Criminal Liability Of Transferee Company For Acts Of Transferor Company After Amalgamation : Supreme Court Explains

The Supreme Court recently(11 Sep) emphasized that a company's criminal responsibility is recognized when it can be attributed to the actions of individual employees, directors, or officials. This approach aligns with previous legal precedents, including cases such as Tesco, Meridian Global Funds, Standard Chartered Bank, and Iridium, where corporate criminal liability was recognized based on individual actions within the company.

The Court observed “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; it ceases to exist.

(e) that apart, only defined legal proceedings, are succeeded to by the transferee company.

The Supreme Court bench comprising Justices S Ravindra Bhat and Justice Aravind Kumar was hearing an appeal against a judgment of the Delhi High Court which had refused to quash supplementary chargesheet against the appellant(DBS Bank). The criminal proceedings against DBS Bank directors were for the acts of Laxmi Vilas Bank (LVB).  The Government of India had invoked Section 45 of the Banking Regulations Act, 1949, on November 25, 2020, to order the non-voluntary amalgamation of the appellant with the erstwhile Laxmi Villas Bank (LVB). This decision was taken in light of LVB's precarious financial situation and aimed at safeguarding the interests of customers, depositors, creditors, and employees of LVB.

The Court quoted Lord Diplock in Tesco Supermarkets Ltd. v. Nattrass 1971 (2) All ER 127 had observed, “In my view, therefore, the question: what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business, including the taking of precautions and the exercise of due diligence to avoid the commission of a criminal offense, is to be found by identifying those natural persons who by the memorandum and articles of association or as a result of action taken by the directors, or by the company in general meeting pursuant to the articles, are entrusted with the exercise of the powers of the company.”

The Court also referred to the ruling in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918, where the issue was whether a company can be held liable for its actions, especially when not every decision is subject to approval by the board or unanimous agreement of shareholders. The Court recognized that simply applying primary rules of attribution might not be sufficient to govern all of a company's actions. Instead, the Court explained that companies also use general rules of attribution, much like individuals, relying on principles of agency. This involves appointing individuals as servants and agents whose actions are considered as those of the company.

Moreover, the Court highlighted that when discussing what a company can or cannot do, it is crucial to refer to the rules of attribution that apply to that specific company.

The Court went on to quote Lord Hoffmann who in his opinion had stated: “It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes, as in In re Supply of Ready Mixed Concrete [1995] and this case, it will be appropriate. On the other hand, the fact that a company’s employee is authorized to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule.”

The Court also relied on Iridium India Telecom v Motorola Inc (2010) 14 (ADDL.) SCR 591 which laid down that the critical factor in determining corporate criminal liability is whether the offense is committed in connection with the corporation's business and whether it is controlled by certain individuals or a body of persons within the company. Essentially, the Court explained that a corporation can be said to "think and act" through these controlling individuals or bodies.

In its judgment, the Court referred to the Constitution Bench ruling in Standard Chartered Bank v Directorate of Enforcement which stressed that the legislative intent to prosecute corporate bodies for offenses committed by them was clear and explicit.

Criminal liability of a company cannot be transferred ipso facto

The central issue in this case revolved around whether a successor bank could be held responsible for the alleged offenses committed by the amalgamating entity, in this instance, the erstwhile Lakshmi Vilas Bank (LVB). The Court reiterated that criminal liability cannot be ipso facto transferred to the transferee entity in cases of amalgamation unless specific penalty proceedings are involved.

The appellant(DBS Bank) had relied on Nicholas Piramal India Limited v. S. Sundaranayagam(Co-ordinate bench decision of Delhi HC in 2007) which had observed, “The legal position which emerges from afore-noted judicial decisions is that upon an amalgamation between two companies, the transferor company dies a civil death and the entity which has evolved upon amalgamation cannot be prosecuted for an offense committed by the transferor company”.

The Court cited its previous decision in McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri 2014 (9) SCR 162, which emphasized that criminal liability remains firmly attached to the actual perpetrator and cannot be transferred through any agreement or statute.

Furthermore, the Supreme Court referred to the ruling in Shyam Sundar v State of Haryana(1989) 4 SCC 630, which clarified that partnership firms cannot be held criminally liable for the individual criminal acts of their partners based on the agency relationship.

Case title: DBS Bank India Ltd. v. State NCT of Delhi & Ors; Religare Finvest Ltd v. State of NCT of Delhi

Citation:  2023 LiveLaw (SC) 790

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