Supreme Court Holds Singh Brothers in Contempt for Asset Diversion in Daiichi Sankyo Case (22 September 2022)

Introduction

Date of the Judgment: 22 September 2022

Citation: Not Available in the source

Judges: Uday Umesh Lalit, CJI, Indira Banerjee, J., K.M. Joseph, J.

Can individuals who give assurances to a court regarding their assets be held in contempt if they act in a way that diminishes those assets? The Supreme Court of India recently addressed this question in a case involving Daiichi Sankyo Company Limited and Oscar Investments Limited, among others. The core issue revolved around whether the respondents had violated court orders and undertakings by moving assets beyond the reach of the petitioner, Daiichi, who was seeking to enforce a foreign arbitral award.

Case Background

This case originates from Daiichi Sankyo’s efforts to enforce a foreign arbitral award from Singapore against 20 respondents, including Malvinder Mohan Singh and Shivinder Mohan Singh, and various associated companies. The award, amounting to approximately INR 2562 crores plus interest, was challenged but ultimately upheld. During the enforcement proceedings in the High Court of Delhi, Daiichi expressed concern that the respondents were attempting to move assets out of reach.

Fortis Healthcare Holdings Private Limited (FHHPL), a holding company controlled by the respondents, held shares in Fortis Healthcare Limited (FHL). Daiichi alleged that the respondents were selling or encumbering FHL shares held by FHHPL. The High Court recorded an undertaking from the respondents that the value of unencumbered assets of FHHPL, disclosed as Rs. 2841.09 crores, would not be diminished.

Timeline:

Course of Proceedings

The High Court of Delhi dismissed objections to the enforcement of the arbitral award, except for those concerning the minor respondents. This decision was upheld by the Supreme Court. The Supreme Court noted that the undertaking recorded in the order dated 21.06.2017 was the fifth such assurance given by the respondents’ counsel. The court also reviewed four previous assurances recorded in the case of Vinay Prakash Singh vs. Sameer Gehlaut & Ors.

The Supreme Court also noted that despite multiple assurances, the respondents continued to encumber and transfer shares, which led to the filing of a contempt petition. The Court clarified its interim orders several times, specifying that the status quo applied to both encumbered and unencumbered shares, except for those encumbered before specific dates.

Legal Framework

The case primarily involves Section 48 of the Arbitration and Conciliation Act, 1996, which deals with the grounds for refusing enforcement of a foreign arbitral award. The court also considered the concept of civil contempt under the Contempt of Courts Act, 1971, which includes willful disobedience of any order of the Court or willful breach of an undertaking given to the Court.

Arguments

Daiichi Sankyo’s Submissions:

• ✓ The respondents devised a plan to dilute their shareholdings and frustrate the enforcement of the arbitral award.
• ✓ Despite having multiple forms of security available, banks and financial institutions targeted the shares held by FHHPL in FHL.
• ✓ The manner in which the controlling interest in FHL was diluted was questionable, with the same assets now controlled by RHT, a trust linked to the respondents.
• ✓ These transactions were not bona fide and required a forensic audit.
• ✓ The banks and financial institutions colluded with the respondents to undermine the court orders.
• ✓ The transfer of INR 4000 crores to RHT was a deliberate attempt to circumvent the court’s orders.

Respondents’ Submissions:

• ✓ The transactions were part of normal business operations, with no intention to evade the award.
• ✓ The banks and financial institutions acted based on pre-existing agreements, not in defiance of court orders.
• ✓ Shivinder Mohan Singh was not involved in the management or negotiations of the transactions.

Banks and Financial Institutions’ Submissions:

• ✓ They were secured creditors and acted to protect their interests.
• ✓ The pledges were created before the court orders, and the sale of shares was a matter of commercial expediency.
• ✓ They were not aware of the assurances given to the High Court.

IHH/NTK’s Submissions:

• ✓ The acquisition of shares in FHL was done through a public process and was a bona fide investment.
• ✓ The transfer of funds was to acquire proprietary interests in assets used by FHL, not to evade the award.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the acts of commission or omission on part of Contemnor Nos.9 and 10 and the entities controlled by them, were calculated to put the assets of the companies under their control beyond the reach of Daiichi?
2. Having given clear assurances to the High Court and this Court, whether such acts of commission and omission on part of Contemnor Nos.9 and 10 amount to contempt of the orders passed by the High Court and this Court?
3. Whether the banks and financial institutions sold the shares which were pledged with them, purely as a matter of commercial expediency or whether there was any deliberate act of defiance to defeat the rigour and width of the orders passed by the High Court and this Court?
4. Whether the acts committed by them were in connivance with Contemnor Nos.9 and 10?
5. Whether the transactions entered into by or with IHH/ NTK were bona fide or whether there was a deliberate attempt to defeat the processes of Court and thereby keep the assets beyond the reach of Daiichi?

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court did not explicitly cite any specific cases or books in the provided text. However, it did refer to the following legal provisions:

• ✓ Section 48 of the Arbitration and Conciliation Act, 1996: This section deals with the grounds for refusing enforcement of a foreign arbitral award.
• ✓ Contempt of Courts Act, 1971: This act defines civil and criminal contempt, including willful disobedience of court orders.

The Court also made reference to the following cases:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ Vinay Prakash Singh vs. Sameer Gehlaut & Ors. The Supreme Court relied on this case to establish the history of assurances given by the respondents.

✓ Delhi Development Authority v. Skipper Construction* The Supreme Court used this case to affirm its power to issue consequential orders in contempt cases.

✓ Satya Brata Biswas v. Kalyan Kumar* The Supreme Court used this case to support the proposition that any act in violation of a court order is void.

✓ Vidur Impex and Traders Private Ltd. v. Tosh apartments Private Ltd.* The Supreme Court used this case to support the proposition that any act in violation of a court order is void.

✓ Rosnan Sam Boyce v. B.R. Cotton Mills Ltd.* The Supreme Court used this case to support the proposition that an undertaking given by a person in management and control will be the undertaking of the company itself.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the fact that the Singh brothers had given multiple assurances and undertakings to the High Court and the Supreme Court, which they then violated by systematically moving assets beyond the reach of Daiichi Sankyo. The Court also noted that there was a clear attempt to undermine the authority of the court. The court was also concerned about the role of the banks and financial institutions, and whether their actions were purely commercial or done in collusion with the respondents. The court was also concerned about the transfer of 4000 crores and whether it was a bona fide transaction.

Logical Reasoning:

The court considered alternative interpretations but ultimately rejected them in light of the multiple violations of court orders and undertakings. The court also noted that the respondents did not make any genuine attempt to purge themselves of contempt.

The court’s decision was based on the evidence of the respondents’ deliberate attempts to undermine the enforcement of the arbitral award. The court also noted that the respondents did not make any genuine attempt to purge themselves of contempt.

“The undertaking so recorded in the order dated 21.06.2017 was the fifth assurance / undertaking given by the learned counsel appearing for respondent Nos. 14 and 19.”

“These contemnors had already prepared a well thought out scheme of diluting their shareholdings directly or indirectly in FHL to defeat the rights of the petitioner.”

“A litigant should always be truthful and honest in court. One who seeks equity must not hide any relevant material.”

The court imposed the maximum sentence of six months imprisonment and a fine of Rs. 5,000/- on the Singh brothers for contempt of court.

Key Takeaways

• ✓ Individuals who provide undertakings to the court must act in good faith and not attempt to circumvent those undertakings.
• ✓ The Supreme Court has the power to hold individuals in contempt for violating court orders and undertakings.
• ✓ The court may order a forensic audit to investigate complex financial transactions and determine if there was any collusion or wrongdoing.
• ✓ The executing court has the power to attach assets of the contemnors and their related entities to satisfy the decree.

Directions

The Supreme Court issued the following directions:

• ✓ Contemnor Nos. 9 and 10 (Malvinder Mohan Singh and Shivinder Mohan Singh) were sentenced to six months imprisonment and a fine of Rs. 5,000 each.
• ✓ The High Court, where execution proceedings are pending, was directed to consider appointing a forensic auditor to analyze the transactions of the banks and financial institutions.
• ✓ The executing court was also directed to consider appointing a forensic auditor to analyze the transactions between FHL and RHT.
• ✓ The amount of Rs. 17,93,40,000 deposited with the Supreme Court Registry was to be transferred to the executing court.
• ✓ Certain shares held by RBL Bank were to be made available to the executing court.
• ✓ All properties offered by Contemnor Nos. 9 and 10 were to be made available to the executing court.
• ✓ All pending proceedings before the concerned courts, including FIRs and proceedings before NCLT, should be taken to their logical conclusion.

Development of Law

This case reinforces the principle that undertakings given to a court are binding and that any attempt to circumvent them will be met with strict action. The case also highlights the importance of maintaining transparency in financial transactions, especially when court orders are in place. The ratio decidendi of the case is that individuals and entities that give undertakings to the court are bound by those undertakings, and any attempt to circumvent them will be met with strict action. This case also clarifies the powers of the court to issue directions to secure the properties that the contemnor had put beyond the reach of the court.

Conclusion

The Supreme Court held the Singh brothers in contempt for violating court orders and undertakings, sentencing them to six months imprisonment and a fine. The court also directed the High Court to consider appointing forensic auditors to investigate the transactions of the banks and financial institutions and also the transactions between FHL and RHT. The court also directed that the amount deposited by Indiabulls be transferred to the executing court. This judgment underscores the importance of upholding the integrity of court orders and the consequences of attempting to evade legal obligations.