Investigation Into Affairs of a Company: Ch. XIV

An investigation into affairs of a company under Chapter XIV of the Companies Act, 2013 can be ordered by either of two authorities. The Central Government orders one under section 210. The Tribunal orders one under section 213, and a qualifying group of members can ask it to. Once ordered, inspectors get civil-court powers, employees get a protection nobody expects, and a voluntary winding up does not stop any of it.

Who can order an investigation into affairs of a company?

An investigation into affairs of a company begins with an order, and section 210 names the three grounds on which the Central Government may make one. It applies where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company:

• (a) on the receipt of a report of the Registrar or inspector under section 208;
• (b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
• (c) in public interest.

Clause (b) is the one people miss. A company can put itself into an investigation by special resolution and intimating it. Clause (a) is the route out of an inspection: a section 206 inspection or inquiry ends in a section 208 report, and that report may recommend further investigation.

Sub-section (2) is not discretionary. Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the Central Government shall order an investigation into the affairs of that company. Sub-section (3) then lets it appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct.

How does the section 213 route through the Tribunal work?

Section 213 gives the Tribunal its own power, and it splits into a members' route and an anyone route.

Clause (a), the members' route. An application may be made by not less than one hundred members or members holding not less than one-tenth of the total voting power, in the case of a company having a share capital, or by not less than one-fifth of the persons on the company's register of members, in the case of a company having no share capital. The application must be supported by such evidence as may be necessary 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.

Clause (b), the circumstances route. An application may be made by any other person or otherwise, and the Tribunal must be satisfied that there are circumstances suggesting one of three things:

1. the business is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members, or that the company was formed for any fraudulent or unlawful purpose;
2. persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or any of its members; or
3. the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager.

Either way the Tribunal orders after giving a reasonable opportunity of being heard to the parties concerned, and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors. The Tribunal decides; the Central Government staffs it.

The proviso adds a consequence at the far end. If after investigation it is proved that the business was conducted to defraud or for a fraudulent or unlawful purpose, or that a person concerned in the formation or management have in connection therewith been guilty of fraud, then every officer in default and the persons concerned shall be punishable for fraud in the manner as provided in section 447. The circumstances in clause (b)(i) overlap the ground for an oppression and mismanagement petition under section 241, which is why section 226 has to say expressly that one does not stop the other.

What does it cost to ask, and who can be an inspector?

Two short sections police the entry.

Section 214 lets the Central Government require security from the applicant, before appointing an inspector under sub-section (3) of section 210 or clause (b) of section 213, of an amount not exceeding twenty-five thousand rupees as may be prescribed, for the costs and expenses of the investigation. It applies to an investigation ordered under clause (b) of sub-section (1) of section 210 or under a Tribunal order under section 213. The security shall be refunded to the applicant if the investigation results in prosecution, so the deposit is at risk only where nothing is prosecuted.

Section 215 is one sentence: No firm, body corporate or other association shall be appointed as an inspector. An inspector is an individual. That matters when reading an appointment, because audit and valuation work under this Act is routinely done by firms; investigation work under Chapter XIV cannot be.

What powers does an inspector get, and how far do they reach?

Section 217 is the toolkit. Officers, employees and agents of the company under investigation, including the former officers, employees and agents, must preserve and to produce to an inspector all books and papers relating to the company, and otherwise to give to the inspector all assistance in connection with the investigation which they are reasonably able to give. The inspector shall not keep in his custody any books and papers produced for more than one hundred and eighty days, with a written order allowing a further one hundred and eighty days.

He may examine on oath the persons named in sub-section (1), and with the prior approval of the Central Government any other person, the notes being taken down in writing and shall be read over to, or by, and signed by, the person examined. Under sub-section (5) he has all the powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) over discovery and production, summoning and enforcing the attendance of persons and examining them on oath, and inspection of books at any place. Sub-section (6) repeats the section 207 penalty for disobeying a direction, including the deemed vacation of office on conviction.

Section 219 extends the reach past the company itself, and its structure is a discretion followed by a duty. The discretion is the inspector's: one appointed under section 210, 212 or 213 who considers it necessary for the purposes of the investigation, to investigate also the affairs of one of four named classes. The duty follows from it, because he shall, subject to the prior approval of the Central Government, investigate into and report on the affairs of the other body corporate or of the managing director or manager, in so far as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed.

Note that the closing words are narrower than the list they draw on. Class (d) reaches any person who is or has at any relevant time been the company's managing director or manager or employee, but what the inspector then investigates and reports on is the affairs of the other body corporate or of the managing director or manager. An employee is inside the class that can bring section 219 into play and is not named in the reporting limb.

The four classes are quoted here in full, because each carries a qualifier that decides its scope:

• (a) any other body corporate which is, or has at any relevant time been the company's subsidiary company or holding company, or a subsidiary company of its holding company;
• (b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;
• (c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or
• (d) any person who is or has at any relevant time been the company's managing director or manager or employee.

Two features of that list do the work. Clauses (a), (b) and (d) are each written in the present as well as the past tense, so a body corporate or person that has since ceased to hold the relationship is still inside them. Clause (c) is present tense only: it turns on a Board that comprises nominees or is accustomed to act on the company's directions, with no "has at any relevant time been" limb of its own. And clause (b)'s closing words are what tie it back to the company under investigation: the shared officer must be one who is, or was, at the relevant time, the managing director or the manager of the company. Without that qualifier the clause would reach any managed body corporate at all.

Three protections written into the Chapter

Employees, under section 218. During an investigation under section 210, 212, 213, 219 or 216, or during a proceeding under Chapter XVI, a company proposing to discharge or suspend any employee, to punish him whether by dismissal, removal, reduction in rank or otherwise, or to change the terms of employment to his disadvantage, must obtain approval of the Tribunal. If no approval arrives within thirty days of the application, then and only then may the company proceed. An objection can be appealed to the Appellate Tribunal within thirty days, and that decision shall be final and binding.

Privilege, under section 227. Nothing in the Chapter requires a legal adviser to disclose any privileged communication made to him in that capacity, except as respects the name and address of his client, or a company's bankers to disclose information about the affairs of their other customers.

Continuity, under section 226. An investigation may be initiated notwithstanding, and no such investigation shall be stopped or suspended by reason only of an application under section 241, a special resolution for voluntary winding up, or a pending winding-up proceeding. Where a winding-up order is passed, the inspector informs the Tribunal, and nothing in the winding up order shall absolve any director or other employee of the company from participating in the proceedings before the inspector.

Section 228 closes the Chapter's reach: its provisions shall apply mutatis mutandis to inspection, inquiry or investigation in relation to foreign companies, so a foreign company under section 379 is inside the same machinery.

Which route applies to which situation?

Every one of those routes ends the same way. An investigation into affairs of a company closes with an inspector's report under section 223, and section 224 then sets out what the Central Government may do with it.

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.