Top corporate lawyers have termed as “first of its kind” the development of a major listed company like Satyam Computer Services (now Mahindra Satyam) filing a suit in a Hyderabad Civil Court claiming damages from its past Board of Directors, certain ex-employees and former statutory auditors, affiliates and partners.
Leading corporate tax lawyer and Supreme Court advocate, Mr H.P. Ranina, told Business Line that the main reason behind the suit seems to be the new management's (led by the Mahindra Group) interest in recouping the losses incurred by the company due to the alleged accounting fraud.
However, he said, the final outcome will depend on the evidence the petitioners submit in court on aspects of fraud and negligence.
Since it is a civil suit, a final decision could take at least 5-6 years due to the long list of pending civil cases in the respective civil courts, he said.
On the damages sought by the company, Mr Ranina said usually the trend is to seek maximum possible damages and if it is more than what the other party can pay, then they will be declared bankrupt.
Another interesting aspect here is that the company has also reportedly sought damages from its audit firm PriceWaterhouse, he said, adding this would mean that the firm will be saddled with a huge liability in case of an adverse order.
“Usually, foreseeing the likelihood of such incidents, the big audit firms take an insurance policy against potential damages. But if the insurance company finds a way not to pay the damages by citing certain clauses, the audit firm itself will have to pay up,” Mr Ranina said.
Also, mostly, international audit firms settle such cases out-of-court, in which case, the suit could even be dropped, he said.
Besides, the company's present management may know that it cannot recover huge damages from the former employees and directors as they will not be in a position to pay up as much as audit firms, Mr Ranina said.
Significantly, the other fall-out would be on directors. “Due to the possibility of such civil suits, not many people will now be ready to take up the offer of joining the board of companies as directors as these liabilities will be much more than the negligible amount that they are offered as fees,” he added.
Another corporate lawyer, speaking on condition of anonymity, said the case seems to be ‘unprecedented', adding that nothing in law stops the company from ensuring that it recovers all its money from the ‘fraudsters'.