Daiichi Sankyo’s decade long recovery battle turns Critical as Fortis Stake Slashed from 71.7% to Under 1% Despite Eight Court Assurances. The Delhi High Court has ordered forensic audit against former Ranbaxy promoters Malvinder Mohan Singh and Shivinder Mohan Singh in Daiichi Sankyo’s decade-long recovery battle which turned critical as Fortis Healthcare stake slashed from 71.7% to under 1% despite repeated court undertakings.
The Court held that procedure is meant to advance the cause of justice and not retard it, and Courts must ensure that decrees are executed not only for the satisfaction of the decree holder but to uphold the majesty of the administration of justice. The Court observed that the difficulties of a litigant begin when a decree is obtained, and that judgment debtors use procedural complications and delays to defeat the rights of decree holders, making Courts instrumental in defrauding creditors.
On the doctrine of reverse corporate veil piercing, the Court held that the separate juristic personality of a company cannot be permitted to become an instrument for defeating the administration of justice or frustrating judicial orders. Where a company is employed as a facade or conduit for shielding assets from creditors, the Court may look beyond the corporate structure. However, such piercing is fact-specific and must be based on cogent material establishing that the corporate structure was used to defeat the decree holder’s rights.
On the necessity of a forensic audit, the Court held that the factual foundation must precede the legal conclusion, and that reconstruction of the chronology of share transactions, fund flows, and the role of directors, officers and banks cannot be effectively undertaken without a forensic examination. Accordingly, the High Court appointed M/s S Ramanand Aiyar & Co., Chartered Accountants, as the Forensic Auditor. The terms of reference require the auditor to reconstruct the entire chain of events relating to the FHHPL shareholding in FHL since May 24, 2016, prepare transaction-wise chronology of all dealings, examine whether any fresh encumbrance, top-up, invocation or sale happened after the status quo orders, prepare a bank-wise statement of facilities and outstanding exposure, examine the IHH transaction and the acquisition of assets from RHT Health Trust Singapore, and identify all entities receiving benefits of loans secured by FHL shares.
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A Single Judge Bench of Justice Subramonium Prasad noted that Malvinder Mohan Singh and Shivinder Mohan Singh (Judgment Debtor-1 and Judgment Debtor-6) held controlling stake in FHL through their wholly-owned holding company Fortis Healthcare Holding Private Limited (FHHPL), and the value of their unencumbered shares in FHL was more than adequate to satisfy the entire decretal amount even after the first assurance was given on May 24, 2016. The Court identified as many as eight separate oral and written assurances given by the judgment debtors between May 2016 and June 2017, assuring that they would not alienate or change the status of their unencumbered assets, that the shareholding disclosed to the Court would remain protected, and that the value of unencumbered assets would not be diminished.
Despite these repeated assurances, the Court observed that the shareholding of FHHPL in FHL fell sharply from 32,50,91,529 shares in September 2016 (with 5,29,31,574 unencumbered) to just 11,53,091 shares by December 2018 (with only 6,01,607 unencumbered). The Court noted that this depletion happened through a series of pledges and cross-collaterals with banks (Yes Bank, Axis Bank, RBL Bank, Lakshmi Vilas Bank, LVB, Ambit, etc.), followed by the invocation and sale of those pledged shares, and finally through the sale of the controlling stake to Malaysia’s IHH Healthcare Berhad via Northern TK Venture Pte Ltd., which brought approximately Rs. 4,000 crores into FHL. The Supreme Court had passed status quo orders on Aug 11, 2017 and Aug 31, 2017 regarding both encumbered and unencumbered shares, and a further order on Dec 14, 2018 regarding the sale to IHH. The Court observed that despite these orders, the shareholding continued to be depleted.
The Court further observed that the shareholding pattern brought to the Court’s notice was the result of pledging shares to raise loans for downstream entities of the judgment debtors, whose business activities and the purpose of these loans have not been disclosed. The Court noted that there was no satisfactory explanation for how a controlling 71.7% stake was reduced to less than 1%, and that this raised serious concerns about an orchestrated effort to defeat the decree.
Briefly, Japanese pharmaceutical major Daiichi Sankyo Company, Limited won a Singapore-seated arbitral award dated April 29, 2016 against the former promoters of Ranbaxy, i.e., Malvinder Mohan Singh and others, directing them to pay around Rs. 2,562 crores along with pre-award interest at 4.44% and post-award interest at 5.33%. The total outstanding amount now stands at approximately Rs. 5,300 crores. The challenge to the award was rejected by the Delhi High Court on Jan 31, 2018 and was upheld by the Supreme Court on Feb 16, 2018.
Despite winning the award and getting it upheld all the way to the Apex Court, Daiichi Sankyo has not been able to recover a single rupee because the judgment debtors kept assuring the Court that their assets were sufficient to satisfy the decree, while quietly reducing their shareholding in Fortis Healthcare Limited (FHL) from 71.7% to under 1% through a maze of pledges, top-up facilities, and downstream entities. The Decree Holder filed three applications, seeking a forensic audit of 17 banks and financial institutions that were part of these transactions.
