Imposition of Restrictions Upon Securities (S. 222)
Imposition of restrictions upon securities is section 222 of the Companies Act, 2013, and its purpose is investigative rather than punitive. The Tribunal freezes what can be done with a company's securities because the section's own test is that the facts cannot be found out otherwise. The order lasts up to three years, and the conduct it punishes is issuing, transferring or acting upon securities in breach of it.
Definition
Imposition of restrictions upon securities
is an order of the Tribunal under section 222 directing that securities issued or to be issued by a company be subject to such restrictions as it may deem fit, for a period not exceeding three years, where relevant facts about those securities cannot otherwise be found out. Source: Companies Act, 2013, section 222(1).
What is imposition of restrictions upon securities under section 222?
Imposition of restrictions upon securities has a two-part test, and both parts have to be satisfied before the Tribunal can make an order. Sub-section (1) applies where it appears to the Tribunal, in connection with any investigation under section 216 or on a complaint made by any person in this behalf, that:
- there is good reason to find out the relevant facts about any securities issued or to be issued by a company; and
- the Tribunal is of the opinion that such facts cannot be found out unless certain restrictions, as it may deem fit, are imposed.
The second limb is a necessity test. Restrictions are available because the facts are otherwise unreachable, which is what makes section 222 a fact-finding tool. Where the facts can be established some other way, the condition in the sub-section is not met.
Note the scope of what can be restrained: any securities issued or to be issued by a company. Securities not yet in existence are inside the order.
What is the connection to section 216?
Section 222 names one investigation and one only. Its route in is any investigation under section 216, which is the investigation of ownership of a company that hunts the true persons financially interested in, controlling, or beneficially owning a company.
That pairing explains the section. A section 216 inspector is trying to determine who is behind the shares. Section 216(4) lets him look at any arrangement or understanding which, though not legally binding, is or was observed or is likely to be observed in practice. Section 222 is what stops the shares themselves from moving while he does it.
The second route in is wider than the first: a complaint made by any person in this behalf. No shareholding, debt or government reference is required, and no pending investigation is required either. What is required in both cases is the two-part test above.
What can the order do, and for how long?
Up to 3 years
The maximum period for which the Tribunal may direct under section 222(1) of the Companies Act, 2013 that securities issued or to be issued by a company be subject to restrictions
Source: Companies Act, 2013, section 222(1)
The Tribunal may, by order, direct that the securities shall be subject to such restrictions as it may deem fit for such period not exceeding three years as may be specified in the order.
The content of the restrictions is left to the Tribunal, in the words as it may deem fit, which appear twice in the sub-section: once in the necessity test and once in the operative direction. What the section fixes is the outer period, not exceeding three years, and it requires that period to be specified in the order. Section 222 states no separate power to renew or extend, so the order's own specified period is the one to read.
What is the penalty under section 222(2)?
Sub-section (2) applies where securities in any company are issued or transferred or acted upon in contravention of an order of the Tribunal under sub-section (1). Three verbs, and the third, acted upon, is broader than a transfer: exercising a right attached to a restrained security can sit inside it.
| Who | Punishment under section 222(2) |
|---|---|
| The company | Fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees |
| Every officer of the company who is in default | Imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both |
Section 222 next to section 221
The two Tribunal restriction powers in Chapter XIV are worth reading side by side, because they are drafted in parallel and differ in five of the seven rows below.
| Section 222, restrictions upon securities | Section 221, freezing of assets | |
|---|---|---|
| What is restrained | Securities issued or to be issued by the company | Removal, transfer or disposal of the company's funds, assets, properties |
| Route in | In connection with any investigation under section 216, or a complaint by any person | Central Government reference, any Chapter XIV inquiry or investigation, or a complaint by section 244(1) members, a creditor owed one lakh, or any other person with reasonable ground |
| The test | Good reason to find out relevant facts, and those facts cannot be found out without restrictions | A likely removal, transfer or disposal prejudicial to the company, its shareholders, its creditors or the public interest |
| Maximum period | Three years | Three years |
| Company's fine | One lakh to twenty-five lakh rupees | One lakh to twenty-five lakh rupees |
| Officer's imprisonment | Up to six months | Up to three years |
| Officer's fine floor | Twenty-five thousand rupees | Fifty thousand rupees |
The company's fine and the three-year cap are identical. Every other row differs, and the pattern is consistent with the purpose of each section: freezing of assets under section 221 protects value that is about to leave, and carries the heavier officer punishment, while section 222 preserves a state of affairs so that facts can be established.
Reading an order for the imposition of restrictions upon securities therefore means checking three things: whether it was made in connection with a section 216 investigation or on a complaint, what restrictions it actually imposes, since the content is entirely at the Tribunal's discretion, and what period it specifies inside the three-year cap. Whatever the underlying investigation concludes lands in an inspector's report under section 223, and the register the ownership question is being asked about is the register of members. Both orders are made by the National Company Law Tribunal.
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Frequently asked questions
What is imposition of restrictions upon securities?
An order of the Tribunal under section 222 of the Companies Act, 2013 directing that securities issued or to be issued by a company shall be subject to such restrictions as it may deem fit, for a period not exceeding three years, where relevant facts about those securities cannot be found out otherwise. Source: Companies Act, 2013, section 222(1).
What triggers a section 222 order?
It appears to the Tribunal, in connection with any investigation under section 216 or on a complaint made by any person in this behalf, that there is good reason to find out the relevant facts about any securities issued or to be issued by a company, and the Tribunal is of the opinion that such facts cannot be found out unless certain restrictions, as it may deem fit, are imposed. Source: Companies Act, 2013, section 222(1).
How long can restrictions upon securities last?
The Tribunal may, by order, direct that the securities shall be subject to such restrictions as it may deem fit for such period not exceeding three years as may be specified in the order. The section states no separate renewal power, so the period is the one specified in the order itself. Source: Companies Act, 2013, section 222(1).
What is the penalty for breaching a section 222 order?
Where securities are issued or transferred or acted upon in contravention of the order, the company is punishable with a fine of not less than one lakh rupees and up to twenty-five lakh rupees. Every officer in default faces imprisonment up to six months, or a fine of not less than twenty-five thousand rupees and up to five lakh rupees, or both. Source: Companies Act, 2013, section 222(2).
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