Contributed by Shaswat Kashyap

Introduction

In India, the doctrine of successor criminal liability is currently in a precarious stage and is determined on a case-by-case basis. A significant development in this context occurred as ruled by the Supreme Court of India in the Banking Sector. The Supreme Court of India (“the Court”) in the matter of Religare Finvest Limited v. State of NCT of Delhi (“Religare Finvest”) stayed 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”). It is crucial to understand the Court’s decision within its specific context. Firstly, the court was heavily driven by the factor that there was a compulsory amalgamation of the LVB with DBS under Section 45(7) of the Banking Regulation Act, 1949 (“the Banking Act”). Secondly, as articulated by Dr Umakanth Varottil (here),  the timing and nature of liabilities played a pivotal role in the Court’s decision. The absence of criminal proceedings against DBS at the time of the merger was a significant factor. At the time of amalgamation (November 27, 2020), proceedings were only against its officers. In this context, the court considered the proviso to Clause 3(3) of The Lakshmi Vilas Bank Ltd. (Amalgamation with DBS Bank India Limited) Scheme, 2020 (“the Scheme”). This proviso which stipulated that criminal proceedings initiated against an officer or employee of LVB before the amalgamation’s appointed date should proceed as if LVB had not been dissolved. Consequently, this proviso absolved DBS of any criminal liability in the matter.

Post-merger Criminal Liability Risk

In the backdrop of a surge in mergers and acquisitions in India, it becomes crucial to delve into the realm of successor liabilities. Post-merger, successor corporations may find themselves accountable for the criminal deeds of their predecessors. This implies defending against charges linked to transactions they were not directly involved in, possibly surfacing years after the fact. The challenge intensifies as changes in personnel and corporate restructuring often accompany mergers, impacting the successor corporation’s ability to mount a defense.

Consequently, comprehending the liability for pre-merger crimes is of utmost significance.

The first consideration involves determining whether mens rea, or criminal intent, can be attributed to the company. The Supreme Court’s ruling in Iridium India Telecom Ltd. v. Motorola Inc. settled the complexity surrounding the criminality of corporations. As per this decision, “mens rea can indeed be attributed to corporate entities, and they cannot claim immunity based on the absence of legal personality.” The Court emphasized that a corporation, much like an individual, can be convicted of common law and statutory offences, provided the offence is committed in relation to the corporation’s business by individuals in control of its affairs.

The second aspect revolves around the question of whether the successor should bear the criminal liability of the predecessor after a merger. In McLeod Russel India Limited v. Regional Provident Fund Commissioner, the Supreme Court clarified that in cases of a business transfer with pending provident fund dues, both the seller and the acquirer are jointly and severally liable. This extends not only to the pending provident fund amount but also to any damages imposed by government authorities. On the flip side, the Delhi High Court in Nicholas Piramal India Limited v. S. Sundarnayagam observed that “the transferor company dies a civil death and the entity which has evolved upon amalgamation cannot be prosecuted for an offence committed by the transferor company.”

The determination of liability should, in my view, primarily hinge on the terms stipulated in the merger scheme. While existing cases provide legal perspectives, the specifics of each merger, as outlined in the scheme, should guide the allocation of criminal liability between predecessor and successor corporations. Indian judgments such as Saraswati Industrial Syndicate Ltd. v. C.I.T. Haryana have emphasized that the true nature and implications of an amalgamation are primarily determined by the terms of the merger scheme, including the respective rights and liabilities.

Further, the liability could also be dictated by provisions pursuant to Section 232 (3)(c) of the Companies Act. Section 232 (3)(c) of the Companies Act 2013 gives power to the National Company Law Tribunal to make provisions for “the continuation by or against the transferee company of any legal proceeding by or against any transferor company on the date of transfer.”

Chartering Foreign Waters

The legal landscape in India regarding corporate criminal liability after a merger or amalgamation is still in its early stages, leading the judiciary to seek guidance from foreign legal precedents. In the United States, it is established, especially in the context of consolidations, that criminal liability persists after a merger and is transferred to the resulting corporate successor. Cases such as United States v Mobile Materials, Inc. and United States v Alamo Bank of Texas have affirmed criminal successor liability for various violations, including antitrust, mail fraud, false statements, and Bank Secrecy Act violations. The principle is clear – a corporation cannot evade punishment by merging with another.

The French Court, since 2020, has taken a similar stance. Public limited liability firms can now be held criminally accountable for the past criminal activities of companies they acquire through “mergers by acquisition.” This groundbreaking ruling by France’s highest court, the Court of Cassation, on November 25, 2020, sets a precedent for such accountability.

In the United Kingdom, depending on the transaction structure, the purchaser or successor company may assume criminal liability for the actions of the acquired company, particularly in a share sale. The Corporate Prosecutions guidance from the Crown Prosecution Service compares company dissolution to a human’s demise, emphasizing that the company ceases to exist. The guidance also highlights that significant differences in the current form of the company from the one that committed the offence can act as a deterrent to prosecution in the public interest.

Conclusion

The corporate criminal liability of the company post-merger largely remains undiscussed in India. The lack of clarity can pose challenges, as the potential consequences of criminal liability may discourage potential buyers from pursuing attractive transactions. The real problem arises when investigations into criminal activities commence post-merger. To address post-merger criminal liability effectively, India needs a balanced approach. On one hand, it should prevent companies from avoiding accountability through restructuring, while, on the other, it should consider public interest factors like the winding up of the company.

A crucial step in this process is to enhance due diligence assessments concerning the acquired company’s status. Companies engaged in buy-side M&A transactions must ensure that potential corporate criminal misconduct is thoroughly examined during the due diligence process. Additionally, incorporating suitable contractual safeguards, such as indemnities, becomes essential to protect the buyer from the repercussions of a criminal conviction involving the target company.