How a Plum CEO position can turn into a Personal Legal Liability

I am not a lawyer, but a C- Suite executive who has faced liabilities due to issues beyond my scope, power, or bandwidth. For the sake of context and background, I was heading a company that was a service provider to a group called SARE homes. SARE Homes was set up by various private equity funds and unlike most companies in real estate did not have a family or individual as a promoter. Due to this the decision-making powers wrested with the offshore lenders, equity holders, or Indian NBFC’s in the project companies which had availed debt facilities. However, being the Company’s face with customers, vendors, media etc in India, I faced personal liability, including criminal cases, although no benefits other than a partially paid salary commensurate with the industry standards was bestowed on me. This has not only put me in a position of stress, despair, financial trouble, but the multiplicity of litigation against me has also put my professional career in a position of uncertainty.

My experience of these affairs tells me that the effective implementation of well-thought legislation can fail by opting for a mere mechanical approach. One such blanket provision under the law is the vicarious liability of Directors and the top management (also known as the Key Managerial Personnel) for the Company’s violation of the law. The blanket application of this law has daunting effects,

A company ought to be treated as a separate legal entity and directors or promoters cannot be personally held liable for any acts of the company, except for fraud, fa?ade or tax evasion where the employees or management of the company act fraudulently in disguise of the company for personal benefit, only then they can be held liable. However, it has been observed at multiple instances that the CEOs of the companies are being attempted to held criminally liable for the alleged wrongs of the company.

Amidst the loss of all hope and a prevailing sense of despair, our Hon’ble Supreme Court (The Bench of Justice Sanjiv Khanna and Justice R.S. Reddy) has recently in its decision?Dayle De’Souza vs Government of India Through Deputy Chief Labour Commissioner and Another?requested that the investigating and prosecuting agencies refrain from proceeding mechanically against directors of erring companies solely based on their position, noting that such avoidable prosecution results in humiliation and loss of reputation in society. The Appeal challenged the provision 22(c) of the Minimum Wages Act, which holds each person who is a top management official liable for any offence committed by the Company?only?by virtue of their position.?The Supreme Court stated that vicarious liability exists only when an offence is committed with the consent, connivance, or is attributable to the neglect of a director, manager, secretary, or other officers of the Company, and not simply because the person holds a responsible position within the Company which is the accurate yardstick to hold someone guilty. The blanket application of such a law is flawed only because it doesn’t factor in the actual power dynamics in an organisation. Sometimes, top management is only appointed for the statutory formalities and doesn’t have substantial decision-making roles.

Let us look at two more cases one of an Indian national working with a global MNC giant and another of an Expatriate working in India for an family promoted company.

Post implementation of new IT Rules, Twitter failed to comply with the rules due to which Twitter managing director Manish Maheshwari have been facing various cases against his name. due to non-compliance of the rules, Twitter lost its status of an intermediary due to which all the legal immunity associated with it under Section 79 of the Information Technology Act, 2000. The controversy began when he told the government that though he was MD of Twitter India, however, the content is overlooked by the US team and his role is that of sales. Later, he had moved to Supreme Court with a Caveat Petition praying that no order ought to be passed against him without giving the opportunity to be heard. He had also sought protection from arrest from Karnataka High Court for the case filed against him in Uttar Pradesh for the matter related to showing distorted map of India.

Another major case is that of Patrick Casserly who was COO, Cambatta Aviation. He spent two months in jail because his employers owed Rs 18 crore in unpaid service tax dues. “How can I guarantee the repayment of service tax? It’s not my money. I don’t have that money,” Casserly said in his meeting with officials at the service tax office in Bandra Kurla Complex. “It was all against me, a personal thing instead of the company. The company has never been charged, which is wrong. And if they thought I was the face of the company, it would be a different scenario. But at that moment it was just me,” said Casserly.

“Will the latest judgement add some relief?”

To a certain extent, the answer is in the affirmative. There have been a bunch of similar cases that have come up recently whether it is the Indian Infoline cases, or the Dayle D'Souza case. The judges have had the same views that the magistrate had to apply his mind and see and evaluate the role played by the professionals in their capacities before initiating a criminal proceeding against them. As stated in the Dayle D'souza case.

“Criminal law should not be set into motion without adequate investigation of facts on mere suspicion”

What's being overlooked here is the humiliation the person has to endure, and the aspect of their integrity being called into question, and we all know how long such cases are dragged. Still, there’s no step or instances where the court has awarded any damages to these high-profile people or had any kind of checks before anyone files a case against them.

Another worrying aspect is that there are lot of judgements on the similar issue, where court again and again has upheld similar points made in Dayle D’souza but it seems the series of cases is not coming to an end. Considering the seriousness of these cases, there must be a strong mechanism that needs to be in place, that monitors the involvement of these professionals and then the cases is taken forward accordingly.

Vineet Relia is the Author and  Managing Partner of Relia Advisory Services LLP, the firm is providing interim management services to certain MNC's operating in India who are facing challenges due to local environment.