Satyam scam: Separate entity must to avoid legal tangle

30 Jan 2009, ET Bureau


NEW DELHI: The government on Thursday said it cannot protect the acquirer of Satyam Computer Services from the fraud-hit software exporter’s legal liability in the aftermath of a merger.

To avoid taking the legal liability of the Hyderabad-based company arising from the law suits filed by its investors abroad, the successful suitor will have to retain it as a separate entity after acquisition, said an official with the ministry of corporate affairs who asked not to be named.

Companies with small stakes could get management control of Satyam with the support of other shareholders. But so long as the company remains a separate entity, all its liabilities will be vested in itself, he said. That is, any company that takes management control of Satyam or make Satyam into a subsidiary will not have to bear the software exporter’s legal liabilities.

“Under the law, a company is a person with perpetual succession. Managements may come and go, but the company’s liabilities remain with it till the time it is wound up. However, in the case of a merger, the company ceases to exist and, therefore, its liabilities are transferred to the acquirer,” the official said.

Engineering giant L&T, which has an information technology arm called L&T Infotech, and Mahindra group’s software arm Tech Mahindra have shown interest in taking management control of Satyam.

While consolidating parent-subsidiary balance sheets, only crystallised liability will show in the parent’s books. Legal liability of Satyam is not crystallised yet and it is only a distant possibility, said the official.