Malvinder Mohan Singh and his younger sibling Shivinder Mohan Singh are like the legendary asura brothers, Ilvala and Vatapi*!
The brothers have been accused of swindling and cheating in all the companies under their charge being, Ranbaxy, Fortis Hospitals and Religare Finance.
The context of this article is the brazen loot of funds belonging to a wholly-owned subsidiary (WoS) of the listed entity, Religare, in which a bank and its officers were complicit, and the litigation that ensued which, finally, culminated in a court order of a contentious nature.
Religare Finvest Ltd (RFL), a WoS of the listed entity Religare Enterprises Ltd, had placed fixed deposits with Lakshmi Vilas Bank (LVB) amounting to Rs750 crore in financial year (FY)16-17.
Sometime in July 2017, the deposits had matured and RFL, to its shock and surprise, found that, out of the maturity proceeds, an amount of Rs723 crore had been debited by the Bank.
It was later discovered that the Bank had appropriated the maturity proceeds of the deposits towards repayment of loans given to the promoter entities owned by the brothers which had been defaulted on!
There was neither any explicit nor a tacit agreement that the deposits of the listed entity's subsidiary would act as a cover for the loans given to the promoters.
RFL filed a suit against the Bank for recovery on the grounds of criminal misappropriation and the police registered criminal cases against some of the officers of the Bank which was later expanded to add the Bank itself.
When matters stood thus, LVB, which was on the brink of collapse, was merged with DBS Bank (DBS) by a diktat of the Reserve Bank of India (RBI) on 25 November 2020.
DBS approached the Delhi High Court (HC) to get itself discharged from the criminal proceedings, contending that it did not have anything to do with the criminal actions of the predecessor, LVB.
The HC confirmed that, under the scheme of merger formulated by RBI, the pending proceedings against the transferor stood fully transferred to the transferee (DBS) and such proceedings covered criminal cases as well. It added a rider that, since the scheme was framed by RBI under special circumstances, any doubt in the implementation required clarification by RBI.
DBS approached the Supreme Court against that part of the order, holding that it was liable as a successor under the scheme to all the pending proceedings, including the criminal case.
The SC has delivered its verdict in criminal appeal 2243 of 2023 on 11 September 2023.
What fell for consideration by the Court was sub-clause 3 of clause 3 of the scheme framed by RBI for the merger, which is reproduced below.
"3. Transfer of assets and liabilities and general effect thereof. –
(3) If on the appointed date, any cause of action, suit, decrees, recovery certificates, appeals or other proceedings of whatever nature is pending by or against the transferor bank before any court or tribunal or any other authority (including for the avoidance of doubt, an arbitral tribunal), the same shall not abate, be discontinued or be ill any way prejudicially affected, but shall, subject to the other provisions of this Scheme, be prosecuted and enforced by or against the transferee bank:
Provided that where a contravention of any of the provision of any statute or of any rule, regulation, direction or order made thereunder has been committed by or any proceeding for a criminal offence has been instituted against, a director or secretary, manager, officer or other employee of the transferor bank before the appointed date, such director, secretary, manager, officer or other employee shall, without prejudice to the application of section 6 of the General Clauses Act, 1897 (10 of 1897), be liable to be proceeded against under such law and punished accordingly, as if the transferor bank, being a banking company had not been dissolved."
The phrase in the main portion of clause 3(3) "any cause of action, suit, decrees, recovery certificates, appeals or other proceedings of whatever nature is pending by or against the transferor bank" should, going by the plain words extracted, cover all the proceedings of whatever nature pending against the transferor.
Historically, courts have taken a view that after an amalgamation, the transferor stands subsumed in the transferee and all that the transferor was liable for at the time of the amalgamation would continue as it is.
There appears to be no reason to view criminal proceedings any differently.
However, the said clause above has a proviso that specifically deals with criminal proceedings against the personnel of the Bank!
The Court somehow persuaded itself to understand that the continuation of criminal proceedings has been provided for only in respect of the personnel of LVB but not against LVB itself!
The opinion of the Court would appear to be highly debatable as the role of the main clause and that of the proviso was to cover different situations.
The main portion of the clause relates to the proceedings against the transferor and covers every conceivable proceeding pending. There appears to be nothing left out of its sweep. There is no need to even look at the proviso. The proviso could have very well been absent and every proceeding against the bank, including criminal ones, would stand fully covered by the language used in clause 3(3).
The subject matter of the proviso is only the specified personnel of the Bank. The Bank itself, being the subject of the amalgamation, was adequately covered in the main part of the clause 3(3).
It should also be highlighted that the language under interpretation is not of a statute but a scheme of amalgamation notified by RBI which is an administrative body with no legislative competence.
Over time, the jurisprudence has become clear that corporations are as much liable to criminal action as individuals. There is no whisper that LVB could not be prosecuted under criminal law if its action of diverting the deposits was proved to be mala fide and unauthorised.
If the intention had been to the contrary, that the criminal proceedings against LVB should abate and not be continued post-merger, then that would have been specifically provided in the scheme.
However, the case of the employees who are charged may be different. Unless the continuance of the proceedings against them after the amalgamation of LVB, that would result in its liquidation, was explicit, it may become contentious.
The subject that engaged the Supreme Court in the appeal by DBS Bank has been dealt with by the Supreme Court of Canada in Black & Decker Manu. Co. (1975) 1 SCR 411, the relevant extract is-
"……such as criminal responsibility, must be regarded as severed from the amalgamating companies and outside the amalgamated company. What happens to these vestigial remnants? Are they extinguished and if so, by what authority? Do they continue in a state of ethereal suspension? Such metaphysical abstractions are not, in my view, a necessary concomitant of the legislation. The effect of the statute, on a proper construction, is to have the amalgamating companies continue without subtraction in the amalgamated company, with all their strengths and their weaknesses, their perfections and imperfections, and their sins, if sinners they be. Letters patent of amalgamation do not give absolution."
The ruling gives the right meaning to an amalgamation where the transferor company is a mere addition to the transferee and carries all its baggage with no alteration!
Like is the approach of a US court in United States of America vs. Alamo Bank of Texas, No.88-6112 United States Court of Appeals, Fifth Circuit decided on 7 August 1989, where it was held
"Under the federal bank statute, CNB continues to exist, albeit now as part of Alamo. "[T]he resulting state bank shall be considered the same business and corporate entity as the national banking association. . . ." 12 U.S.C. 214b. Thus, Alamo is CNB, and it is CNB now named Alamo which is responsible for CNB's actions and liabilities. This includes criminal responsibility. See Melrose Distillers, Inc. v. United States, 359 U.S. 271, 274, 79 S.Ct. 763, 765, 3 L.Ed.2d 800 (1959).
In fact, the Delhi HC had considered the above in confirming that DBS cannot seek exclusion from the continuance of the criminal case.
The decision of the SC, tragically, terminates the criminal proceedings against the Bank which, if pursued, would help to shine the light on the way LVB (mal)functioned and the laxity and negligence of RBI in its supervisory role.
Many aspects of the malfunctioning of the Bank and how the regulatory system failed to catch it in real time would certainly be a valuable addition to the corpus of the literature of corporate loot where invariably banks played an able anchor—like YES Bank in the swindle by the Wadhawan brothers of DHFL.
The Supreme Court, unfortunately. entangled itself with the objective of the action of RBI to rescue a failing bank and protecting the interest of the depositors, matters being completely unrelated to the interpretation of the specific clause in the amalgamation order issued by the regulator.
It is difficult to believe that LVB's top echelon was not in cahoots with the Singh brothers in the loot. The facts make this inference quite tenable. The company had clarified to its members in their annual report that LVB confirmed the availability of the deposits to the auditors of the company even sometime in November 2017, while to the company it took the stand that the deposits were adjusted in July 2017.
Ideally, RBI should apply for rectification of the error in the SC’s order so that the criminal case can be proceeded against the Bank and the sordid saga made public of how a highly regulated bank could have been a party to a criminal conduct that is no different than a midday heist by a gang of masked robbers!
RBI should not rejoice in having this case hushed up!
Ilvala and Vatapi were the masters of deception. Ilvala possessed the secret to call the dead back to life. Vatapi could change to any animal form he chose. The brothers would invite the holy men living in the forests to partake of food in their abode. Vatapi would change his form to a calf or a lamb and his brother would kill it and cook a hearty meal. Once the guest had his fill of the repast, Ilvala would call the brother back to life and Vatapi would come out tearing the stomach of the guest. The brothers had a great run in their macabre method till they found their end when sage Agastya ate the meal and quickly digested the food, ending Vatapi's option to return to life!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies)