Inspector's Report Under Section 223: What Follows

An inspector's report under section 223 of the Companies Act, 2013 is what an investigation produces. The section governs its form, who may get a copy and how it is authenticated for use as evidence. Section 224 is the consequential section: prosecution, a winding-up petition, recovery proceedings or a disgorgement application, all of them keyed to what the report says.

What must an inspector's report under section 223 contain, and when?

An inspector's report under section 223 comes in two forms, and only one of them is compulsory. Section 223(1) states that an inspector appointed under the Chapter may, and if so directed by the Central Government shall, submit interim reports to that Government, and on the conclusion of the investigation, shall submit a final report to the Central Government.

So an interim report is at the inspector's option, becomes obligatory once the Central Government directs one, and the final report is obligatory on conclusion. Sub-section (2) settles the form: every report shall be in writing or printed as the Central Government may direct.

The recipient is the Central Government in every case, including where the Tribunal ordered the investigation under section 213. The Tribunal orders, the Central Government appoints the inspectors, and the report comes back to the Central Government.

Who can obtain a copy?

Sub-section (3) allows a copy of the report made under sub-section (1) to be obtained by members, creditors or any other person whose interest is likely to be affected, on an application in this regard to the Central Government.

Those words were inserted by Act 1 of 2018, section 72, with effect from 9 February 2018. The sub-section now identifies the applicants by class: members, creditors, and a residual class defined by an effect on interest rather than by status. The same amending Act inserted clause (c) into section 216 on investigation of ownership in June that year, on 13 June 2018.

How is the report authenticated, and why does that matter?

Because authentication is what makes it evidence. Sub-section (4) requires the report of any inspector appointed under the Chapter to be authenticated either:

• (a) by the seal, if any of the company whose affairs have been investigated; or
• (b) by a certificate of a public officer having the custody of the report, as provided under section 76 of the Indian Evidence Act, 1872 (1 of 1872),

and such report shall be admissible in any legal proceeding as evidence in relation to any matter contained in the report.

The words by the seal, if any in clause (a) were substituted by Act 21 of 2015, section 18, for "by the seal", with effect from 29 May 2015. That is a two-word insertion with a practical consequence: a company that has no common seal can still have a report authenticated, and route (b) through a public officer's certificate remains available in any case.

Sub-section (5) then carves out one report entirely: Nothing in this section shall apply to the report referred to in section 212. A report of the Serious Fraud Investigation Office goes to the Central Government under section 212(12), a copy is obtained on application to the court under section 212(13), and section 212(15) gives it its own evidentiary status as a deemed police report under section 173 of the Code of Criminal Procedure, 1973. None of the section 223 machinery touches it.

What can the Central Government do with the report?

Section 224 sets out five things, and each is conditioned on what the report shows.

Prosecution, under sub-section (1). If from an inspector's report made under section 223 it appears to the Central Government that any person has, in relation to the company or to any other body corporate or other person whose affairs have been investigated under the Chapter, been guilty of any offence for which he is criminally liable, the Central Government may prosecute such person for the offence, and it shall be the duty of all officers and other employees of the company or body corporate to give the Central Government the necessary assistance in connection with the prosecution.

A winding-up petition or an oppression application, under sub-section (2). Where the company or body corporate is liable to be wound up under this Act or under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and it appears from a section 223 report that it is expedient to act by reason of any such circumstances as are referred to in section 213, the Central Government may, unless the company or body corporate is already being wound up by the Tribunal, cause to be presented to the Tribunal by any person authorised by the Central Government in this behalf one of three things. Note that the sub-section does not have the Central Government present the petition itself: it has the petition presented by a person the Central Government authorises.

• (a) a petition for the winding up of the company or body corporate on the ground that it is just and equitable that it should be wound up;
• (b) an application under section 241; or
• (c) both.

The reference to the Insolvency and Bankruptcy Code was inserted by Act 31 of 2016, section 255 and the Eleventh Schedule, with effect from 15 November 2016. Clause (b) is the route into an oppression and mismanagement proceeding started by the government rather than by members.

Recovery proceedings, under sub-section (3). Where it appears that proceedings ought, in the public interest, to be brought by the company or any body corporate whose affairs were investigated, either (a) for the recovery of damages in respect of any fraud, misfeasance or other misconduct in connection with the promotion or formation, or the management of the affairs, or (b) for the recovery of any property of such company or body corporate which has been misapplied or wrongfully retained, the Central Government may itself bring proceedings in the company's name. The closing words of the sub-section read proceedings for winding up in the name of such company or body corporate, although clauses (a) and (b) describe recovery of damages and of property; they are quoted here as printed.

Indemnity, under sub-section (4). The Central Government shall be indemnified by such company or body corporate against any costs or expenses incurred by it in, or in connection with, any proceedings brought by virtue of sub-section (3).

Disgorgement, under sub-section (5). Where the report states that fraud has taken place and that a director, key managerial personnel, other officer, 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 apply to the Tribunal for orders on disgorgement of such asset, property, or cash and for holding that person liable personally without any limitation of liability. Section 212(14A) carries the same remedy off an SFIO report, inserted in 2019.

Who pays for the investigation?

Section 225 puts the expenses on the Central Government first and then reimburses them. The expenses of, and incidental to, an investigation by an inspector appointed by the Central Government, other than expenses of inspection under section 214, shall be defrayed in the first instance by the Central Government, and are reimbursed by:

• (a) any person convicted on a prosecution instituted, or who is ordered to pay damages or restore any property in proceedings brought, under section 224, to the extent the same proceedings order him to pay;

• (b) any company or body corporate in whose name proceedings are brought as aforesaid, to the extent of the amount or value of any sums or property recovered by it as a result; and

• (c) applies unless, as a result of the investigation, a prosecution is instituted under section 224, and it names two classes, printed as separate sub-clauses:

  • (i) any company, body corporate, managing director or manager dealt with by the report of the inspector; and
  • (ii) the applicants for the investigation, where the inspector was appointed under section 213,

  in each case to such extent as the Central Government may direct.

Clause (c) is why the applicant's security matters. Where no prosecution follows, the members who asked for the investigation under section 213 can be made to contribute, which sits alongside the section 214 security of not exceeding twenty-five thousand rupees that is refunded only if the investigation results in prosecution. Sub-section (2) makes any amount a company owes under clause (b) a first charge on the sums or property mentioned in that clause.

Reading an inspector's report under section 223 therefore means checking four things: whether it is an interim or a final report under section 223(1), how it was authenticated under section 223(4), whether the report is one section 223 even applies to, and which of the five section 224 consequences the Central Government has chosen. The inspection that may have started it all is the Registrar's power to inspect books under section 206, whose own report under section 208 is a recommendation rather than a finding.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.