[Jatin is a student at Hidayatullah National Law University.]
The concept of corporate criminal liability has been a highly debated topic, particularly in the latter part of the 20th century and continuing into the 21st century. This debate has intensified as the actions of corporations have increasingly been seen to have significant impacts on various aspects of society including the environment, economy, social fabric, financial stability, and personal security. Recently, the Indian Supreme Court also in the case of Religare Finvest Limited v. State of NCT deliberated over the question of whether the Indian Law recognises the liability of the successor company following the merger. The apex court answered in negative. Such a finding is in sharp contrast to the earlier judgement of the French Court of Cassation in which the said court while overruling the prior precedents held the successor company liable for the criminal acts of the merged company.
The contrasting decisions of the Indian Supreme Court and the French Court of Cassation regarding corporate criminal liability in the case of mergers and acquisitions underline the complexities and jurisdictional disparities in this area of law. This article seeks to examine the discord between the two legal stances and evaluate the advantages and disadvantages inherent to each position.
A Brief Background of the Cases
Religare Finvest v. State of NCT
The apex court in Religare Finvest established an important precedent in Indian corporate jurisprudence, clarifying that upon the merger of a company, the successor entity, which in this case was DBS Bank, does not inherit the criminal liabilities of the dissolved company, here being Laxmi Vilas Bank. The ruling underscored that the transfer of criminal liability through a merger is not an automatic process and cannot be presumed either through contractual agreements or legislative enactments. Furthermore, the court specified that the scheme of amalgamation maintained liability solely against the individual officers of the defunct bank, thereby exempting the acquiring company, DBS Bank, from charges related to the corporate predecessor's alleged misconduct.
The Supreme Court observed that the accountability for alleged financial misconduct remained with the individual officials of the now-defunct Laxmi Vilas Bank, even after its merger with DBS Bank. The court acknowledged that DBS had no participation in the previous actions of LVB's personnel and, thus, could not be held liable for them. In delivering its judgment, the court recognized the critical need for maintaining public trust in the banking system and emphasized that pursuing DBS for offences allegedly committed by LVB's officials would be an injustice. The decision was framed around the principle that penalizing a company for taking over a financially troubled bank could dissuade other institutions from acting as rescuers in similar situations.
The verdict of the French Cour de Cassation
On the Contrary, the Cour de cassation's decision to hold the successor company liable for the acts of the merged company stems from a significant shift in legal interpretation influenced by both European Union directives and rulings from the European Court of Human Rights (ECHR). Previously, the Cour de cassation had interpreted Article 121-1 of the French Penal Code, emphasizing the principle of personal criminal liability, which prohibited the transfer of criminal liability in the event of a merger. This interpretation was based on equating the dissolution of a legal entity with the death of a natural person, following the logic that criminal liability does not survive the person who committed the act. However, influenced by the case law of the CJEU and the ECHR, which emphasized the economic continuity of the absorbed company after the merger and the non-existence of a true "third party" status for the absorbed company, the Cour de cassation re-evaluated its position. The CJEU's interpretation in Modelo Continente Hipermercados SA v. Autoridade para as Condições de Trabalho of the directive on the merger of public limited allowed the liability for acts committed prior to a merger to be transferred to the acquiring company liability companies, coupled with the ECHR's ruling in Carrefour France v. France that imposing penalties on the acquiring company for acts of the absorbed company does not violate the principle of specific penalties for offenders, prompted the cour de cassation to align its interpretation with these principles. Therefore, the cour de cassation concluded that in the case of a merger, the criminal liability of the absorbed company could be transferred to the acquiring company, ensuring coherence with EU directives and human rights considerations while recognizing the legal entity's continuity despite changes in legal form.
The US and the EU Comparative Analysis
In the United States, the principle of criminal successor liability has evolved over time and has become a well-established concept in corporate law. Historically, criminal liability was viewed as attached to the corporate form itself. This meant that if a corporation was dissolved through a merger or consolidation, it was akin to the "death" of the entity, and any criminal liability ceased to exist. However, this perspective gradually changed, particularly in light of the need to prevent companies from avoiding liability through corporate reorganization. State courts in the US began to recognize criminal successor liability as early as the late 1950s, even though there is no federal common law specifically governing this area.
In United States v. Alamo Bank of Texas, the Fifth Circuit Court of Appeals affirmed the concept of criminal successor liability in the context of violations of the Bank Secrecy Act. The case revolved around a situation where Alamo Bank of Texas had merged with another corporation, and the question arose whether the surviving corporation could be held liable for the criminal acts committed by the absorbed entity prior to the merger. In the case of United States v. Arcos Corp., the court relied on state law to infer criminal liability observed:
“A key to finding criminal liability of a dissolved corporation often lies with the existence of a state statute that permits extending the criminal liability beyond the life of the entity. This is because corporations are created and dissolved pursuant to state law and therefore state law may control the legal obligations of the entity”.
For the EU, as already stated above the major influence behind the landmark judgment of the French Court was the earlier judgements by the ECHR and CJEU ensuring that its decision regarding successor liability was consistent with broader European legal principles.
Successor Identity Approach: Reaching the Middle Ground?
An alternative approach to the two opposite positions of law in this regard is the concept of successor identity promulgated by Mihallis E Diamantis which propounds that “successors should be liable for the crimes of their predecessors only when they inherit their predecessors’ compliance vulnerabilities”. This would create a connection between successors and their predecessors in terms of criminal liability. The justification for this approach is that it would encourage corporations to reorganize in ways that enhance compliance and reduce the chances of future offences. Additionally, it would ensure that corporate successors are punished under criminal law only when it is warranted.
The successor identity approach is essentially based on the idea of tying liability to the organizational features responsible for corporate misconduct. This approach involves a two-step process to determine which if any, present-day successor is criminally liable for the misconduct of a predecessor.
First, factfinders must identify and isolate the specific organizational features that were causally responsible for the predecessor's misconduct. This could include factors such as a toxic corporate culture, significant compliance deficiencies, or other systemic issues within the organization. By identifying these features, factfinders establish the predecessor's criminal identity.
Second, factfinders must then assess whether any of the successors emerging from the reorganization inherited these identified organizational features. If a successor is found to have inherited the same toxic corporate culture, compliance deficiencies, or other relevant factors from the predecessor, then that successor would share a criminal identity with the predecessor and could be held liable for its misconduct.
In essence, the successor identity approach seeks to hold present-day successors accountable for the misconduct of their predecessors by examining whether they have inherited the same underlying organizational issues that led to the misconduct. This approach aims to promote fairness and accountability in corporate governance by ensuring that those responsible for perpetuating a culture of wrongdoing.
Conclusion
In the Indian legal context, the prevailing stance tends to lean towards a strict interpretation where criminal liability is not transferred to successor companies. However, this approach may be perceived as rigid and may not adequately address situations where successor companies inherit the compliance vulnerabilities of their predecessors. On the other hand, both the US and the French legal systems have evolved to recognize the concept of successor liability. This approach acknowledges the economic continuity between merging companies and aims to ensure accountability and deterrence of corporate misconduct.
The successor identity approach offers a nuanced perspective that aims to strike a balance between these two conflicting approaches so that it holds corporations accountable for their misconduct and also ensures that corporate reorganizations, such as mergers, are not unduly discouraged. By focusing on whether successors inherit their predecessors' compliance vulnerabilities, this approach incentivizes corporations to reorganize in ways that prioritize compliance and minimize the likelihood of future offences. Instead of imposing blanket liability on successor companies, it encourages proactive measures to enhance compliance standards, foster ethical conduct, and reduce the risk of misconduct.
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