This article has been written by Shraddha Vasanth, pursuing the Certificate Course In Companies Act from LawSikho.

Introduction

The Companies Act gives the shareholders various kinds of rights, like the rights to appoint and remove directors and auditors, the right to receive dividends etc. However, shareholders are often ill-equipped to exercise these rights effectively over the Company as the Company, for all practical purposes, is managed by the Board of Directors. The Directors may, at times, be inefficient or at other times, act in a manner that is not favourable to the shareholders or company or act in a fraudulent manner. This is said to be an abuse of their position by the Directors. To prevent and curb such practices, the Central Government has been vested with wide powers to investigate the affairs of the Company in cases where they have a reason to believe that the business of the Company is being conducted with an intent to defraud its members, creditors or where the company has been set up to conduct unlawful or illegal activities. With this intention, Chapter XIV has been provided for in the Companies Act, 2013 (“the Act”), which deals with the provisions relating to Inspection, Inquiry and Investigation of the affairs of companies.

The term Investigation, in common parlance, means “a searching inquiry for ascertaining facts”; it is a detailed or careful examination to arrive at the truth behind the activities or affairs of the Company. It generally succeeds in the inquiry and inspection conducted by the Registrar of Companies. There are 4 parallel provisions dealing with Investigations under the Act. The Sections are 210, 212, 213 and 216, each of which are independent provisions and yet interconnected.  

This article gives a brief outline of the provisions of an investigation into the ownership of companies, which is covered under Section 216 of the Act and the manner in which such investigation is conducted. 

Need for Section 216

Section 216 deals with the investigation of ownership of the Company by the Central Government. The term member (owner) means the subscriber to the Constitution documents, persons whose name is entered in the Register of Members, persons who have declared their beneficial interest in the company. The members include individuals, LLP, bodies corporate, companies, Association of Persons (AOP), Hindu Undivided Family (HUF), Pooled Investment Vehicle (PIV) and Trusts. The various kinds of members and complex corporate structures necessitate a separate provision for such investigation.

The importance of the provisions of this section can be understood by forging links with other provisions of the Act such as:

Inter-connections with the other provisions of Chapter XIV – Inspection, Inquiry and Investigation

As mentioned above, there are 4 specific investigations that can be conducted under the Act. These are an investigation into the affairs of the Company by members/ shareholders (Sec. 201), the investigation into the affairs of the company by members as well as other persons (Sec. 213), an investigation by the Serious Fraud Investigation Office (Sec. 212). These inspections/ investigations can be carried on account of the following reasons:

1. Misstatement of a prospectus.
2. Fraudulent inducement to invest.
3. Acquisition of securities.
4. Offences relating to the issue of share certificates, transfer and transmissions.
5. Reduction of share capital.
6. Fraudulent application for removal of the name of the company from the Register.
7. Fraudulent conduct of business etc.

If during the inquiry or inspection, for any of the above-mentioned reasons, the Central Government is of the opinion that a deeper probe into the owners ought to be conducted to nail the real owners of the company, an investigation can be ordered under this section. An investigation under this section is specifically conducted to ascertain the real people:

1. Controlling the directors.
2. Controlling ownership.
3. Controlling the decisions taken at the shareholder or board meetings.
4. Beneficial ownership of securities.

Inter-connections with cases on oppression and mismanagement 

The Members have been given the power to approach the National Company Law Tribunal (NCLT) if they believe that the affairs of the company are being conducted in a manner prejudicial to the public interest or the member(s)’ interest or the interests of the company. These are broadly termed as acts of oppression or mismanagement by the directors/ majority owners of the Company and are governed by Chapter XVI of the Act. Within the said chapter, the NCLT has been vested with powers, which inter-alia, include the power to the purchase of shares or interests of any members of the company by other members thereof or by the company as well as the power to restrict the transfer or allotment of shares of the company. In order to exercise these powers, the NCLT may order an investigation into the ownership to ascertain the real owners of the company.

Inter-connections with money laundering, benami and hawala transactions

Companies are often used for money laundering, benami and/ or hawala transactions, frauds etc. leading to other deeper issues like terrorism. In such cases, it becomes essential for authorities to pierce the corporate veil and ascertain the real persons who are behind the corporate structures. This also necessitates the investigation into the company’s membership.

Instances when the investigation can be ordered

The Central Government has been vested with the discretionary power to investigate the ownership of a company if it has reason to believe that such a probe is warranted, based on the facts and circumstances of each case. The probe is to determine the true persons:

1. who are or have been financially interested in the success or failure, whether real or apparent, of the company; or
2. who are or have been able to control or to materially influence the policy of the company; or
3. who have or had a beneficial interest in shares of a company or who are or have been beneficial owners or significant beneficial owner of a company. [Sec. 216(1)(a), (b) &(c)]

How is an investigation conducted?

Who can order the investigation?

• Suo-Motu action by the Central Government
• Order by the NCLT
• Complaint by members

Who conducts the investigation?

The investigation will be conducted by an Inspector appointed by the Central Government. The scope and the period of investigation also will be determined by the Central Government.

Powers of the Inspector

To conduct the investigation, a wide range of powers have been vested in the Inspector; they are:

• The power to summon the officers, employees (including former officers and employees of the company) and other persons in relation to the company as they deem necessary. [Sec. 217(1)]
• Require the body corporate to furnish information and produce such books and papers deemed necessary. [Sec. 217(1)(a)]
• Require any other body corporate to furnish information and produce such books and papers deemed necessary. [Sec. 217(1)(a)]
• Subject to the terms of appointment, the inspector may also investigate any circumstances suggesting the existence of any arrangement or understanding which, though not legally binding, is or was observed or is likely to be observed in practice. [Sec. 216(4)]
• Seizure of documents if he has reasonable cause to believe that the documents can be mutilated or destroyed. [Sec. 220(1)]
• Keep seized documents in his/ her custody. [Sec. 220(2)]
• In addition to the above, the investigator is also vested with the powers of a civil court under the Code of Civil Procedure, 1908, with regard to the discovery of books and documents, summoning and enforcing the attendance of persons on oath and inspection of any books, records and other documents at any place. [Sec. 217(5)]

Submission of Report by the Inspector [Sec. 223]

Powers of the NCLT

• The Tribunal may, either on a reference by the Central Government or on a complaint made under Sec. 244 or complaint by a creditor having Rs. 1 lakh outstanding against the company or deems it necessary, freeze the assets of the company for a period of 3 years. [Sec. 221(1)]
• The Tribunal may, either on a complaint or Suo-motu in connection with an ongoing investigation, impose restrictions on the transfer etc. of securities. [Sec. 222(1)]

Action by Central Government upon receipt of the Report 

• Prosecute the officers and/ or employees if they are held guilty of offences that are criminal in nature.
• Order for winding up of the company.
• Recover damages in respect of any fraud, misfeasance or other misconduct in connection with the promotion or formation, or the management of the affairs.
• Recover property which has been misapplied or wrongfully retained.

Other provisions 

Penal provisions

The Act imposes penalties in case of violation of the orders of the inspector and the Tribunal. The following penalties may be levied:

• Disobedience of the direction of the Inspector or Registrar attracts imprisonment of upto 1 year and fine of Rs. 25,000/- extendable upto Rs. 1 lakh or both on the directors and officers of the company. [Sec. 217(6)(i)]
• Disqualification and vacation of office of the directors. [Sec. 217(6)(ii)]
• Non-furnishing of information, non-production of documents, non-appearance before the inspector etc. attracts imprisonment of upto 6 months and fine of Rs. 25,000/- extendable upto Rs. 2,000/- for every day of default. [Sec. 217(8)]
• Transfer of assets that are frozen by the NCLT attracts a fine of Rs. 1 lakh extendable to Rs. 25 lakhs on the company and imprisonment of upto 6 months and a fine of             Rs. 25,000/- extendable upto Rs. 5 lakhs or both on the officers. [Sec. 221(2)]
• Transfer of securities in contravention of the order of the NCLT attracts a fine of              Rs. 1 lakh extendable to Rs. 25 lakhs on the company and imprisonment of upto 6 months and a fine of Rs. 25,000/- extendable upto Rs. 5 lakhs or both on the officers. [Sec. 222(2)]
• Certain acts like destruction, mutilation, falsification of documents, provision of false information etc. also attract criminal charges under Sec. 447. [Sec. 229]

Miscellaneous 

• The expenses of investigation may be recovered by the Central Government from the convicts. [Sec. 225]
• The Act extends protection to employees, bankers and legal advisers during the course of investigation. [Sec. 218, 227]
• All provisions under the Chapter apply to foreign companies also. [Sec. 228] 

Conclusion 

Corporate structures are often used to perpetrate illegal and fraudulent activities. These activities impact the other members, creditors, depositors and the financial system in general. It is with the intent to nail such persons hiding behind the corporate veil that the Companies Act 2013 includes provisions on the investigation of ownership of companies. The law also provides wide powers to the inspector to perform their duties. These provisions are, thus, very critical towards building an environment of good corporate governance.

References

[1] http://ebook.mca.gov.in/Default.aspx?page=main 

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