17 Investigation Of Companies, Its Need And Procedure

DR.Rita Gupta

18.1 Introduction

In last few decades, there has been a radical shift in the perception towards business generally and incorporated enterprises specifically. In National Textile Worker’s Union case, the Supreme Court of India observed that the company is now no longer a mere profit-making enterprise, but it has assumed the role of a ‘Social Institution’ to discharge its social responsibilities for accomplishing the socio-economic objectives of a welfare State as enshrined in Part IV of the Constitution of India relating to the Directive Principles of State Policy. To keep an effective control and check over the functioning of the companies, the Companies Act, 2013 provides for administrative machinery as well as the procedure for inspection, inquiry and investigation of companies. Chapter XIV (Ss.206 to 229) of the Act provides for the inspection, inquiry and investigation of the companies. The Act imposes a duty upon the directors and officers of any company to produce books and papers and information demanded by the Registrar. Disobedience on the part of the directors makes them liable for imprisonment as well as fine. The Registrar or inspector may order for search and seizure of books and papers if they have reasonable grounds to believe so. The Central Government is authorized to issue order for such investigation. The Act provides for establishment of Serious Fraud Investigation Office (SFIO) to investigate frauds relating to companies.

18.2 Need for Investigation of Companies

Since the shareholders themselves are unable to supervise and ensure efficient functioning of the companies, the organized supervision by government agencies assumes significant role. Its only efficient and smooth functioning of the corporate that can ensure an adequate return on capital invested by the shareholders. In Barium Chemicals Ltd., the SC observed:

“The elementary philosophy of the Companies Act is to trust the shareholders for ensuring efficient performance. But for reasons more than one, the shareholder has already receded to the background. Firstly, he is an investor who, for the most part does not wish to be bothered except by dividends. Secondly, due to great diffusion of stock, shareholders become indifferent to voting and controlling. Thirdly, the shareholders are ill-equipped to challenge the wisdom and expertise of officers. Fourthly, few shareholders have the means or ability to act against management.”

As per Freund, “The reality of control can only be found in the action of public opinion andin the organized supervision exercised by government agencies. Hence, the importance of investigation.”

Thus, the provisions for investigation help prevent corporate abuses, as well as wrongs and ensure efficient functioning of the corporate managements.

18.3 Comparison between Inspection and Investigation

18.4 Right to bail of persons charged and arresting guilty persons

Sections 212(6) – (10) deal with this procedural aspect. The offences specified under various provisions of the Act that attract punishment for fraud under Section 447 are to be cognizable offence. The persons accused of any such offence shall not be released on bail or on his own bond unless

The Special Court is not to take cognizance of any offence except upon a complaint in writing made by the director, or by the SFIO investigating officer or any officer of the Central Government authorized by a general or a special order in writing. These limitations of Section 212(6) are in addition to the limitations provided under the Criminal Procedure Code, 1973.

18.5 The Powers of the Central Government

The Central Government may appoint persons having expertise in the fields of investigations, cyber forensics, financial accounting, management accounting, cost accounting and any other fields as may be necessary for the efficient discharge of SFIO functions under the Act. (Rule 3 Companies (Inspection, Investigation & Inquiry Rules), 2014.

The Central Government, where it deems appropriate, may assign the investigation into the affairs of any erring company as per the provisions of Sec. 212(1) to the SFIO.

If the Central Government so directs, the SFIO shall submit an interim report Sec. [212(11)] or investigation report on completion of the investigation to the Central Government Sec. [212(12)]. On receipt of the investigation report, the Central Government may, after examination of the report (and after taking such legal advice, as it may think fit), direct the SIFO to initiate prosecution against the company and its officers or employees, who or have been in employment of the company or any other person directly or indirectly connected with the affairs of the company sec. [212(14)].

Where the Central Government orders such an investigation, it may require the applicant to give such security not exceeding Rs. 25,000/- for payment of costs and expenses of investigation as per the criteria mentioned in Rule 5 of the Companies (Inspection, Investigation & Inquiry Rules), 2014.

18.6 Investigation by the Tribunal

Section 213 provides that in the following other cases, the Tribunal may order investigation into company’s affairs:

a) On an application made by members:

i. Not less than 100 members or members holding one tenth of the total voting power in the case of a company having share capital.

ii. Not less than one-fifth of the persons on the company’s register of members, in the case of a company without share capital.

The said application should be supported by such evidence as may be necessary for the purpose of showing that the applicants have a good reason for seeking an order.

b) On an application made by any other person or otherwise if the circumstances suggest that-

i. The business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for fraudulent or unlawful purposes or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose.

ii. Persons concerned in the formation of the company or management of its affairs have been guilty of fraud, misfeasance and other misconduct towards the company or towards any of its members; or

iii. The members of the company have not been given all the information about its affairs which they might reasonably expect including information relating to calculation of the commission payable to managing or other director, or the manager, of the company.

Reasonable opportunity of being heard must be provided to the concerned parties. The Central Government shall appoint one or more persons as inspectors to investigate into the affairs of the company. Such inspectors shall submit their report to the Government. The defaulting persons are liable to be punished for fraud under Section 447.

18.7 Investigation of ownership of company

Sometimes, in the public interest, it becomes necessary for the Central Government to know the true persons who:

In view of the above mentioned reasons, Section 216 of the Act provides that the Central Government shall appoint one or more inspectors to investigate and submit report on matters pertaining to the company and its memberships. Moreover, the Central Government is bound to appoint inspectors if the Tribunal, in the course of any proceeding before it, directs that the affairs of the company ought to be investigated as regards its membership and other purposes. The Central Government may define the scope of the investigation, whether as respects the matters is to extend, may limit the investigation to matters connected with particular shares or debentures[Sec.216(3)]. The powers of inspector shall extend to the investigation of any circumstances suggesting the existence of any arrangement or understanding, which though not legally binding, may be observed (in present, past or future) in practice and which is relevant for the purposes of investigation. [Sec.216 (4)] Procedure, powers etc. of Inspectors [Sec.217]

It is the duty of all officers and employees, past and present, including those of any other corporate whose affairs are under investigation under Sec.219 to preserve and to produce to the inspector all books and papers relating to the company and otherwise to give all reasonable assistance for investigation which they are reasonably able to give. For investigation, the inspector has the power of a civil court and a reasonable assistance shall be provided to him by the officers of the Central or State Government or police or statutory authority.

Notes of examination have to be taken in writing, read over to the person, signed by him and they become evidence against him. Failure to furnish requisite information, or produce books and papers, to appear before the inspector in person when required or to sign notes, makes the defaulter punishable with imprisonment for a term extending to 6 months and fine of not less than Rs. 25,000/- and extending up to Rs. 1,00,000/- and Rs. 2000/- for everyday during which the default continues. The Central Government may enter into agreement with the Government of a foreign state for reciprocal arrangements to assist in any inspection, inquiry or investigation.

Further, Sec. 218 protects employees from any action been taken against during the course of investigation without approval of the Tribunal. Sec. 219 enables the inspector to conduct investigation into the affairs of the related companies. Sec. 220 empowers the inspector to conduct searches and seizures as if he had the right to do so under the provisions of the Criminal Procedure Code, 1973. The Tribunal is empowered to

• order for freezing of the assets of the company during inquiry and investigation under the prescribed circumstances [Sec. 221];
• impose restriction upon securities if it appears to be necessary for finding out the real facts [Sec. 221].

As per Sec. 223, the inspector may submit his interim reports and final report on the conclusion of investigation to the Central Government. A copy of the report can be obtained by making an application to the Central Government. The report has to be authenticated by

• the seal of the company whose affairs have been investigated, or
• by a certificate of the public officer having custody of the report as per Sec. 76 of the Evidence Act, 1872.

The report is admissible in any legal proceeding as evidence to its contents. This Section shall not apply to the report of SFIO under Section 212.

Action to be taken in pursuance of report [Sec. 224]

If from the report, it appears that any person has been guilty of an offence for which he is criminally liable, the Central Government may prosecute him for the offence. The company and its employees shall be duty bound to provide the necessary help in connection with the prosecution. If the report shows that it would be expedient to wind up the company, the Central Government may file a petition for winding up on any of the following grounds:

If it appears to the Central Government from the report that the proceedings ought to be brought in public interest by the company or any body corporate whose affairs have been investigated for recovery of damages in respect of fraud, misfeasance or other misconduct in the promotion, formation or management of the company or for recovery of any property of such company, the Central Government may itself bring proceedings for winding up in the name of company, for which the company has to indemnify the Government for its costs.

Disgorgement of benefits obtained by director, etc [Sec. 224(5)]

Where the report states that a fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit in any form whatsoever, the Central Government may file an application to the Tribunal for appropriate order for disgorgement of such benefit and also for holding the person concerned liable personally without any limitation or liability.

Expenses of Investigation [Sec.225]

Expenses of investigation are to be borne by the Central Government at the initial stage but the Government can seek reimbursement from any person who has been convicted or prosecuted or called upon to pay damages or restore the property of the company, the company in whose name the proceedings have been brought or persons dealt within the report or applicants for investigation where the inspector was appointed under Section 213.

Voluntary winding up of company not to stop investigation [Sec.226]

An investigation can be initiated and it is not to be stopped only because an application has been made under Sec. 241 or the company has passed a special resolution for voluntary winding up or any other proceeding for the winding up of the company is pending before the Tribunal. The Inspector has to inform the Tribunal of the pendency of investigation. The Tribunal may pass such order as it deems fit.

Legal Advisers and Bankers not to disclose certain information [Sec.227]

Legal advisers and bankers are not to disclose any privileged communication or information as to the affairs of bank’s customers.

18.8 Investigation, etc. of foreign companies [Sec. 228]

With effect from 01.04.2014, the provisions mentioned herein shall apply mutatis mutandis to inspection, inquiry or investigation in relation to foreign companies

Penalty for furnishing false statement, mutilation or destruction of documents [Sec. 229]

Any person, who is required to provide an explanation during the course of inspection, inquiry or investigation:

destroys, mutilates or falsifies or conceals or tampers or unauthorizedly removes documents related to property or affairs of company;makes a false entry in any document concerning the company or body corporate; or furnishes false information shall be punishable for fraud as provided under Sec. 447

Learning Outcomes:

Summary:

In this module, the importance of investigation has been discussed. The legal framework of investigations of companies and the procedure as prescribed under the Companies Act, 2013 has been dealt with briefly. Under different provisions of the Chapter XIV of the Act, the powers to conduct such investigation vests with the Central Government, Registrar and Inspector. The procedure pertaining to submission of report and actions in terms of report etc. have been dealt with.

References:-

1) National Textile Workers Union v P.R. Ramkrishnan AIR 1983 SC 75 at 81

2) Barium Chemicals Ltd. V Company Law Board (1996)36 Comp Cas 639

3) Otto K. Freund, “ Company Law Reform”, (1946) 9 Mod LR 235 at 245

4) Avtar Singh, Introduction to Company Law, Eleventh Edition, Eastern Book Company

5) Taxmnn’s Companies Act 2013 with Rules, 2014

6) http://aishmghrana.me/2013/12/06/inspection-inquiry-investigation-companies-act-2013/