied by mens rea, or a guilty mind.


An issue arises when corporate criminality and M&A collide. Is the acquiring business accountable for the post-merger behaviour of its predecessor? It's important to recognize that an organization loses its distinct legal character after a merger. "The entity which has evolved upon amalgamation cannot be prosecuted for an offence committed by the transferor company and the transferor company dies a civil death," as stated in Nicholas Piramal India Limited v. S. Sundaranayagam.


The case was decided using precedents such as Sham Sunder & Others v. State of Haryana and McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri & Ors. These decisions created the rule that an acquiring firm cannot be subject to vicarious criminal culpability—only the real offender may be held responsible for their actions. The Supreme Court affirmed in M/s. General Radio & Appliances Co. Ltd. vs. M.A. Khader that following a merger, the merging company gains a new legal identity while the transferring firm loses its unique identity. Therefore, the two organizations cannot be viewed as equal partners or as having equal responsibility for their separate debts and assets.


Indian court rulings like Saraswati Industrial Syndicate Ltd. v. C.I.T. Haryana, Brooke Bond Lipton India Ltd. v. State of Assam, etc. have highlighted that the provisions of the merger scheme, including the corresponding rights and obligations, are what ultimately determine the true nature and implications of an amalgamation.


To this pertinent problem of determining liability in such cases, the doctrine of “Substantial Continuity” add another angle. The doctrine has strong parallels with labour law’s Successorship Doctrine. It states that if after the merger acquisition of one company in another company, the resulting corporation retains the same business as its constituent company, using the same production processes to produce the same products for the same customers i.e., basically maintains the same basic structure, then the successor corporation can be made liable for the acts of its constituent company.


However, the application of this doctrine is not universal and rather depends upon case to case as the courts take into consideration the circumstances related to the merger and acquisition and also explore the background of the transaction. This helps in identifying whether the transaction is a de-facto merger in substance done in order to avoid liability or if it is a bona-fide purchase done in furtherance of the business interests of the company. If the court finds that it is the former then, it can impose culpability on the successor.


This doctrine has been used in various jurisdictions but not necessarily in the context of Mergers and Acquisitions. As regards to the Indian jurisprudence, this doctrine has not been formally recognized but there have been a few Indian cases where it has been used. For instance, in the case of Sri Balaji Enterprise (Firm) v. The Deputy Regional Provident Fund (1979), the doctrine was referred while affixing liability to the apparently new firm also.


III. Chartering foreign waters


In the absence of significant development in Indian law concerning corporate criminal culpability subsequent to mergers or amalgamations, courts have resorted to international legal precedents for guidance which are analyzed below:

 

The US Perspective


The United States of America “(US)” permits state statutes to decide liability-related issues, as demonstrated by rulings like Melrose Distillers, Inc. and Shields Rubber Corp. This strategy has the potential to entangle legitimate investors who have no connection to illegal activity. For many years, American courts have applied the concept of criminal successor liability in merger cases, where the acquired firm is dissolved and incorporated into the acquiring entity. In these situations, the criminal culpability transfers to the new business entity after the merger or consolidation.

 

France’s New Approach (since 2020)


A significant decision rendered by France's highest court, the Court of Cassation, on 25 November 2020, states that public limited liability organisations may henceforth be held criminally liable for previous illegal action of companies they acquire through "mergers by acquisition". This decision aligns French legal doctrine on the Anglo-Saxon doctrine of criminal successor culpability and overturns earlier case law. However, if a merger was carried out dishonestly to exonerate the acquired firm from criminal responsibility, an exemption might be made.

 

UK


In certain situations, including share sales, the buyer or successor firm may be held criminally liable for the acts of the acquired company, depending on the specifics of the transaction structure. The Corporate Prosecutions advice from the Crown Prosecution Service compares a corporation's dissolution to a person's death because the company vanishes. The guidelines also state that it may be in the public interest to forego prosecution if the company's current structure substantially varies from the one that committed the violation.


IV. Conclusion


In India, courts have mainly avoided discussing a company's post-merger corporate criminal responsibility, instead leaving the company's liability up to the terms of the applicable merging plan. The distinct consequences of criminal responsibility could discourage potential buyers from otherwise desirable deals. The primary problem arises when the investigation is launched following the merger.


The "Substantial Continuity Doctrine", which stipulates that a successor corporation may be held accountable for the deeds of the predecessor if it carries on with the same operations following a merger or asset acquisition, as a consistent approach could bring some much needed uniformity in the law. Factors like as job responsibilities, supervisors, working conditions, and employee retention all have a role in determining liability.


Apart from the three conditions laid down in the case of Iridium India Telecom Ltd v. Motorola Incorporated Co, for determining whether the criminal charges sustain against the resultant firm or not, the NCLT should also look into the targeted company’s financial and legal history while approving a scheme of arrangement, which can help in the uncovering of potential criminal activity before the merger.


Also, introduction of whistle-blowing laws in India will allow the employees of the target company to report potential criminal activity before or during a merger like the European Union’s Directive on Whistleblowing Protection. Finally, regulatory bodies can be established which can scrutinize the M&A deals for potential anti-trust concerns or other regulatory violations.


Improving due diligence evaluations of the acquired company's status is crucial. Businesses engaged in such mergers and acquisitions should ensure that the due diligence procedure covers possible corporate criminal activity. They should also use appropriate contractual protections, such indemnities, to protect the buyer from the fallout in the event that the target company is found guilty of a crime.

 

To address post-merger criminal liability, India should adopt a balanced approach. On one hand, it should prevent companies from evading accountability through restructuring, while simultaneously, it should also consider public interest factors, like the company’s winding up.   

 

 


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