Supreme Court Allows Forensic Audit Into Alleged Dissipation Of Fortis Shares In Daiichi Sankyo Arbitration Case

The Supreme Court on Friday refused to interfere with the Delhi High Court's order directing a comprehensive forensic audit into the alleged dissipation of Fortis Healthcare Ltd (FHL) shares and other assets.

The audit concerns former promoters Malvinder Mohan Singh and Shivinder Mohan Singh, their downstream entities, Fortis officials, and 17 banks and financial institutions.

The proceedings arise from Daiichi Sankyo's efforts to enforce its ₹2,562 crore arbitral award against the Singh brothers.

The assets in question included FHL shares held through Fortis Healthcare Holding Pvt Ltd. The entity was directly or indirectly controlled by the Singh brothers and held over 70% of FHL.

Malvinder Singh was FHL's Managing Director and Chairman. Shivinder Singh was its Director and Vice-Chairman until February 2018.

A bench of Chief Justice Surya Kant, Justices Joymalya Bagchi and V. Mohana declined to interfere with the High Court's directions and allowed the forensic exercise to proceed.

“It goes without saying that the forensic audit should be conducted independently, without being impressed by the observations made in the impugned order,” the Court said.

Appearing for Fortis, Senior Advocates Dr. Abhishek Manu Singhvi and Neeraj Kishan Kaul argued that FHL had no legal mechanism to prevent the Singh brothers, as shareholders, from transferring their dematerialised shares.

Singhvi submitted, “A listed company like the petitioner has no power or ability to restrict the movement of its demat shares.”

He added, “Under the Depositories Act, shares of a public listed company are freely transferable, with the listed company having no role in the transfer. The only mechanism to prevent transfer of a demat share is a freeze order communicated to the depository by a court or regulator.”

Singhvi also questioned how FHL's alleged knowledge of transactions by its shareholders could be transformed into a legal liability.

He pointed out that Daiichi had a list of around 20 entities allegedly connected with the Singh brothers. However, it had not pursued tracing proceedings against those entities in the same manner.

The bench questioned whether FHL could claim complete ignorance when the Singh brothers had held around 70% of the company.

The court also noted that the shares were transferred in tranches and that the process ultimately resulted in a change of management control.

“They were holding overwhelming shareholding, you know these are being transferred in tranches. Then there is a new promoter coming in. If we are diluting their control over the company, is it not necessary, Dr. Singh?”, the Court asked.

The court also questioned the distinction between the company's knowledge of the transfers and the legal consequences that could follow from such knowledge.

“How does this knowledge that my shareholder sold shares, convert into a liability? How does a legal transformation take place?”

Singhvi further relied on the High Court's observations concerning FHL's alleged role.

He sought protection against those observations being used against the company in collateral proceedings. He submitted that the audit, if permitted to continue, should not prejudge FHL's liability.

Appearing for Daiichi Sankyo, Senior Advocate Mukul Rohatgi argued that the audit was necessary to reconstruct the movement of the assets that had allegedly been dissipated despite assurances given to the courts.

He submitted, “The admitted facts are, after giving assurances to the Court, the Singh brothers dissipated the shares, with the connivance of the banks, because those shares, which were not even encumbered, were made encumbered by top-up pledge agreements.”

Rohatgi further said, “The shares were sold, the monies went into the banks' bank accounts, and the banks have taken away the money in discharge of their debts. Not a single naya paisa has come to Fortis.”

He argued that the Depositories Act could not be used to defeat an inquiry into whether the overall transactions had resulted in dissipation of assets available for enforcement of Daiichi's award.

The court also questioned the scope of the audit. It considered whether the exercise was confined to the movement of funds and shares or would also examine the role of FHL's officers and corporate managers.

The bench referred to the earlier Supreme Court judgment permitting the Delhi High Court to consider appointing a forensic auditor to analyse transactions involving FHL, RHT, and related entities.

Ultimately, the Supreme Court refused to interfere with the Delhi High Court's direction for a forensic audit.

It clarified that the audit must be conducted independently and without being influenced by the observations or findings contained in the High Court's order.