The past few years have seen a marked increase in regulatory investigations and enforcement action into fraud. This increased scrutiny brings into focus the liability of the individuals involved in the fraud and the extent to which such individuals are liable.
Typically, when the company has committed fraud, persons who are responsible for the actions of the company – the ‘directing mind and will– are held liable. In contrast, where a fraud is committed on the company and/or its shareholders, it involves identifying both, the officers at whose behest, or for whose benefit, such actions were undertaken, as well as persons who executed the fraud.
While the law in India sets out the broad standard of conduct expected from certain important functionaries of a company, the gradation of liability among all the officials ranging from the chief executive officer to an official in the finance team, is not individually prescribed.
As a result, the question that naturally arises in the context of fraud on the company and/or its shareholders, especially in the context of Indian companies that are beset with their own unique hierarchies, is whether there is (or should be), deeper regulatory and judicial appreciation of the differences between persons at the helm and those accustomed to act unquestioningly on such instructions?
While acting on the orders of “a person in power/superior/person under whose directions the organisation is accustomed to act”, has been used as a defence in various contexts, the law has not prescribed the degrees of culpability for persons in power and persons who are merely following instructions. In particular, the Securities Exchange Board of India (SEBI), while examining circumstances where fraud is alleged to have been committed on the company and other such grave lapses, typically does not limit its scrutiny to only the most senior levels of officials. Accordingly, the extent to which different classes of officials are liable for frauds committed on the company becomes important.
Although judicial precedent on this is limited, there are a few cases that analyse these distinctions closely. A case in point is the 2018 SEBI order against Vijay Mallya and certain officials of United Spirits Limited (USL) involving diversion of funds to various domestic and overseas entities and potentially improper transactions. SEBI issued an interim order against the chairman, managing director, chief financial officer and certain officials in the finance and accounts department, restraining them from accessing the capital markets. In the final order, SEBI distinguished between the role of key managerial personnel and others who were in the vice president cadre of the finance and accounts team. SEBI accepted the defense of the junior officers that they were merely acting under the instructions of senior officers and had not independently undertaken the actions and did not hold them liable for any of the charges.
Is There a Superior Orders Defence Available Under Law?
Under international criminal law, the superior orders doctrine is an established (if controversial) defence that a subordinate must not be held liable for any illegalities that may have been committed by him, acting in accordance with the orders of a superior. Infamous for its role in the Nuremberg trials, this defence (a principle of criminal jurisprudence) is, in a limited manner, included in the Rome Statute of the International Criminal Court – superior orders could be used as a defense if (i) the accused was under a legal obligation to obey the orders of the superior and (ii) the accused did not know that the order was unlawful and the order was not manifestly unlawful.
Applying this principle to the determination of individual liability in the Indian regulatory context, two conflicting approaches emerge, on whether a similar defence should be legislatively codified or at least recognised by courts in the course of examining cases involving fraud committed on companies:
- At the threshold, it would be difficult to argue that company officials are under a legal obligation to follow the orders of their superiors. In situations that mandate actions that are patently illegal, the professional is expected to act in the best interests of the company.
- Allowing for such defences also permits parties to escape liability for their own actions and cast the blame on the sole, superior functionary. Needless to add, such a defence is fraught with the risk of fostering a callous and negligent attitude among senior employees within the company.
- On the other hand, subjecting the CEO and a junior finance official to the same liability ignores the realities of corporate hierarchy. Asymmetry of power within organisations and, in fact, industries, can impair the ability of employees, regardless of their seniority, to refuse compliance with instructions, vocalise their reservations or even resign on these ground. Other than filing whistleblower complaints and anonymous tip-offs, dissenting employees rarely have the ability to deviate from instructions issued by the promoter/shadow promoter, given their enormous sphere of influence.
No jurisdiction can hazard creating fixed rules that mechanise the process of determining liability. However, in the course of scrutinising the role of the persons involved in frauds against a company, we should move towards nuanced standards of determining liability that will allow for more realistic and fairer outcomes. Although allowing employees and directors to use the defense of superior orders in all circumstances may not be viable, courts and tribunals should certainly recognise the role of the employee as important considerations for determining liability and penalty.