LAW

CORPORATE LAW Investigation of companies, its need and procedure

18: Investigations of Companies, its Need and Procedure Module Overview: This module focuses on the importance of the investigations of the affairs

of the Companies, its importance and the Procedure. The new Companies Act, 2013 provides

for inspection, inquiry and investigation of companies under Chapter XIV (Ss.206 to 229).

Sections 206 to 209 of the Act empowers the Registrar to call for information, inspect the

books conduct inquiries. Such powers may be exercised if on scrutiny of any document filed

by a company or on any other information, he feels that any other explanation or information

is required. Section 210 further provides that the Central Government may order an

investigation into the affairs of the company. Sections 211-216 describe the establishment of

a Serious Fraud Investigation Office (SFIO) and investigation by inspector so appointed. The

Procedure of such investigation has been stated under Section 217 of the Act. Further

Sections provide for related steps for investigation and penalty for furnishing false statement,

mutilation and destruction of documents by the erring companies. This module provides an

overview of the whole framework.

Subject Name: Law

Paper Name: Corporate Law

Module ID: 18 Pre-requisites: For understanding the module, basic knowledge of the functioning of

Companies and the adjudicatory mechanism under old Companies Act 2013 is required.

Objectives:

Keywords: Inspection, Inquiry, Investigation, Registrar, Information, Companies, Notice,

Books of Account, Report, Frauds, Search and Seizure, Conduct, Powers, Affairs, Inspector,

Freezing of Assets

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

To make students understand the

procedure of investigation as

prescribed in the Companies Act 2013

To appraise the students of the need

and importance

of investigation

of the Companies

The main objective of the

module is to provide

preliminary knowledge about the investigation of the companies

to the students

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 and

in 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

Inspection

1) The Registrar is empowered to carry out inspection of the books of accounts and other documents of

Investigation

1) Where on the receipt of the report of the Registrar or inspector under sec.208 or on intimation of

the company. Where on a scrutiny of any document filed by a company or on any information received by him, the Registrar is of the opinion that any further information or explanation or any further documents relating to the company is necessary, he may by a written notice require the company

to furnish in writing such information.[Sec.206 (1)]

2) If the information so provided by the company is inadequate or in Registrar’s opinion, unsatisfactory state of affairs exists in the company or does not disclose a full and fair statement of the information required, he may again call on the company to produce such books or papers. [Sec.206 (3)]. After fulfilling the procedure, the Registrar may carry such inquiry as he deems fit. [Sec.206 (4)]

3) The Central Government may authorize any statutory authority to carry out the inspection of books of account of a company or class of

companies. [Sec.206 (5)] 4) For carrying out such inspection or

inquiry, the Registrar or inspector shall have powers of a civil court in relation to the matters as prescribed. [Sec.207 (3)]

a special resolution passed by a company or in public interest, the Central Government may order an investigation, where necessary, into the affairs of a company [Sec.210(1)]. The Central Government may appoint one or more persons as inspectors to investigate into the affairs of the

company [Sec.210 (2)]. No firm, body corporate or association shall be appointed as an inspector. [Sec.215]

2) The Central Government shall establish an office called Serious Fraud Investigation Office (SFIO) to investigate frauds relating to companies. It is a multi-disciplinary organization consisting of experts from various fields inter alia Banking, Law, Corporate Affairs, Taxation and Information Technology etc. [Sec.211]

3) The Director of SFIO may designate such number of inspectors as he may consider

necessary to investigate into the affairs of company [Sec.212 (1)]. Where any case has been assigned to SFIO, no other investigation agency of either Central or State Government is to investigate the

5) The Registrar or Inspector shall submit a report to the Central Government and recommend, if necessary, further investigations into the affairs of the company ([Sec.208]

6) The Registrar or inspector may

enter and search the place or places and seize such books and papers if they have reasonable ground to believe that such papers as mentioned are likely to be destroyed, mutilated, altered or falsified or secreted. Before doing the search and seizure, they have to obtain an order from the Special Court. [Sec.209(1)]

7) No company or member can ask for a copy of inspection report.

8) The expenses of inspection are borne entirely by the Government

and are not recoverable.[Sec.225]

same case. [Sec. 212(2)]. 4) The officer designated shall have

the powers of an inspector under Sec.217.

5) SFIO shall conduct the investigation in the manner and follow the procedure as per the provisions and submit its report to the Central Government within

the specified period. The Central Government may demand an interim report of investigation. [Sections 212(3) and 212(11-17)].

6) The Director, Additional Director or Assistant Director of SFIO may arrest any person who he believes is guilty of an offence punishable under the sections referred in sec. 212(6) and such person arrested sub-section (8) shall within 24 hours be taken to a Judicial Magistrate or a Metropolitan Magistrate having the jurisdiction . [Sec.212(10)]

7) A copy of the investigation report may be obtained by any person concerned by making an

application in this regard to the court.[ Sec.212(13)]

8) The expenses, in the first instance, shall be defrayed by the Central Government but may be reimbursed partially or fully by

the persons as prescribed under Section 225.

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:

However, the following may be released on bail if the special court so directs:

• A person below the age of 16 years

• A woman, sick or infirm

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

B) The court is satisfied

that there are reasonable

grounds for believing that

he is not guilty of such

offence and that he is not

likely to commit any

A) The Public Prosecutor has been given an opportunity to oppose the application for such release

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

a) are financially interested in a company and

b) control its policy or

c) materially influence the policy

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

Ø order for freezing of the assets of the company during inquiry and investigation under the prescribed circumstances [Sec. 221];

Ø 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

Ø the seal of the company whose affairs have been investigated, or

Ø 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.

a) just and equitable;

b) an application for prevention of oppression and mismanagement under Sec. 241; or

c) both

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:

Ø destroys, mutilates or falsifies or conceals or tampers or unauthorizedly removes documents related to property or affairs of company;

Ø makes a false entry in any document concerning the company or body corporate; or Ø 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

i) Learning about the need and importance of investigation of Companies

ii) Understanding

the legal framework of

investigations of companies.

iii) Finding the prescribed

procedure for the same 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.