Supreme Court: In appeals against Delhi High Court’s order rejecting petition for quashing criminal proceedings against DBS Bank India Ltd. (‘DBS Bank’), the Division Bench of S. Ravindra Bhat* and Aravind Kumar, JJ. held that criminal liability can neither be attributed to DBS nor its directors, brought in after the amalgamation, whose appointments were approved by the RBI.
Religare Finvest Limited (‘RFL’) filed a commercial suit for recovery of Rs 791 Crores from Laxmi Vilas Bank (‘LVB’) rooted in allegations that LVB misappropriated Fixed Deposits (‘FDs’) furnished as security by RFL and its group companies (RHC Holding Pvt. And Ranchem Pvt. Ltd) to secure short-term loans. On 23-09-2019, RFL lodged a criminal complaint alleging conspiracy by LVB with RHC Holding and Ranchem, which led to registration of First Information Report (‘FIR’) by Economic Offences Wing under Sections 409 and 120-B of Penal Code, 1860 (‘IPC’). It was alleged that RFL had placed four FDs with a combined value of Rs 750 Crores as security for short term loans. LVB extended loans to group companies, utilizing these FDs as security. RHC Holding and Ranchem defaulted on their loan payments, LVB debited Rs 723.71 Crores from RFL’s current account without obtaining due authorization or notice. Meanwhile, 2 years of negative return on assets and high leverage, the Reserve Bank of India (‘RBI’) placed LVB under ‘Prompt Correction Action’ due to high net levels on Non-Performing Assets, inadequate Capital to Risk (Weighted) Average Ratio and Common Equity Tier-I Capital.
A chargesheet was filed against 10 LVB officials but LVB itself was not implicated as an accused, and the Chief Metropolitan Magistrate took cognizance of the offences on 17-09-2020. 2 months later on 17-11-2020, RBI imposed a moratorium on LVB under Section 45(2) of Banking Regulation Act, 1949 (‘BR Act’). On 25-11-2020, the Central Government directed its non-voluntary amalgamation to DBS due to LVB’s unstable financial condition. Later, a supplementary chargesheet was filed for impleading LVB as an accused represented through its director along with bank officials and group companies.
As per allegations, LVB and other accused conspired to siphon off funds lent and belonging to RFL, while LVB made substantial profits since it obtained FDs @4.5% interest and then ostensibly lent the money @10% per annum. Investigation hinted that LVB’s actions were premised on RFL, RHC Holding, and Ranchem being group companies under the same promoters. While LVB created security against RFL’s FDs, proper authorization was not secured from RFL for such an arrangement, and the loans advanced by LVB to group companies against RFL’s FDs were ultimately utilized by RHC Holding. When RHC Holding failed to repay the loans to LVB, RFL’s FDs were adjusted by LVB against outstanding loan amounts, and thus, RHC Holding became the actual beneficiaries of RFL’s funds, amounting to â‚¹729.13 Crores. The absence of sufficient documentation supporting explicit authorization from RFL resulted in allegations that LVB facilitated the diversion of funds for promoter’s personal gain. Therefore, LVB revoked FDs worth Rs 729 Crores and earned Rs 115 Crores in interest.
Since summons were issued to DBS, it sought quashment of supplementary chargesheet and summoning order before Delhi High Court with the contention that LVB had ceased to exist due to Non-Voluntary Amalgamation Scheme, and DBS should not face prosecution for acts and omissions of entity it merged with, and the liability should not be attributed to rescuer bank. The High Court refused to quash the summoning order but stayed the same and directed the parties involved to seek clarification from RBI regarding interpretation of Clause 3(3) of Amalgamation Scheme regarding ‘criminal proceedings constituted against transferor bank if be carried forward to transferee bank or not after the amalgamation’. The High Court’s refusal to quash criminal proceedings against DBS was challenged in the instant matter.
Court’s Analysis of Criminal Liability of Company
The Court perused the relevant provisions under Clause 3(3) and Clause 13 of amalgamation scheme published by RBI, Section 45(5)(e) of BR Act. The Court framed the question of “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.”
The Court advanced with the divergence of opinion amongst High Courts regarding liability of corporate entities through various cases including A.K. Khosla v. T.S. Venkatesan and State of W.B., 1991 SCC OnLine Cal 225; Esso Standard Inc. v. Udharam Bhagwandas Japanwalla, 1973 SCC OnLine Bom 56. It further cited Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530 regarding reference to a ‘person’ as per IPC Section 11 which includes a Company or Association or body of persons, the 41st and 47th Law Commission Reports, wherein, the intent to prosecute corporate bodies for offences committed was explicit. The Court scrutinized the meaning of amalgamation through Stroud’s Judicial Dictionary of Words and Phrases, Black’s Law Dictionary, etc.
The Court referred to General Radio & Appliances Co. Ltd. v. M.A. Khader, (1986) 2 SCC 656 for the effect of amalgamation of two companies wherein it was held that transferor company thereby ceases to exist. It also referred to Saraswati Industrial Syndicate Ltd. v. CIT, 1990 Supp SCC 675 regarding income tax liability, and McLeod Russel India Ltd. v. Regl. Provident Fund Commr., (2014) 15 SCC 263 regarding default in payment of provident fund dues. Through different aspects covered in different case laws, in consonance with the instant matter were referred to and relied upon by the Court to conclude that “criminal liability of a company:
is recognized where it can be attributable to individual acts of employees, directors or officials of a company or juristic persons;
Is recognized even if its conviction results in a term of imprisonment;
cannot be transferred ipso facto, except when it is in the nature of penalty proceeding;
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;
that apart, only defined legal proceedings, are succeeded to by the transferee company, which, in this case, is the DBS Bank.”
The Court clarified that Clause 3(3) of amalgamation scheme does mention regarding continuation of legal proceedings by or against a transferee bank, but such amalgamation is aimed at securing larger public interest 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 further added that “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” and explained that the scheme aims to ensure recovery of bank’s dues and creditors’ protection.
The Court held that express mention of directors and other individuals means that prosecution or other criminal proceedings can continue to that extent only. Therefore, criminal liability can neither be attributed to DBS nor its directors, brought in after the amalgamation, whose appointments were approved by the RBI. The Court restricted the criminal liability to LVB officials, whose individual responsibility and accountability remained unaffected by the amalgamation. It also highlighted the fact that chargesheet filed by Delhi Police did not reveal any involvement of DBS Bank, and therefore, the High Court erred in not considering that very aspect.
The Court said that “There is no gainsaying that the power to quash a criminal investigation or proceedings should not be lightly exercised. Yet, to refuse recourse to that power, in cases that require or may demand it, is being blind to justice, which the courts can scant afford to be.” The Court expressed that the public’s confidence in the banking industry was at stake in the instant matter, when RBI stepped in to impose the moratorium and asked DBS to take over LVB’s assets and liabilities, and that “To permit prosecution of DBS for the acts of LVB officials would result in travesty of justice.”
The Court quashed the pending and consequent criminal proceedings against DBS and set aside the impugned judgment by the High Court.
[Religare Finvest Limited v. State (NCT of Delhi), 2023 SCC OnLine SC 1148, decided on 11-09-2023]
Judgment by: Justice S. Ravindra Bhat
Advocates who appeared in this case :
For Appellants: Senior Advocate Mukul Rohatgi, Senior Advocate Jayant Bhushan, Advocate Amit Jajoo, Advocate Sushmita Gandhi, Advocate on Record Malak Manish Bhatt, Advocate Neeha Nagpal, Advocate Vatsala Pant, Advocate Samridhi, Senior Advocate Jana Kalyan Das, Senior Advocate Rana Mukherjee, Advocate on Record Sandeep Devashish Das, Advocate Samarth Mohanty, Advocate Anandini Kumari
For Respondents: Senior Advocate Jana Kalyan Das, Senior Advocate Rana Mukherjee, Advocate on Record Sandeep Devashish Das, Advocate Samarth Mohanty, Advocate Anandini Kumari, Advocate on Record Shreekant Neelappa Terdal, Advocate Bhanwar Pal Singh Tandon, Advocate Susheel Tomar, Advocate Chetan Jadon, Advocate on Record Malak Manish Bhatt