Supreme Court: DBS Bank Directors cannot be held Liable for LVB's Pre-Amalgamation Misconduct

Supreme Court: DBS Bank Directors cannot be held Liable for LVB's Pre-Amalgamation Misconduct

The Supreme Court has determined that DBS Bank and its Directors cannot face criminal liability for the actions associated with the former directors of Lakshmi Vilas Bank (LVB) who were appointed with proper approval by the Reserve Bank of India (RBI).

The Court held that the public interest in protecting the banking system outweighed the need to prosecute DBS for the actions of LVB's former management. The Court also noted that the amalgamation of DBS and LVB was intended to safeguard the interests of depositors, creditors, and employees of LVB.

The Court also noted that the chargesheet against DBS did not allege any wrongdoing on the part of the bank or its directors. The chargesheet only alleged that LVB's former directors had committed criminal offences. As DBS was not involved in these offences, the Court held that it could not be held liable for them.

“Therefore, pending criminal proceedings arising out of the FIR, to the extent it involves DBS and all consequent proceedings are hereby quashed. The impugned judgment is set aside. Appeal by DBS is allowed,” the Apex Court ruled.

The Supreme Court bench, consisting of Justices S Ravindra Bhat and Aravind Kumar, presided over an appeal challenging a judgment from the Delhi High Court. The Delhi High Court had declined to annul the supplementary chargesheet filed against the appellant, DBS Bank.

On November 25, 2020, the Government of India, citing the precarious financial state of the erstwhile Laxmi Vilas Bank (LVB), invoked Section 45 of the Banking Regulations Act, 1949, to decree the compulsory amalgamation of the appellant with LVB. This measure was implemented with the objective of protecting the welfare and interests of LVB's customers, depositors, creditors, and employees.

The Court's decision was based on the interpretation of Clause 3(3) of the scheme announced by the Ministry of Finance, Department of Financial Services. This clause states that criminal proceedings against the transferor bank before the amalgamation will be transferred to the transferee bank. However, the Court held that this clause does not apply to DBS, as it was not a party to the amalgamation scheme.

Before dissecting the interpretation of this particular clause, the Supreme Court emphasised the paramount importance of safeguarding the interests of depositors, creditors, and the general public who had invested in the distressed bank prior to its financial turmoil. The Court underscored that the principal objective of the amalgamation scheme was to ensure the broader public interest in the overall well-being of the banking sector.

The Court made a notable observation that the scheme had been devised with the intent of safeguarding the interests of depositors, creditors, and other individuals who had invested in the bank prior to its financial troubles. This was seen as a measure to secure the broader public interest in maintaining the health of the banking industry.

The Court further noted that delaying intervention in the bank's affairs could lead to a scenario where there is a rush to withdraw funds, causing a severe loss of confidence in the intricately connected banking and financial system. The overarching objective of the scheme, as highlighted by the Court, is to recover the bank's outstanding dues and ensure the protection of creditors.

The Supreme Court also highlighted that the content of the chargesheet suggested an attempt to assign criminal responsibility to DBS for actions taken by the former directors of LVB. The Court clarified that the personal responsibility and liability of LVB's directors under criminal law remained intact despite the amalgamation.

While recognising the need for exercising caution when considering the dismissal of a criminal investigation, the Supreme Court emphasised the importance of using this power judiciously, particularly in situations where it is necessary to uphold the principles of justice.

The Court's decision is a significant victory for DBS and its directors. It affirms the principle that a company cannot be held liable for the actions of its predecessor company. The decision also sends a message that the courts will not lightly interfere with the amalgamation of banks, even if it means that some criminal prosecutions may be dropped.