Criminal Liability Cannot be Fastened on Transferee Bank in Non-Voluntary Amalgamation by RBI

In a decision of the Supreme Court in Religare Finvest Ltd. v. State (NCT of Delhi), [2023 SCC OnLine SC 1148][2023 INSC 819] delivered on September 11, 2023, it was held that in cases where there is a non-voluntary amalgamation by the RBI under the provisions of the Banking Regulation Act, 1949, the rescuer bank cannot be fastened with the corporate criminal liability attributed to the erstwhile sick bank.  

In the instant case, one of the appellants, Religare Finvest Limited (RFL), filed a commercial suit seeking to recover Rs. 791 Crores from the erstwhile Laxmi Vilas Bank (LVB). The allegations against LVB were that it misappropriated the fixed deposits furnished by RFL and its group companies, as security to obtain short-term loans.

Subsequently, a criminal complaint was also filed by RFL against the officials of LVB, alleging criminal conspiracy with RFL’s group companies, namely, RHC Holding Pvt. Limited and Ranchem Pvt. Ltd. This led to the registration of an FIR with the Economic Offences Wing and a chargesheet was filed against ten bank officials of LVB. LVB, however, was not implicated as an accused.

During the pendency of these offences, the RBI imposed a moratorium on LVB under Section 45(2) of the Banking Regulation Act, 1949 and directed its non-voluntary amalgamation to DBS. Subsequent to this mortarium, a supplementary chargesheet was filed to additionally implead LVB (DBS Bank India Limited after amalgamation) through its director as an accused.

Aggrieved by the summons issued to DBS, a case was filed before the Delhi High Court seeking to quash the supplementary chargesheet stating that LVB ceased to exist due to the non-voluntary amalgamation scheme. Accordingly, DBS should not face prosecution for the acts and omissions of the entity with which it merged, on the direction of the Government of India and RBI. The High Court, however, refused to quash the criminal proceedings stating that it may hamper the purpose of the amalgamation scheme. Thus, DBS’s appeal was against the High Court’s refusal to quash the criminal proceedings against it.

DBS contended that the acts outlined in the chargesheet occurred well before the date of amalgamation during which time LVB was not implicated as an accused. Before the amalgamation, LVB had no ties to DBS and existed as a distinct, separate entity, not associated with DBS in any manner or capacity. It was further argued that only the actual wrongdoer can be punished for its wrongdoing and no vicarious liability can be inherited by a transferee company.

It was also submitted that the High Court by its impugned order, was ignoring well settled precedents on this position. Subsequent to the impugned order of the High Court, the RBI, through its letter, also clarified that criminal proceedings against the officials of the transferor bank do not get carried forward to the transferee.

RFL’s contentions in this matter are that the High Court should not have indefinitely stayed the summons against DBS especially when it observed that quashing the summons order against DBS would not be in the public interest. RFL also submitted that the direction of the High Court to approach RBI for clarification was beyond the scope of the original petition as DBS did not assert or seek this relief in its petition for quashing the criminal proceedings. Thus, it was argued that the direction imposed a new obligation on the parties involved.

With respect to the criminal proceedings themselves, RFL contended that they do not automatically abate on the amalgamation of a company. It was submitted that LVB gained from the illegal transaction and DBS benefited from the assets of LVB, which would include the misappropriated funds obtained from RFL’s fixed deposits. Further, there was no bar in the scheme of amalgamation against transferring criminal liability onto the transferee bank.

In answer to the question “whether a transferee entity can be held liable for the offences which the amalgamating entity is accused of” the apex court held that, an amalgamation under the provisions of the Banking Regulation Act, 1949 is done with the objective of protecting the general public and ensuring the interests of depositors, creditors and others who had invested in or given credit to the bank before its sickness.

The Court observed that in such a context, the express mention of directors and such other individuals in the subject provisions of the scheme of amalgamation, means that it is only to the extent that prosecutions or other criminal proceedings can continue. Criminal liability can thus, neither be attributed to DBS nor its directors who were brought in after the amalgamation and whose appointments were approved by the RBI. Accordingly, the criminal proceedings against DBS were quashed and the impugned order of the High Court was set aside.