Investigation, Inquiry and Inspection (Companies Act )

Topic:- Investigation, Inquiry and Inspection

Author: Prabhuti Mandhyan, LCD, Uttranchal University, Dehradun.

Introduction

Investigation, Inquiry and Inspection are defined in Chapter XIV of the Companies Act under Sections 206 to 229 where the main objective of the Central Government was to protect the interest of Shareholders so as to maintain transparency so that shareholders can inspect investigate or inquire during situations where it could be mirrored that business of the company was done in a fraudulent and unfair manner.

Investigation, Inquiry and Inspection

Power to investigate, inspect and inquire is vested in Section 206 of the Companies Act where on scrutiny of any document filed by any company or information received by Registrar he is of opinion  that further information or explanation of documents relating to the Company is necessary he may by written notice require the company

(a) to furnish in writing such information or explanation or

(b) to produce such documents, within such reasonable time as may be specified in the notice

After receiving receipt of notice it is the duty of the company and its officers to furnish such information or explanation to the best of their knowledge and power to produce documents to Registrar as within time prescribed by the Registrar this information can also include information of past employees of the company. If Registrar is of opinion that inadequate information is received he may ask through notice to produce such documents and explanations. After receiving of adequate information if Registrar is of opinion that Company is carried out in a fraudulent manner or there exist some grievances of investors which need to be addressed, Registrar after informing the company can call on the company to furnish in writing such information and carry such inquiry as deems fit accordingly where Company is given opportunity to be heard. Central Government can also if satisfied that circumstances so warrant an inquiry may direct Registrar an inspector appointed by it to carry out an inquiry , where the business of the company has been or is being carried out on or for a fraudulent or unlawful purpose, every officer of the company in default shall be punishable for fraud in manner as provided in Section 447 of Companies Act

If the Central Government is satisfied that the circumstances so warrant may direct inspection of books and papers of a company by an inspector appointed by it for this purpose without any prejudice. It can accordingly have regard to circumstances by general or special order authorize any statutory authority to carry out inspection of books of account of a company or class of companies. If the company fails to furnish any information or explanation or produce any document required under Section206 then every officer of the company who is in default shall be punishable with a fine which may extend to one lakh rupees and failing which it may extend to five hundred rupees for every day after the first during which failure continues.

1. Conduction of Inspection and Inquiry:-

Section 207 states  Conduct of Inquiry and Inspection where the Registrar or Inspector have powers to inspects accounts, books of the company and shall have powers as vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the following matters, namely:—

i. the discovery 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;

ii. summoning and enforcing the attendance of persons and examining them on oath; and

iii.  inspection of any books, registers and other documents of the company at any place.

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 may extend to one year and with a fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. If a director or an officer of the company has been convicted of an offense under this section, they shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified from holding any office in any company.

• Report on Inspection made

The Registrar or inspector shall, after the inspection of the books of account or an inquiry under section 206 and other books and papers of the company under section 207, submit a report in writing to the Central Government along with such documents, if any, and such report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary giving his reasons in support.

• Search and Seizure:-

Whereupon receiving information in his possession the Registrar or Inspector has reasonable ground to believe that the books and papers of a company, or relating to the key managerial personnel or any director or auditor or company secretary in practice if the company has not appointed a company secretary, are likely to be destroyed, mutilated, altered, falsified or secreted, he may, after obtaining an order from the Special Court for the seizure of such books and papers-

a.     enter, with such assistance as may be required, and search, the place or places where such books or papers are kept; and

b.    seize such books and papers as he considers necessary after allowing the company to take copies of, or extracts from, such books or papers at its cost.

The Registrar or inspector shall return the books and papers seized as soon as may be, and in any case not later than one hundred and eightieth day after such seizure, to the company from whose custody or power such books or papers were seized, it may also be called for a further period of one hundred and eighty days by an order in writing if needed again.   The provisions of the Code of Criminal Procedure, 1973 relating to searches or seizures shall apply, mutatis mutandis, to every search and seizure made under this section.

• Investigation into affairs of Company:-

Where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company,   on the receipt of a report of the Registrar or inspector under section 208, on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or in the public interest, it may order an investigation into the affairs of the company. The Central Government may 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 and before it if any order is given by Court or Tribunal then Central Government may act accordingly.

• Serious Fraud Investigation Office:-

It is under the jurisdiction of the Ministry of Corporate Affairs, Government of India & primarily supervised by officers from Indian Administrative Service, Indian Police Service, Indian Corporate Law Service, Indian Revenue Service and other Central Services. It is mandated to conduct Multi-disciplinary investigations of major corporate frauds. ^[1]

It is a multi-disciplinary organization having experts from the financial sector, capital market, accountancy, forensic audit, taxation, law, information technology, company law, customs, and investigation. Based on the recommendation of the Naresh Chandra Committee on corporate governance (which was set up by the Government on 21 August 2002) and in the backdrop of stock market scams as also the failure of non-banking companies resulting in a huge financial loss to the public, the Vajpayee Government decided to set up SFIO on 9 January 2003. Agency headquarters is in the Indian capital, New Delhi, with field offices located in major cities throughout India

The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a company the Serious Fraud Investigation Office shall be headed by a Director and consist of such number of experts from the following fields to be appointed by the Central Government from amongst persons of ability, integrity and experience in,—

              i.        banking;

             ii.        corporate affairs;

            iii.        taxation;

            iv.        forensic audit;

             v.        capital market;

            vi.        information technology;

           vii.        law; or

          viii.        such other fields as may be prescribed.

The Central Government shall, by notification, appoint a Director in the Serious Fraud Investigation Office, who shall be an officer not below the rank of a Joint Secretary to the Government of India having knowledge and experience in dealing with matters relating to corporate affairs and may appoint such experts and other officers and employees in the Serious Fraud Investigation Office as it considers necessary for the efficient discharge of its functions under this Act.

•  Procedure and Power of Inspectors:-

Inspectors are delegated by the Registrar of Companies to perform an investigation into affairs, procedure and powers of inspectors are explained in Section 217 as-

• Employees, officers, and agents are required to produce documents, papers, books relevant for investigation, the inspector shall keep books and papers produced for one hundred and eighty days, provided that books and papers may be called by the inspector if needed again by an order in writing
• Inspector may examine on oath with prior approval of the Central Government in relation to affairs of Company or body corporate as the case may be, in case of an investigation under section 212 prior approval of Director, Serious Fraud Investigation
• Officer. The inspector, being an officer of the Central Government, making an investigation under this Chapter 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 following matters,-   the discovery and production of books of account and other documents at such place and time as may be specified by such person,  summoning and enforcing the attendance of persons and examining them on oath; and inspection of any books, registers and other documents of the company at any place.
• If the director or officer of the company disobeys the direction issued by the inspector, he shall be punishable with imprisonment which may extend to one year, and with a fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. If a director or an officer of the company has been convicted of an offense under this section, the director or the officer shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified from holding any office in any company.
• If any person fails without reasonable cause or refuses to produce to an inspector any book or paper which is his duty, to furnish any information, to appear before the inspector personally when required to or to answer any question which is put to him by the inspector in pursuance or   to sign the notes of any examination, he shall be punishable with imprisonment for a term which may extend to six months and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, and also with a further fine which may extend to two thousand rupees for every day after the first during which the failure or refusal continues
• The officers of the Central Government, State Government, police, or statutory authority shall provide assistance to the inspector for the purpose of inspection, inquiry, or investigation, which the inspector may, with the prior approval of the Central Government, require. The Central Government may enter into an agreement with the Government of a foreign State for reciprocal arrangements to assist in any inspection, inquiry, or investigation under this Act or under the corresponding law in force in that State.

Appeals:

Appeals against orders of the Company Law Board is defined in Section 10 F of Companies Act where any person aggrieved by any decision or order of the Company Law Board may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order. Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days. In JP Srivastava and Sons (Rampur) (P) Ltd v Gwalior Sugar Company Ltd where there was a petition for prevention of oppression and mismanagement the finding of facts by the Company Law Board was that even the preliminary requirements were not satisfied. The Court refused to interfere as it found that finishing was based on evidence already in the record.