Inspection, Inquiry and Investigation

INTRODUCTION

Inspection, Inquiry and Investigation falls as the XIV^th Chapter of the Companies Act, 2013. From Section 206 to Section 229, the details of Inspection, Inquiry and Investigations are explained.

The Shareholders of a Company have several rights, including those of the right to vote and elect their directors, right to convene board meetings, right to receive dividends and so on. Although, sometimes these shareholders are ill-equipped to exercise all their powers, and this is abused by those who control the majority of the affairs of the company. Thus, with the introduction of the Companies Act, 2013, the Central Government through this Chapter of the Act, vested the shareholders with the powers to inspect, inquire and investigate the affairs of the company in appropriate situations where it could be believed that the business of the company was being done in a fraudulent or unfair manner.

INVESTIGATION

Investigation means to carry out a systematic or formal inquiry to discover and examine facts of an incident to establish the truth. In relation to the aspects of the Companies Act, an investigation refers to an exploration into the affairs of a company. The main aim of such investigations is to obtain any evidence or facts regarding any malpractice in the course of business, although this may not be the only reason. Investigations may also be undertaken to identify the profits and losses of a business, the assets and liabilities and so on.

Section 206 of the Companies Act, 2013 deals with the Power to call for information, inspect books and conduct inquiries. The Registrar of Companies possesses such a power. After the filing of documents by a company, if the Registrar feels the need to get some additional information regarding the documents, he sends a written notice and a reasonable time period is provided to comply with such notice. The Registrar may inspect the books of account and conduct an inquiry when –

• The Company does not comply with the specified time period mentioned in the notice

• The information provided by the company is unsatisfactory

• The Registrar feels that not all the information has been provided for review

If a company fails to follow the written notice as issued by the Registrar then, as per Section 206 the defaulting officers are liable to pay a fine of up to Rs. 1,00,000 and a supplementary fine of Rs. 500 for each day of default.

Conduct of Inspection and Inquiry

Section 207 of the Companies Act, 2013 talks about the conduct of Inspection and Inquiry. It states that every director of a company has the duty to provide any and all information and details that is required by the Registrar of Companies. The Registrar has the power to make copies of such information provided. The Registrar or Inspector

conducting inspection or inquiry shall have the powers of a civil court as provided in the Civil Procedure Code.

Section 207(4) is in relation to penalties. It states that any disobedience of orders could make the directors or employees liable to imprisonment or fines of not less than Rs. 25000 extending till Rs. 1,00,000. If there is a conviction of offence, then the person has to vacate their position.

Report on Inspection

Post the completion of inquiries and inspection as per the procedures under Section 206 and 207, it is fundamental that the Registrar submits a written report to the Central Government of his findings. If required, the Registrar may also recommend a further investigation to be undertaken. If so, the reasons for such investigation should be mentioned. This is elucidated under Section 208 of the Companies Act, 2013.

Search and Seizure

A search and seizure is a procedure that is generally undertaken by police to search the property of a person who is suspected to have committed a crime. They then, seize any evidence or property linked to the crime. In the case of company law, a search and seizure takes place according to Section 209 of the Companies Act, 2013. If an inspector or Registrar on prudent grounds believes that any documents of papers or information in relation to any personnel of a company is to be destroyed, or altered, or falsified, or mutilated, an order from court may be obtained for the seizure of such materials. Thus, through the order, the inspector and his officials may enter the places where these records have been placed.

By this section, it is the duty of the Registrar to return all the materials seized within a 180 days, although they may be taken again if needed. It is also the right of the Registrar to make his own copies of the seized records. The provisions relating to search and seizure mentioned under the Civil Procedure Code are also applied here.

Investigation into Affairs of the Company

As per Section 210 of the Companies Act, 2013, the Central Government may appoint some inspectors or investigators to investigate the affairs of the company and report to on the basis of the report submitted by the Registrar under Section 208 or on basis of a special resolution passed by a company or in public interest. An investigation may also be ordered by the Central Government by any company on the recommendation of any tribunal.

In Barium Chemicals Ltd. v. Company Law Board [AIR (1967) SC 295], the Supreme Court quashed an order of investigation based upon “delay, bungling and faulty planning project that caused double expenditure and many losses, which resulted in more than one-third of the company’s capital being wiped out.

Serious Frauds Investigation Office

An Office called the Serious Fraud Investigation Office was established under the Companies Act, 2013 in Section 211, as per the Naresh Chandra Committee Report on Corporate Audit and Governance. The aim of this office is to identify any and all serious frauds that take place in companies. The report of this committee stated the need for such an office in these words – “a multi-disciplinary team that not only uncovers the fraud, but is able to direct and supervise prosecutions under various economic legislations through appropriate agencies.” Scams such as the Satyam Scam was uncovered through this office.

This office comes under the control of the Ministry of Corporate Affairs. It is headed by director and is required to have experienced people from the following fields –

1. banking;

2. corporate affairs;

3. taxation;

4. forensic audit;

5. capital market;

6. information technology;

7. law; or

8. any other fields as may be necessary for the efficient discharge of Serious Fraud Investigation Office (SFIO) functions under this Act.

Section 212 defines when the SFIO may investigate the affairs of a company. The Central Government can commision the SFIO to investigate any company on the basis of report of the Registrar or Inspector under section 208; or on intimation of a special resolution passed by a company requesting an investigation or in public interest; or on the request of any Department of Central Government or a State Government. The Registrar then, appoints the necessary number of inspectors to conduct the investigation.

Powers and Procedures of the Inspector

Inspectors are delegated by the Registrar of Companies to perform the investigations into the affairs of companies. The powers and procedures of these inspectors are explained under Section 217 of the Companies Act, 2013 in several clauses.

Section 217(1) talks about the duties of the employees of the company that is under investigation. It states –

It shall be the duty of all officers and other employees and agents including the former officers, employees and agents of a company which is under investigation in accordance with the provisions contained in this Chapter, and where the affairs of any other body corporate or a person are investigated under section 219,

(a) to preserve and produce to an inspector all books and papers of or relating to the company or the other body corporate or person which are in their custody or power; and

(b) to give to the inspector all assistance in connection with the investigation which they are reasonably able to give.

The powers of the inspector conducting the investigations are –

(i) To require anyone mentioned in Section 217(1) to furnish information or records that are related to the investigation being conducted. The records should be returned within 180 days, although a notice may be given to obtain these records for investigative purposes again. The records taken are to be returned to the company from which they had been seized.

(iii) Have all the powers of a Civil Court under the Code of Civil Procedure, 1908, in respect of the following matters :

(a) the discovery and production of books of account and other documents at such time and place as may be specified;

(b) summoning and enforcing attendance of persons and examining them an oath; and

(c) inspection of any books, registers and other documents of the company at any place.

It is also the duty of Central or State Government officers to provide assistance to the

Inspector, when required after getting the necessary permission from the Central Government. It shall be obligatory for the officers of the Central or State Government, police or statutory authority to provide necessary assistance to the inspector for the purpose of inspection, inquiry or investigation.

As per Section 223, the inspector could file an interim report during the midst of conducting the investigation but it it is compulsory for him to file a final report and submit it to the Central Government. The report must be in writing and is admissible as evidence under The Indian Evidence Act, 1872. The report that is used here should not be confused with that of the ones mentioned in Section 212.

Appeals

The appeal system had found mention in the Companies Act, 1956 as well as the Companies Act, 2013. The Amendment Act of 1988 had introduced a new section to provide for appeals. At this point, the Company Law Board (CLB) had been removed from the control of the state and had become an independent entity. This enlarged the jurisdiction, and thereby resulted in an appeal system becoming necessary. Section 10F stated that an appeal could be filed against any order given by the CLB to the High Court on any question of law. The board was the final authority on the basis of facts. Consent orders that are issued by the CLB are also appealable if a doubt regarding the genuineness of the consent exists.

In Subhash Mohan Dev v. Santosh Mohan Dev [(2004) 106 Comp Cas 405], a dispute on shareholding patterns was resolved by the CLB under consent orders. There was no grievance as to the genuineness of the consent. The court did not interfere with order of appeal.

In JP Srivastava & Sons (Rampur) (P) Ltd v. Gwalior Sugar Co. Ltd [2002 CLC 1792 (MP)], there was a petition for the prevention of oppression and mismanagement, the finding of facts by the CLB was that even the preliminary requirements were not satisfied. The court refused to interfere as it found that the finishing was based on the evidence that was already in records.

The court can only interfere in the decisions of the CLB when there is evidence to prove that the power of CLB has not been exercised properly in spite of the availability of sufficient evidence. A company may file appeals within 60 days from the date of the communication of order to appellant. The High Court also has the right to increase it to another 60 days if it sees fit.

Powers of SEBI

The SEBI or Securities Exchange Board of India was established in the year 1988 and given statutory powers on 30 January 1992 through the SEBI Act, 1992. It is headquartered in Mumbai. The powers of the SEBI are illustrated under Section 24 of the Companies Act, 2013. It talks about SEBI’s power to regulate, issue, and transfer securities.

Section 24(1) allows the SEBI to administer certain provisions of the Companies Act. These provisions are listed under Chapter 3 and 4 and Section 127 as they relate to issuing and transferring securities and non-payment of dividend by companies that have listed or those companies which are to be listed or intend to get listed on any stock exchange.

The powers are to be exercised by the Central Government. This explanation is provided under sub-clause (1) of this section as follows

For the removal of doubts, it is hereby declared that all powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be.

Section 24(2) states that – The Securities and Exchange Board shall, in respect of matters specified in subsection (1) and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992.

By – Nirupama V Shankar

(The Tamilnadu Dr. Ambedkar Law University)

REFERENCES

1. Singh, Avtar Dr., Company Law, 2016

2. Singh, Avtar Dr., Business Law, 2014

3. Cheffins, Brian R., Company Law: Theory, Structure and Operation, 1997

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