1. Appointment of special auditor — Contractual right under Shareholders' Agreement — Dispute over entitlement to audit based on alleged material misstatements. (Para 3 , 4 )
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2017 Supreme(SC) 1122
SUPREME COURT OF INDIA
R.F. Nariman, Sanjay Kishan Kaul, JJ.
M/s Soul Jewels & Ors. - Appellants
Versus
M/s Hanjer Biotech Energies P. Ltd. & Ors. – Respondents
Civil Appeal Nos. 19631-19632 of 2017 (Arising Out of SLP (C) Nos. 14214-14215 of 2014) With Civil Appeal No. 1963 of 2017 (Arising Out of SLP (C) No.16420 of 2015) With Contempt Petition (Civil) Nos.503-504 of 2015 In Civil Appeal Nos. 19631-19632 of 2017 (Arising Out of SLP (C) Nos.14214-14215 of 2014)
Decided On : 23-11-2017
Important Points
The Court held that a contractual right to appoint a special auditor must be exercised reasonably and based on a reasonable belief of material misstatement or irregularity. Such rights cannot be used to reopen settled matters or as a means of harassment against the company.
Subject
Corporate Law - Company Law
Act Referred
Headnote
Company law – Appointment of special auditor – Company already having three auditors – Contractual right of a party to appoint special auditor – Subject to showing irregularity in financial statement of the company – Instantly CLB on 29.10.2013 rejecting application for appointment of special auditor – However granting interim relief on 31.01.2014 to appoint special auditor without condition being fulfilled – High Court rightly set aside the CLB order. (Para 3, 4, 5)
Legal Category Hierarchy
Advocates Appeared:
For the Appellants :- Satish Vig, Devendra Singh, Advs.
For the Respondents:- T.V. Ratnam, Devendra Singh, Aldanish Rein, Shamik Shirishbhai Sanjanwala, Sunil Kr. Kaundal, Ankur Yadav, Alex Joseph, Advs.
For the Appellants :- Satish Vig, Devendra Singh, Advs.
For the Respondents:- T.V. Ratnam, Devendra Singh, Aldanish Rein, Shamik Shirishbhai Sanjanwala, Sunil Kr. Kaundal, Ankur Yadav, Alex Joseph, Advs.
Table of Contents
2. Entitlement to appoint special auditor — Reasonable exercise of contractual rights — Allegation of harassment to enforce share purchase agreement. (Para 3 , 4 )
3. Contractual rights to appoint special auditors must be exercised reasonably — Cannot be used to reopen settled matters or as a tool for harassment. (Para 3 , 4 )
4. Contractual rights to appoint special auditors must be exercised reasonably and cannot be used to reopen closed and settled matters. (Para 3 )
5. Appeals and related contempt petitions dismissed. (Para 6 , 7 )
6. When can a contractual right to appoint a special auditor be exercised?
A contractual right to appoint a special auditor may be exercised when there is a reasonable belief that a material misstatement or irregularity exists in the financial statements, provided the right is exercised reasonably. (Para 3 )
7. Can a contractual right to appoint a special auditor be used to reopen settled matters?
No, the court held that the contractual right to appoint a special auditor cannot be intended to reopen closed and settled matters. (Para 3 )
8. Under what circumstances might a request for a special audit be considered unjustified?
A request may be unjustified if it is deemed an attempt to extract a buy-out price, an exercise in harassment, or if it would hamper existing corporate debt restructuring processes. (Para 4 )
ORDER
R.F. Nariman, J.
Leave granted.
2. By our order dated 21.08.2017, we recorded that the arguments have been concluded and liberty granted to the parties to file written submissions. We have perused the written submissions so filed.
3. The order under appeal dated 14.2.2014 notices that by an order dated 29.10.2013, the Company Law Board had rejected the application for appointment of a special auditor. However, despite this order never having been challenged, a second order of the Company Law Board dated 31.01.2014 granted the interim relief of appointing a special auditor. The learned single Judge went on to find that in point of fact there are already three auditors and the only justification for appointing a special auditor found by the CLB order dated 31.1.2014 is that a contractual right existed under clauses of the SHA. Clause 5.2.3.2 makes it clear that the investor must reasonably believe that there is a material misstatement or irregularity in the financial statements of the Company for the investor to have the right to appoint a special auditor of its choice at the cost of the Company. As correctly stated by the learned single Judge, this contractual right has to be exercised reasonably and could not ever have been intended to reopen closed and settled matters.
4. Apart from this, the learned single Judge held:
"Mr. Chagla's charge is direct and pointed: this is nothing but an attempt to extract the buy-out price and enforce the SPA. It is an exercise in harassment pure and simple and is no more complicated than that. That there was a proposed buy-out is not in dispute. Hanjer Energies is today unable to fulfill its obligations under the SPA to buy out a part of IIF's stake. That Hanjer Energies is in financial straits is conceded; hence the CDR and the special investigative audit. IIF took a 26% stake in Hanjer Energies in 2009-2010 for Rs. 250 crores. Three years later, in 2012, it agreed to sell 7% of its stake for Rs. 157.5 crores. This had to be done because Hanjer Energies' institutional lenders insisted on a majority stake being with the Furniturewala Group. A further infusion of Rs. 57 crores has recently been made. But how does any of this give IIF the right to a special audit under the SSA, the SHA and the Articles? The impugned order does not say. Before Mr. Dwarkadas can get to his argument that the impugned order does not prejudice Hanjer Energies he must first show IIF has demonstrated an entitlement to such a relief, and that sufficient grounds have been made out. They have not; and the prejudice is certain. A fourth auditor with as sweeping a remit as the impugned order proposes can only hamper and hinder Hanjer Energies and, perhaps more importantly, the CDR itself. An auditor is a watchdog. Hanjer Energies has three. That is more than enough. What IIF wants is a bloodhound. That is uncalled for and unjustified; there are more than enough sentinels on Hanjer Energies' ramparts."
5. Given these findings, we find no reason to exercise our discretionary jurisdiction under Article 136 in favour of the appellants.
6. The appeals stand dismissed accordingly.
CONTEMPT PETITION (CIVIL) NOS.503-504 OF 2015 IN CIVIL APPEAL NOS. 19631-19632 OF 2017 (ARISING OUT OF SLP (C) NOS.14214-14215 OF 2014)
7. In view of the dismissal of the civil appeals arising out of S.L.P. (C) Nos. 14214-14215 of 2014 and S.L.P (C) No. 16420 of 2015, nothing survives in these contempt petitions and, hence these are dismissed accordingly.
