From Mergers to Misuse: Assessing Criminal Implications in India

Abstract:

In recent times, the convergence of corporate law and criminal liability has become a focal point of discussion, particularly concerning the strategic use of mergers and acquisitions (M&A) to navigate legal obligations. India, with its expanding corporate sector, is no stranger to the complexities surrounding these transactions. The strategic maneuvers employed in these transactions often demand a comprehensive understanding of the legal nuances and safeguards embedded in the Indian legal system. The evolving nature of corporate law necessitates a thorough exploration of relevant legislation, including the Companies Act, 2013, and its implications on criminal liability. This article explores the detailed landscape of evading criminal liability through M&A in the Indian legal framework, examining key provisions that shape this complex interaction.

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In India, the Companies Act, 2013 serves as the cornerstone of the corporate legal framework, delineating the rights and responsibilities of companies and their officers. Criminal liability can be triggered for a range of offenses, spanning from financial irregularities to corporate fraud. A foundational understanding of these legal provisions is essential for unraveling the dynamics of M&A transactions within the Indian legal context. Corporate entities can incur criminal liability under Section 17 of the Companies Act, 2013, wherein companies are held accountable for offenses committed by their officers. This provision introduces the concept of corporate criminal liability, raising questions about the potential exploitation of M&A transactions as a means for corporations to shield themselves from impending criminal investigations or prosecutions. The Companies Act further provides a statutory mechanism for companies to restructure through a "Scheme of Arrangement" under Sections 230-232. While the primary objective of this mechanism is to safeguard the interests of shareholders and creditors, there exists the potential for its inadvertent exploitation as a shield against criminal liability.

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The crux of the matter lies in a fundamental legal question: does Indian law recognize criminal successor liability of a company following a 'merger'? In 2021, the Supreme Court, in Religare Finvest Ltd. v State of NCT (AIRONLINE 2021 DEL 825) delivered a consequential judgment, answering in the negative. The ruling in this case highlighted that criminal liability cannot be automatically transferred through a merger, whether by contract or statute. The court emphasized that clause 3(3) of the amalgamation scheme only provided for the continuation of liability against the officers of the erstwhile bank. Beyond this specific case, the broader implications of the Supreme Court's decision are significant, suggesting that companies could potentially exploit mergers to evade various legal obligations. This extends to circumventing environmental laws, sidestepping money laundering regulations, or escaping criminal proceedings initiated by state authorities or regulatory bodies like the Securities and Exchange Board of India. A critical aspect that emerges is the maintenance of criminal actions initiated by the merged company. If the successor cannot be criminally liable for the actions of the merged company, questions arise about the justification of allowing the successor to pursue criminal actions filed by the merged entity, particularly when the successor was never the victim of those acts. This nuanced aspect introduces complexities that may lead to potential misuse and manifest injustice in contemporary legal landscapes. The heart of the matter lies in the Supreme Court's interpretation of the Companies Act, 2013, and the transfer of 'rights and liabilities' to the successor company. The decision in Religare Finvest draws parallels with an older ruling in McLeod Russel India Limited v. Regional Provident Fund Commissioner, Jalpaiguri, which suggested that criminal liability cannot be transferred even by statute. However, this dictum merits reconsideration, especially in light of the relevant provisions of transfer under the Companies Act and its potential impact on successor liability in criminal matters. International perspectives, such as the recent decision of the Criminal Chamber of the French Supreme Court, add complexity to the debate. While the French court held that criminal liability of the merged company could be transferred to the successor company, the Indian Supreme Court has maintained a contrasting stance. The differences in legal frameworks and their interpretations underscore the need for a nuanced analysis within the Indian context. In the wake of these legal deliberations, a thoughtful and comprehensive review of the Companies Act becomes imperative. Such a review should take into account the intricacies of mergers, the potential for misuse, and the evolving challenges posed by corporate actions. Furthermore, a close examination of international legal precedents can offer valuable insights into how other jurisdictions handle the intersection of mergers and criminal liability.

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A critical aspect of this discussion involves analyzing landmark cases such as the Satyam scandal and the IL&FS crisis. These cases provide insights into the judicial response to corporate malfeasance within the context of M&A. Courts have demonstrated a willingness to pierce the corporate veil, holding individuals accountable and underscoring the importance of corporate governance and individual responsibility. A thorough examination of these cases is crucial for understanding the evolving jurisprudence surrounding M&A and criminal liability. Regulatory bodies, including the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA), play a pivotal role in overseeing corporate transactions. Their vigilance is essential in preventing the potential misuse of M&A as a tool to evade criminal liability. Amidst these legal considerations, ethical dimensions also come to the forefront. Aspiring legal professionals must actively engage in discussions surrounding corporate ethics. While M&A transactions can offer legitimate business advantages, it is essential to emphasize that they should not serve as a shield for unlawful activities. Encouraging a culture of transparency, accountability, and ethical conduct within the corporate sector is integral to maintaining the integrity of M&A transactions in India.

In conclusion, navigating the complexities of mergers, acquisitions, and criminal liability in India requires a meticulous examination of existing legal frameworks. Reflecting on these challenges, the words of the eminent legal scholar, Roscoe Pound, resonate: "Law must be stable, and yet it cannot stand still." Looking ahead, a proactive and dynamic approach is essential. The legal community must engage in a robust discourse to address the gaps in the current legal framework and explore avenues for reform. Striking a balance between facilitating legitimate corporate transactions and ensuring accountability for unlawful acts is paramount. A careful reevaluation of legislative provisions, coupled with an in-depth understanding of their practical implications, can pave the way for a more equitable and just legal landscape in India. The way forward involves a comprehensive review of the Companies Act, 2013, exploring potential amendments, and ensuring a nuanced interpretation of transfer provisions. Engaging in thoughtful legal discourse and considering international perspectives will be instrumental in refining corporate legal frameworks, ultimately achieving a delicate balance between accountability and facilitating legitimate business transactions.

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References:

• Chaudhary, S., & Pandey, R. (2023, December 29). Dodging Criminal Liability through Mergers & Amalgamations.

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*This article is authored by Arjun Gupta, Student of Symbiosis Law School, Noida and reviewed by Vrinda, Student of Symbiosis Law School, Noida.