Inquiry, Inspection and Investigation – Companies Act 2013

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Inquiry, Inspection and Investigation - Companies Act 2013

INSPECTION, INQUIRY AND INVESTIGATION – COMPANIES ACT 2013

INTRODUCTION

A company is a separate legal entity where the management and shareholders are distinct entities. The management is elected by the shareholders of the company who are given the power to run the affairs of the company. However, sometimes there may be abuse of power by directors or officers of company and it may lead to loss of stakeholders. Therefore it was imperative for the government of India to take on certain powers to Inspect, Inquire and investigate the affairs of such Companies where there is reason to believe that the business of the company was being conducted with an intent to defraud its creditors or members or for a fraudulent or unlawful purpose. Sections 206 to 229 of the Companies Act, 2013; deals with the provisions concerning Inspection, Inquiry and Investigation into the affairs of company.

POWER TO CALL FOR INFORMATION, INSPECT BOOKS AND CONDUCT INQUIRIES (SECTION 206)

  1. Power of the Registrar to call for information, explanation or documents: Where on 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 documents relating to the company is necessary, he may, by a written notice require the company to furnish the same within a specified time.
  2. Duty of the company and its officers: On the receipt of a notice under of section 206(1) from the registrar, it shall be the duty of the company and its officers, whether past or present, to furnish such information or explanation to the best of their knowledge and power within the time specified in the notice.
  3. Additional written notice by the Registrar: In case no information is provided by the company or if inadequate information is submitted to the registrar then the Registrar, for reasons recorded in writing, may by another written notice call on the company to produce for his inspection such further information.
  4. Inquiry by the Registrar: On the basis of information available with him or representations made to him or grievance of the shareholders not being addressed, the Registrar may call on the corporate to furnish in writing any information or explanation on matters laid out in the order within such time as he may specify therein and undertake such inquiry as he deems fit after providing the company a reasonable opportunity of being heard.
  5. Inspection by Central Government: The Central Government may, if it deems fit, direct inspection of books and papers of a company by an inspector appointed by it for this purpose.
  6. Failure to furnish information: The Company and every officer of the company, who is in default shall be punishable with a fine which may extend to 1 lakh rupees and in the case of a continuing failure, with an additional fine which may extend to 500 rupees for every day.

CONDUCT OF INSPECTION AND INQUIRY (SECTION 207)

Section 207 of the Companies Act, 2013 provides for the conduct of inspection and inquiry as follows:

Duty of director, officer or employee:

  1. Where a Registrar or inspector calls for the books of account and other books and papers under section 206(1), it shall be the duty of every director, officer or other employees of the company:
  2. To produce all such documents; and
  3. To furnish with such statements, information or explanations in such form as may require; and
  4. To render all assistance in connection with such inspection.

Powers of the Registrar or inspector:

  1. The Registrar or inspector making an inspection or inquiry under section 206 may, during the course of such inspection or inquiry, make copies of books and papers and place identification marks there.
  2. The Registrar or inspector making an inspection or inquiry shall have all the powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the subsequent matters, namely:—
    1. The inspection and production of books of account and other documents, at such place and time as may be specified by such Registrar or inspector making the inspection or inquiry;
    2. Summoning and enforcing the attendance of persons and examining them on oath.
  3. Penalty for Contravention: If any director or officer of the company disobeys the direction issued by the Registrar or the inspector under this section, the director or the officer shall be punishable with imprisonment which can reach up to 1 year and with fine between 25,000 rupees to 1 lakh rupees, as may be deemed fit.

CONDUCT OF INSPECTION AND INQUIRY (SECTION 208)

The Registrar or inspector shall, after the inspection of the books of account or an inquiry under section 206 and under section 207, submit a report in writing to the Central Government. The registrar or inspector may recommend in report that there is the need of further investigation. The said recommendation has to be given with reasons in support.

SEARCH AND SEIZURE (SECTION 209)

  1. Where the Registrar or inspector believes that books and papers relating to the company may be destroyed, mutilated, altered, falsified or secreted, he can make an application to Special Court.
  2. The Special Court, may, by order, authorize it, to enter into the places or premises where books and papers are placed, to search the place and to seize the books and papers, after allowing the company to make copies.
  3. Search and seizure must be according to provisions of Code of Criminal Procedure.
  4. The seized papers must be returned within 180 days. The Registrar can take copies of any document or place identification marks on them before returning the books and papers. He can ask the papers again, if needed, by sending a written order.

Illustration: A group of creditors of Mac Trading Limited makes a complaint to the Registrar of Companies, Hyderabad alleging that the management of the organization is indulging in destruction and falsification of the accounting records. The complainants appealed to the Registrar to take immediate steps to seize the records of the enterprise so as to prevent the management from tampering with the records. The complaint was received at 10 A.M. on 1st July 2018 and therefore the ROC entered the premises at 10.30 A.M. for the search. Examine the powers of the Registrar to seize the books of the company.

Answer: Consistent with the provisions, Registrar may enter and search the place where such books or papers are kept and seize them only after obtaining an order from the Special Court. Since within the said question, Registrar entered the premises for the search and seizure of books of the concern without obtaining an order from the Special Court, he’s not authorized to seize the books of the Mac Trading Limited.

INVESTIGATION INTO THE AFFAIRS OF THE COMPANY (SECTION 210)  

  1. Investigation in the opinion of Central Government: The Central Government may order and appoint inspectors for investigation into the affairs of the company under the following three conditions:
  • On the receipt of a report of the Registrar or an Inspector under section 208.
  • On Intimation of a special resolution passed by the company that the affairs of the company ought to be investigated.
  • Suo-moto in publicly interest.
  1. Investigation on the order by a court or the Tribunal: Where an order is issued by a court or the Tribunal in any proceedings before it that the affairs of an establishment are required to be investigated, the Central Government shall order an investigation into the affairs of that company.

ESTABLISHMENT OF SIGNIFICANT FRAUD INVESTIGATION OFFICE (SECTION 211)  

The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office (SFIO), to scrutinize frauds concerning a company. The SFIO shall be headed by a director so appointed for this purpose and shall also consist of other competent authorities who shall be experts on this matter.

INVESTIGATION INTO AFFAIRS OF A COMPANY BY SERIOUS FRAUD INVESTIGATION OFFICER (SECTION 212)  

  1. Pursuant to section 212 when the Central Government is of the opinion that it’s necessary to probe into the affairs of a corporate by the SFIO, it may, by order, assign the investigation into the affairs of the said company to the SFIO.

On receipt of such order, the Director, SFIO may designate such number of inspectors, as he may consider necessary for the conduction of such investigation.

  1. Where any case has been assigned by the Central Government to the SFIO for investigation under this Act, no other investigating agency of Central Government or any State Government shall proceed with investigation in such case in respect of any offence under this Act. However, if any such investigation has already been initiated, it shall not be proceeded further.
  2. Where the investigation into the affairs of a firm are assigned by the Central Government to SIFO, it shall conduct the investigation within the manner provided in this Chapter (Chapter XIV- Inspection, Inquiry and Investigation) and submit its report to the Central Government within such period as may be laid out in the order.
  3. The company and its officers and employees, who are or have been in employed by the company shall be responsible to furnish all information, explanation, documents and assistance to the Investigating Officer as he may require for conduct of the investigation.
  4. Offences covered under section 447 of this Act shall be cognizable and no one accused of any offence under those sections shall be released on bail or on his own bond unless—
    1. The Public Prosecutor has been given a chance to oppose the plea for such release; and
    2. Where the Public Prosecutor opposes the plea, the court is satisfied that there are reasonable grounds for believing that he’s acquitted of such offence which he’s unlikely to commit any offence while on bail.

However, a person, who, is under the age of sixteen years or is a woman or is sick or infirm may be released on bail, if the Special Court so directs.

Provided that the Special Court shall not take cognizance of any offence referred in point 5 above except upon a complaint in writing made by the Director, SFIO or any officer of the Central Government authorized by a general or special order in writing in this regard by that Government.

  1. If any officer not below the rank of the assistant director of SFIO, authorized during this behalf by the Central Government has a reason to believe that a person has been guilty of any punishable Offence under sections mentioned in sub-section (6), he may arrest such person and shall inform him of the grounds for such arrest.
  2. All persons arrested shall within twenty-four hours, be taken to a Special Court or Judicial Magistrate or a Metropolitan Magistrate having jurisdiction.
  3. The SFIO shall submit the investigation report to the Central Government on completion of the investigation.
  4. On receipt of the investigation report, the Central Government may, after examination of the report, direct the SFIO to initiate prosecution against the firm and its officers or employees, past or present or any other person directly or indirectly connected with the affairs of the company.

Where the report states that fraud has taken place in a company and owing to such fraud,  any director, key managerial personnel, other employee of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with reference to disgorgement of such asset, property or cash and also for holding such director, key managerial personnel, other officer or any other person liable personally with no limitation of liability.

  1. The SFIO shall share any information or documents available with it, with any investigating agency, State Government, police authority or tax authorities, which can be relevant or useful for them in respect of any offence or matter being investigated by it under other laws.

INVESTIGATION INTO COMPANY’S AFFAIRS IN OTHER CASES (SECTION 213)

According to this section, NCLT can order investigation in specified cases. Such order can be issued by NCLT only after giving reasonable opportunity of being heard to the concerned parties.

Cognizance of Offence by Tribunal

  1. In event of company having a share capital:

The Tribunal may, order for conduct of investigation on an application made by 100 or more members or members holding 1/10th of total voting powers.

If the solicitation is supported by such evidences as deemed necessary for the motive of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the company.

  1. On account of company having no share capital:

The Tribunal may, order for conduct of investigation on an application made by one fifth or more of the persons on the company’s register of members if the plea is supported by such evidences as may be essential for the purpose of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the company.

  1. In other cases:

The Tribunal may, order for conduct of investigation on an application made by any other person or otherwise on the circumstances suggesting that –

  1. The business of the company is being conducted with intent to defraud its creditors, members or any other person or for a fraudulent or unlawful purpose, or by a manner oppressive to any of its members or that the concern was formed for any fraudulent or unlawful purpose
  2. Persons concerned with the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or other misconduct towards the firm or towards any of its members, or
  3. The members of the company haven’t been given the expected information with regards to the affairs of the company.

After giving a sufficient opportunity of being heard to the parties concerned that the affairs of the firm ought to be investigated by an inspector(s) appointed by the Central    Government and where such an order is passed by the Tribunal, the Central Government shall appoint one or more competent persons as inspectors to scrutinize the affairs of the company in respect of such matters and to report them.

4. Punishment in case of guilty:

If after investigation, it’s proven that—

  • the business is being conducted with intent to defraud its creditors, members or any other persons or for a fraudulent or unlawful purpose, or that the corporate was formed for any      fraudulent or unlawful purpose or;
  • any person concerned with the formation of the company or the management of its affairs have in connection therewith been guilty of fraud then –
    1. Every officer of the establishment who is in default, and
    2. The persons concerned with the formation of the company or the management of its affairs shall be punishable for fraud in the manner as provided in section 447.

Author: Nirrmiti Somaani,
DES Shri Navalmal Firodia Law College - First Year BBA LLB

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