Inspection, Inquiry and Investigation – CA Final Law Study Material

Inspection, Inquiry and Investigation – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Inspection, Inquiry and Investigation – CA Final Law Study Material

Question 1.
A notice was sent to Mr. Left by the registrar to furnish the information related to a business transacted during his tenure in the X company. Mr. Left ignored the notice considering that he is no more an employee of X company. Registrar issued the summon against Mr. Left. Explain in the light of the Companies Act, 2013 about the liability of the Mr. Left in the given case. [RTP-May 16]
Answer:
Duty of Past officers of the Company:

Section 206(1) of the Companies Act, 2013 provides that where on a scrutiny of any document filed by a company or on any information received by him, the Registrar is of the opinion that any further information or explanation or any further documents relating to the company is necessary, he may by a 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.

Section 206(2) of the Companies Act, 2013 provides that on the receipt of a notice u/s 206(1), it shall be the duty of the company and of its officers concerned to furnish such information or explanation to the best of their knowledge and power and to produce the documents to the Registrar within the time specified or extended by the Registrar.

Proviso to Sec. 206(2) provides that where such information or explanation relates to any past period, the officers who had been in the employment of the company for such period, if so called upon by the Registrar through a notice served on them in writing, shall also furnish such information or explanation to the best of their knowledge.

In the present case, a notice was sent to Mr. Left by the registrar to furnish the information related to a business transacted during his tenure in the X company. Mr. Left ignored the notice considering that he is no more an employee of X company. Registrar issued the summon against Mr. Left.
Conclusion: Considering the provisions of Sec. 206(2), Mr, Left is liable to provide such information.

Question 2.
A group of shareholders of M/s. FMG Limited made a complaint to the concerned Registrar of Companies (RoC) that the business of the Company is being carried on for unlawful and fraudulent purposes and filed an application to enquire into the affairs of the Company. Referring to and analyzing the provisions of the Companies Act,-2013, decide:
(i) Whether the RoC has the power to order for an inquiry into the affairs of the Company?
(ii) If yes, state the procedure to be followed by the RoC.
(iii) Whether the inquiry should be pursued by the RoC in case the complaint is withdrawn by the same group of shareholders subsequent to the Order for enquiry?
(iv) Whether the Central Government has the power to direct the RoC to carry out the inquiry? [Nov. 19 – New Syllabus (4 Marks)]
Answer:
Inquiry by the Registrar:
As per Sec. 206(4) of Companies Act, 2013, if the Registrar is satisfied on the basis of information available with or furnished to him or on a representation made to him by any person that:

the business of a company is being carried on for a fraudulent or unlawful purpose or not in compliance with the provisions of this Act, or

the grievances of investors are not being addressed, the Registrar may by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order within such time as he may specify therein and carry out such inquiry as he deems fit after providing the company a reasonable opportunity of being heard.

Before passing such an order, the Registrar has to inform the company of the allegations made against it.

Conclusion: Based on the provisions of Sec. 206(4), following conclusions may be drawn:

(i) Roc has power to order for an inquiry into the affairs of the company.

(ii) Procedure to be followed by Roc is covered by Sec. 206(4) and stated above.

(iii) There is no specific provision in the law as to the situation if the complaint is withdrawn by the same group of shareholders subsequent to the Order for enquiry. However, it seems reasonable that once an order for conduct of inquiry is passed, the inquiry should be completed even where the complaint is withdrawn.

(iv) The C.G. may, if it is satisfied that the circumstances so warrant, direct the Registrar or an inspector appointed by it for the purpose to carry out the inquiry u/s 206(4).

Question 3.
The Registrar, after inspection of the books of account of the PQR Ltd., submitted its report with further recommendation of investigation into the affairs of the company. Explain the law as to the recommendation for further investigation by the registrar. [MTP-Oct.18]
Answer:
Report on Inspection made:

Sec. 208 of Companies Act, 2013 provides that the Registrar or inspector shall, after the inspection of the books of account or an inquiry u/s 206 and other books and papers of the company u/s 207, submit a report in writing to the Central Government (delegated to Regional Director) along with such documents, if any.

Such report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary giving his reasons in support.

Question 4.
A group of creditors of Mac Trading Limited makes a complaint to the Registrar of Companies, Hyderabad alleging that the management of the company is indulging in destruction and falsification of the accounting records of the company. The complainants request the Registrar to take immediate steps to seize the records of the company so that the management may not be allowed to tamper with the records. The complaint was received at 11 A.M. on 6th June, 2020 and the ROC entered the premises at 11.30 A.M. for the search.
Examine the powers of the Registrar to seize the books of the company. [May 16 (4 Marks)]
Or
A group of creditors of XYZ Limited makes a complaint to the Registrar of Companies, Gujarat alleging that the management of the company is indulging in destruction and falsification of the accounting records of the company.

The complainants request the Registrar to take immediate steps to seize the records of the company so that the management may not be allowed to tamper with the records. The complaint was received at 11 A.M. on 06th June, 2020 and the registrar has attempted to enter the premise of company but has been denied by the company, due to not having order from special court.

Is the contention of company being valid in terms of Companies Act, 2013? [RTP – Nov. 18]
Answer:
Circumstances for seizure:
Section 209(1) of the Companies Act, 2013 provides that where, upon information in his possession or otherwise, 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.

In the present case, a group of creditors makes a complaint to the Registrar of Companies alleging that the management of the company is indulging in destruction and falsification of the accounting records of the company. The complainants request the Registrar to take immediate steps to seize the records of the company so that the management may not be allowed to tamper with the records. The complaint was received at 11 A.M. on 06th June, 2020 and the registrar has attempted to enter the premise of company but has been denied by the company, due to not having order from special court.

Conclusion: In the given scenario, the registrar has failed to obtain permission from the special court so, he is not authorized to enter the premises of the company and seize the books of account. Hence, the contention of the company is valid in law.

Question 5.
Shareholders of Hide and Seek Ltd. are not satisfied about performance of the company. It is suspected that some activities being run in the name of the company are not in the interest of the company or its members. 101 out of total 500 shareholders of the company have made an application to the Central Government to appoint an inspector to carry out investigation and find out the true picture.
With reference to the provisions of the Companies Act, 2013, mention whether the shareholders’ application will be accepted? Elaborate. [Nov. 15 (4 Marks)]
Or
Shareholders of Akash Ltd. not satisfied with the performance of the company inferred that some activities conducted by the company are against the interest of the members of the company. Group of shareholders of the company filed an application to the Central Government to appoint an inspector to carry out investigation to look into the matter.
With reference to the provisions of the Companies Act, 2013, mention whether the shareholders’ application is tenable? Elaborate.
Answer:
Circumstances when Investigation may be ordered by C.G.

Sec. 210(1) of the Companies Act, 2013 provides that where the C.G. 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 u/s 208;
on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
in public interest,

it may order an investigation into the affairs of the company.

In the present case, Shareholders of Hide and Seek Ltd. are not satisfied about performance of the company. It is suspected that some activities being run in the name of the company are not in the interest of the company or its members. 101 out of total 500 shareholders of the company have made an application to the C.G. to appoint an inspector to carry out investigation and find out the true picture.

Conclusion: Considering the provisions of Sec. 210(1), application will not be accepted as special resolution not passed. Alternatively, in public interest, C.G. has discretion to order for the investigation.

Question 6.
A majority of the Board of directors of M/s High Value InfoTech Ltd. have realized that some of the business activities carried out in the name of the company is not in the interest of either the company or its members. They want that the company should make an application to the C.G. to appoint an Inspector to carry out investigation and find out the whole truth. Explain the steps that should be taken to achieve the purpose.
Answer:
Circumstances when Investigation may be ordered by C.G.

Sec. 210(1) of the Companies Act, 2013 provides that where the C.G. 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 u/s 208;
on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
in public interest,

it may order an investigation into the affairs of the company.

In the instant case, majority of the directors have realized that some of the business activities carried out in the name of the company is not in the interest of either the company or its members. They want that the company should make an application to the C.G. to appoint an Inspector to carry out investigation and find out the whole truth.

Conclusion: Considering the provisions of Sec. 210(1), special resolution need to be passed and application to be made to C.G.

Question 7.
The shareholders of SKM Limited are not satisfied with the performance of the company. Some of the activities carried on by the company are not in the interest of the company and its members. The total number of shareholders as per the Register of Members as on 31.3.2021 was 2,000 and 450 members holding 16% of the paid-up value of the shares have made an application jointly to the Central Government to appoint an Inspector to carry out the investigation and find out the true picture.

With reference to the provisions of the Companies Act, 2013, mention whether the application will be accepted? Elaborate. After the filing of the application about 100 members holding about 7% of the paid-up capital had withdrawn. Decide whether the application is maintainable or not. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Circumstances when Investigation may be ordered by C.G.

Sec. 210(1) of the Companies Act, 2013 provides that where the C.G. 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 u/s 208;
on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
in public interest,

it may order an investigation into the affairs of the company.

In the present case, Shareholders of SKM Ltd. are not satisfied about performance of the company. It is suspected that some activities carried on by the company are not in the interest of the company and its members. 450 out of total 2000 members of the company have made an application to the C.G. to appoint an inspector to carry out investigation and find out the true picture.

Subsequent withdrawal of applicant from the application has no consequences, as application was not maintainable from the very beginning as special resolution not passed.

Question 8.
Explain the provisions of the Companies Act, 2013 relating to the establishment of Serious Fraud Investigation Office by the Central Government. State its composition.
Answer:
Establishment of Serious Fraud Investigation Office (SFIO) (Sec. 211)

Sec. 211(1) of Companies Act, 2013 provides that the C.G. shall, by notification, establish an office to be called the SFIO to investigate frauds relating to a company.

Sec. 211 (2) of Companies Act, 2013 provides that SFIO shall be headed by a Director, and Consist of such number of experts from the following fields to be appointed by the C.G. from amongst persons of ability, integrity and experience in,-

banking;
corporate affairs;
taxation;
forensic audit;
capital market;
information technology;
law; or
such other fields as may be prescribed.

Sec. 211(3) provides that the C.G. shall, by notification, appoint a Director in the SFIO, 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.

Sec. 211(4) of Companies Act, 2013 provides that the C.G. may appoint such experts and other officers and employees in the SFIO as it considers necessary for the efficient discharge of its functions under this Act.

Question 9.
What are the grounds on which the investigation is assigned to Serious Fraud Investigation Office?
Answer:
Grounds on which investigation may be assigned to SFIO:
Sec. 212(1) of Companies Act, 2013 provides that without prejudice to the provisions of Sec. 210, where the C.G. is of the opinion that it is necessary to investigate into the affairs of a company by the SFIO –
(a) on receipt of a report of the Registrar or inspector u/s 208;
(b) on intimation of a special resolution passed by a company that its affairs are required to be investigated;
(c) in the public interest; or
(d) on request from any Department of the Central Government or a State Government, it may, by order, assign the investigation into the affairs of the said company to the SFIO.

Question 10.
Mrs. Preeti, a lady aged about 32 years and Managing Director of M/s Grow more plantations Ltd., has been arrested for an offence covered under section 447 of the Companies Act, 2013 on a complaint made by the Director, Serious Fraud Investigation Officer. Mrs. Preeti seeks your legal advise as to the conditions under which she can be released on bail and the role of Special Court in this regard. [Nov. 17 (4 Marks)]
Answer:
Conditions for release on bail in case of offences covered u/s 447:

Sec. 212(6) of Companies Act, 2013 provides that offences covered u/s 447 of this Act shall be cognizable and no person accused of any such offence shall be released on bail or on his own bond unless—
(a) the Public Prosecutor has been given an opportunity to oppose the application for such release; and
(b) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail.

However, a person, who, is under the age of 16 years or is a woman or is sick or infirm, may be released on bail, if the Special Court so directs.

The Special Court shall not take cognizance of any offence referred in this sub-section except upon a complaint in writing made by—
(a) the Director, SFIO; or
(b) any officer of the C.G. authorised, by a general or special order in writing in this behalf by t that Government.

In the present case, Mrs. Preeti has been arrested for an offence covered u/s 447 of the Act on a complaint made by the Director, SFIO.

Conclusion: Considering the provisions of Sec. 211(6), Mrs. Preeti may be released on bail if the Special Court so directs.

Question 11.
Answer the following:
(i) The shareholders of Kumar Ltd. passed a special resolution that the affairs of the company ought to be investigated. The company submitted the special resolution to the Central Government. Examine, explaining the relevant provisions of the Companies Act, 2013, whether the power of the Central Government to order an investigation is mandatory or discretionary?
(ii) Enumerate the procedures to be followed by the Serious Fraud Investigation Office to arrest a person who has been found guilty ofan offence committed under section 447 of the Companies Act, 2013. [Nov. 18-New Syllabus (7 Marks)]
Answer:
(i) Powers of Central Government to order an investigation:
Section 210(1) of the Companies Act, 2013 provides that 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 u/s 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,
it may order an investigation into the affairs of the company.

Conclusion: Use of the term ‘may’ make it clear that the power of the Central Government to order an investigation is discretionary.

(ii) Procedure to be followed by Serious Fraud Investigation Office (SFIO) for arrest of a person:
Section 212(8), (9) & (10) of Companies Act, 2013 read with the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 provides the provisions relating to procedure to be followed for arrest of a person who has been guilty of any offence punishable u/s 212 of the Act.

Sec. 212(8): If any officer not below the rank of Assistant Director of SFIO authorised in this behalf by the C.G. by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in Sec. 212(6), he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest.

Sec. 212(9): The officer authorised u/s 212(8) shall, immediately after arrest of such person, forward a copy of the order, along with the material in his possession, to the SFIO in a sealed envelope, in prescribed. SFIO shall keep such order and material for such period as may be prescribed.

Sec. 212(10): Every person so shall within 24 hours, be taken to a Special Court or Judicial Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction. The period twenty four hours shall exclude the time necessary for the journey from the place of arrest to the Magistrate’s court.

Question 12.
Some creditors of NTY Limited approached you to guide them to apply to the Tribunal for seeking an order for conducting an investigation into the affairs of the company due to the fact that the business of the company is being conducted with intention to defraud its creditors. Referring to the provisions of the Companies Act, 2013, guide them regarding the circumstances under which and how a person, not being a member of the company can apply to the Tribunal to seek an order for conducting an investigation into the affairs of a company. [May 18 – Old Syllabus (4 Marks), RTP – Nov. 18]
Answer:
Circumstances in which Tribunal may pass order
Clause (b) of Sec. 213 of Companies Act, 2013 provides that Tribunal on filing of an application by person (not being a member of the company or otherwise) if it is satisfied that there are circumstances suggesting that-

(i) the business of the company 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;

(ii) persons concerned in the formation of the company or the management of its affairs have in connection there with been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) 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, of the company,

may pass order, after giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct.
Conclusion : Creditors should be guided in terms of provisions stated above.

Question 13.
The business of Weak Fabrication Limited is conducted fraudulently and the management activities are not in the interests of the company. The paid-up capital of the company is one crore rupees. A group of shareholders numbering 110 members representing 1 /9 of total voting power decided to approach Tribunal (NCLT) to carryout investigation into the company’s affairs under the provisions of the Companies Act, 2013. They seek your advice in the following matters, stating the relevant provisions of the companies Act, 2013.
1. Whether the group can make valid application?
2. Other than member, can any other person make application?
3. Are the applicants required to furnish security for payment of cost and expenses of investigation? [May 18 – New Syllabus (7 Marks)]
Answer:
Investigation into company affairs:
Sec. 213 of the Companies Act, 2013 provides that the Tribunal on an application made by:
(i) not less than 100 members or members holding not less than 1/10th of the total voting power, in the case of a company having a share capital;
or
(ii) not less than 1 /5th of the persons on the company’s register of members, in the case of a company having no share capital,

and 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, may order that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government.
Further, order for investigation may also be passed by Tribunal if on an application made to it by any other person or otherwise, it is satisfied that there are circumstances suggesting that—

(i) the business of the company 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;

(ii) 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 towards any of its members; or

Accordingly,

1. Group as stated in the question can make valid application as the group consists of more than 100 members.
2. Persons other than Shareholders can also make application as per the circumstances mentioned above.
3. Applicants are required to furnish security as per the provisions of Sec. 214 which states that C.G. may before appointing an inspector u/s 213, require the applicant to give such security not exceeding ₹ 25,000 as may be prescribed, for payment of the costs and expenses of the investigation.

Protection of employees during investigation (Sec. 210)

Question 14.
Mr. Atul is an employee of the company ABC Limited and investigation is going on him under the provisions of Companies Act, 2013. The company wants to terminate the employee on the ground of investigation is going against him. They have filed the application to tribunal for approval of termination. Company has not received any reply from the tribunal within 30 days of filling an application. The company consider it as a deemed approval and terminated Mr: Atul.
(a) Is the contention of company being valid in law?
(b) What is remedy available to Mr. Atul?
(c) What is remedy available to Mr. Atul, if reply of Tribunal has been received within 30 days of application? [MTP-March 18, March 19]
Answer:
Protection of employees during investigation

Sec. 218(1) of Companies Act, 2013 provides that if during the course of any investigation of the affairs of a company, such company proposes:

to discharge or suspend any employee; or
to punish him, whether by dismissal, removal, reduction in rank or otherwise; or
to change the terms of employment to his disadvantage,

the company shall obtain approval of the Tribunal of the action proposed against the employee and if the Tribunal has any objection to the action proposed, it shall send by post notice thereof in writing to the company.

Sec. 218(2) provides that if the company does not receive within 30 days of making of application, the approval of the Tribunal, then and only then, the company may proceed to take against the employee, the action proposed.

As per Sec. 218(3) and 218(4) if the company or person concerned is dissatisfied with the objection raised by the Tribunal, it may, within a period of 30 days of the receipt of the notice of the objection, prefer an appeal to the Appellate Tribunal in such manner and on payment of such fees as may be prescribed. The decision of the Appellate Tribunal on such appeal shall be final and binding on the Tribunal and on the company, other body corporate or person concerned.

In the present case, Mr. Atul is an employee of the company ABC Limited and investigation is going on him under the provisions of Companies Act, 2013. The company wants to terminate the employee on the ground of investigation is going against him. They have filed the application to tribunal for approval of termination. Company has not received any reply from the tribunal within 30 days of filling an application. The company consider it as a deemed approval and terminated Mr. Atul.

Conclusion: Applying the provisions of Sec. 218, following conclusions may be drawn:

(a) Contention of company is valid in law and company can consider it as deemed approval.
(b) Mr. Atul has no remedy because appeal can be made to appellate tribunal only if the person is dissatisfied with the objection raised by the appellate tribunal. But in the given case, there is no reply from appellate tribunal.
(c) Atul may prefer an appeal to the Appellate Tribunal within a period of 30 days of the receipt of the notice of the objection, in such manner and on payment of such fees as may be prescribed.

Question 15.
Damage Ltd, the Company wanted to suspend Mr. Z, the CFO of the Company during the pendency of an investigation being conducted under the provisions of the Companies Act, 2013 on the order of Tribunal. The Company approached the Tribunal on 3rd January, 2021 for the proposed action. The Company on 15th February, 2021 passed an order of suspension without waiting for the orders from Tribunal. Comment upon the action taken by the Company with reference to the relevant provisions of the Act. [May 17 (4 Marks)]
Answer:
Non-receipt of approval from Tribunal

Sec. 218(1) of Companies Act, 2013 provides that if during the course of any investigation of the affairs of a company, such company proposes:

to discharge or suspend any employee; or
to punish him, whether by dismissal, removal, reduction in rank or otherwise; or
to change the terms of employment to his disadvantage,

In the present case, company wanted to suspend Mr. Z, the CFO of the Company during the pendency of an investigation being conducted under the provisions of the Companies Act, 2013 on the order of Tribunal. The Company approached the Tribunal on 3rd January, 2021 for the proposed action. The Company on 15th February, 2021 passed an order of suspension without waiting for the orders from Tribunal.

Conclusion: Considering the above provision, Action taken by company is valid as suspension takes
place after 30 days.

Question 16.
‘ Pursuant to Section 210 of the Companies Act, 2013 an Inspector was appointed to investigate the affairs of Sterling Trading Limited. Mr. Ahmed the General Manager (Operations) who is aware of certain misdeeds of the management, desires to know whether he is entitled to any protection against dismissal by the company if he discloses the misdeeds during the course of examination by the inspector. Advise him explaining the relevant provisions of the Companies Act, 2013. [Nov. 17 (3 Marks)]
Answer:
Protection of employees during investigation:

Sec. 218(1) of Companies Act, 2013 provides that if during the course of any investigation of the affairs of a company, such company proposes:

to discharge or suspend any employee; or
to punish him, whether by dismissal, removal, reduction in rank or otherwise; or
to change the terms of employment to his disadvantage,

Question 17.
Discuss the powers of Inspectors regarding investigation into affairs of related companies.
Or
What are the circumstances in which an inspector appointed under section 210 of the Companies Act, 2013, can investigate into affairs of related companies also?
Answer:
Power of inspector to conduct investigation into affairs of related companies, etc.
As per Sec. 219 of Companies Act, 2013, if an inspector appointed under section 210 or 212 or 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, shall also investigate the affairs of—

(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.
Such Investigation is allowed only with prior approval of the Central Government.

Question 18.
During investigations conducted on the affairs of a company in the public interest, the inspector observed that the Directors of the company had been acting on the instructions of the holding company and he proceeded to investigate the holding company Is Inspector permitted to do under the provisions of the Companies Act, 2013? [May 17 (4 Marks)]
Or
Members of Sarat Solutions Ltd. are concerned about the performance of the company as they suspect gross negligence and mismanagement of the affairs of the company that may be detrimental to the interests of the company and therefore filed an application to the Central Government to appoint an inspector to carry oil the investigation. Mr. X, who was appointed as inspector, is of the view that to Find out the true picture it is necessary to investigate into the affairs of M/s.

Hemant Softech Solutions Ltd., which is a subsidiary of Sarat Solutions Ltd. Referring to and analysing the provisions of the Companies Act, 2013 decide, whether the inspector has powers to investigate into of M/s. Hemant Softech Solutions Ltd. [May 19 – Old Syllabus (4 Marks)]
Answer:
Power of inspector to conduct investigation into affairs of related companies, etc.
As per Sec. 219 of Companies Act, 2013, if an inspector appointed under section 210 or 212 or 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, shall also investigate the affairs of-

(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;

(d) any person who is or has at any relevant time been the company’s managing director or manager or employee.
Such Investigation is allowed only with prior approval of the Central Government.

Freezing of assets of company on inquiry and investigation (See. 221)

Question 19.
The members of company with no paid-up share capital, filed a complaint against change in the management of the company due to which it was likely that the affairs of the company will be conducted in a manner that it will be prejudicial to the interest of its 25 members. Total number of members of company were 100. On inquiry and investigation on the complaint, having a reasonable ground to believe that the transfer or disposal of assets of the company may be against to the interests of its shareholders. The Tribunal passed an order that such transferor disposal of assets shall not be made during one year of such order.

Evaluate on the basis of the given facts, the following situations according to the Companies Act, 2013:
(a) Eligibility of the members to file a complaint.
(b) Where if the management dispose of the certain assets in contravention to the order of the Tribunal. [MTP-March 18]
Answer:
Freezing of assets of the company on inquiry and investigation:
(a) Eligibility of members to file a complaint:

As per Sec. 244(1), in the case of a company not having a share capital, atleast 1/5th of the total number of its members have the right to apply u/s 221.

Where any members of a company are entitled to make an application u/s 244(1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

In the instant case, requirement of minimum numbers of members is fulfilled i.e. it is more than 1/5th of the total number of its members of the company (1/5 × 100 = 20).

Conclusion: Members are eligible to file a complaint. Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the above requirements as to enable the members to apply u/s 241.

(b) Penalty provisions:

As per Sec. 221(1) of the Companies Act, 2013, if it appears to the Tribunal, on a complaint made by members as specified u/s 244(1) that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of its members, Tribunal ordered that such transfer, removal or disposal shall n’ot take place during such period not exceeding 3 years as may be specified in the order or may take place subject to such conditions and restrictions as the Tribunal may deem fit.

Sec. 221(2) provides that in case of removal, transfer or disposal of funds, assets or properties ‘of the company in contravention of the order of Tribunal u/s 221(1), the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 5 lakh, or with both.

Question 20.
XYZ Ltd. proposed for amalgamation with the PQR Ltd. The issued and paid up capital of XYZ Ltd. is ₹ 5 crore consisting of 5,00,000 equity shares of ₹ 100 each. The said company has 500 members. It was believed by certain members of the company that the proposed Scheme of amalgamation resulting into the transfer and disposal of funds and assets of the company to the transferee, will be effecting their interest. So, 80 members holding 10,000 equity shares of the company decided to file an application for relief before the Tribunal.

Examine the given situation in the light of the Companies Act, 2013 –
(i) Whether the said petition will be maintainable.
(ii) In case where it appears to the Tribunal, that such proposal is likely to effect the interest of the members, remedy available to the aggrieved members. [MTP-Aug. 18]
Answer:
Right to apply u/s 241 for oppression and mismanagement:

As per Section 244 of the Companies Act, 2013, in the case of a company having share capital, members eligible to apply for oppression and mismanagement shall be lowest of the following:
100 members; or
1/10th of the total number of members; or
Members holding not less than 1/10th of the issued share capital of the company.

The shareholding pattern of MNC Limited consists of ₹ 5,00,00,000 equity share capital held by 500 members. The petition shall be valid if it has been made by the lowest of the following:

100 members; or
50 members (being 1/10th of 500); or
Members holding 7 50,00,000 share capital (being 1/10th of ₹ 5,00,00,000)

The petition alleging oppression and mismanagement has been made by some members as follows:

No. of members making the petition – 80
Amount of share capital held by members making the petition – ₹ 10,00,000

Conclusion: Petition made by 80 members meets the eligibility criteria specified under section 244 of the Companies Act, 2013 as it exceeds the minimum requirement of 50 members in this case. Therefore, the petition is maintainable.

(ii) Remedy available to aggrieved members:

As per Sec. 2 21 (1) of the Companies Act, 2 013, if it appears to the Tribunal, on a complaint made by members as specified u/s 244(1) that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of its members, Tribunal ordered that such transfer, removal or disposal shall not take place during such period not exceeding 3 years as may be specified in the order or may take place subject to such conditions and restrictions as the Tribunal may deem fit.

Sec. 2 21 (2) provides that in case of removal, transfer or disposal of funds, assets or properties of the company in contravention of the order of Tribunal u/s 221(1), the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 5 lakh, or with both.

Question 21.
Remedial Pharma Limited, over the years, enjoys a high reputation in the market and its general reserves are ten times more than the paid-up capital of the company. There is a serious apprehension of cornering the share of the company by a group of unscrupulous persons likely to result in change in the Board of Directors which may be prejudicial to the public interest. The company seeks your advice as to how it can block the transfer of shares of the company under the provisions of the Companies Act, 2013. [Nov. 17 (4 Marks)]
Answer:
Imposition of restrictions upon securities:

Sec. 222(1) of Companies Act, 2013 provides where it appears to the Tribunal, in connection with any investigation u/s 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 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 as may be specified in the order.

In the present case, there is a serious apprehension of cornering the share of the company by a group of unscrupulous persons likely to result in change in the Board of directors which may be prejudicial to the public interest.

Conclusion: The management of Remedial Pharma Limited may make a complaint to the Tribunal and convince that the transfer of shares in favour of the group of unscrupulous persons would change the composition of the Board of directors of the company which shall be prejudicial to the public interest and if the Tribunal is convinced with the pleas of the company, it may pass an order as stated above which would block the transfer of shares as stated in the question.

Question 22.
The Central Government ordered an investigation under Section 216 of Companies Act, 2013 against M/s Green Wood Limited for determining the true membership of the company. In connection with this investigation a reference was made to the Tribunal. It appears to the Tribunal that there is a good reason to find out the relevant facts about the company and the Tribunal is of the opinion that unless restrictions are imposed on further issue of such equity shares for two years, the purpose cannot be solved.

Referring to the provisions of the Companies Act, 2013 and Rules framed in this regard, answer:
(i) Can the Tribunal put such a restriction on further issue of shares?
(ii) Period for which such a restriction can be imposed by the Tribunal? [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Imposition of restrictions upon securities:

in the present case, the Central Government ordered an investigation u/s 216 of Companies Act, 2013 against M/s Green Wood Limited for determining the true membership of the company. In connection with this investigation a reference was made to the Tribunal. It appears to the Tribunal that there is a good reason to find out the relevant facts about the company and the Tribunal is of the opinion that unless restrictions are imposed on further issue of such equity shares for two years, the purpose cannot be solved.
Conclusion: Tribunal may restrict further issue of shares.
Period for which restriction may be imposed: Tribunal for impose the restriction for any period but not exceeding three years.

Question 23.
An investigation was ordered by the Central Government under section 216 of the Companies Act, 2013, against PKR Limited for determining the true membership of the Company. In connection with this investigation, it appears to the Tribunal that there is good reason to find out the relevant facts about 9% Redeemable Cumulative Preference Shares (RCPS) issued by the company on 15.10.2019 and the Tribunal is of the opinion that unless restriction is imposed on further issue of such shares, the purpose cannot be solved.

Accordingly, the Tribunal, by an Order dated 15.08.2020, directed the Company that the further issue of RCPS shall be subject to restrictions for a period of four years. Despite the order of the Tribunal as above, PKR Limited proceeded with further issue of RCPS on 20.08.2020 in order to fund the working capital requirements for its expansion project.

Referring to the provisions of the Companies Act, 2013, examine the following:
(i) Can the Tribunal restrict further issue of RCPS? If yes, then to what period?
(ii) What are the penal provisions in case of contravention to the above order? [Nov. 18-New Syllabus (5 Marks)]
Answer:
Imposition of restrictions upon securities:

In the present case, Tribunal, by an Order dated 15.08.2020, directed the Company that the further issue of RCPS shall be subject to restrictions for a period of four years.
Conclusion: Tribunal may restrict further issue of RCPS for any period not exceeding three years.

Penal Provisions in case of contravention of Tribunal Order:

Sec. 222(2) of the Companies Act, 2013 provides that where securities in any company are issued or transferred or acted upon in contravention of an order of the Tribunal u/s 222(1),

the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakh and
every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 Months or with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5 lakh, or with both.

Question 24.
What the duties of the inspector as enumerated in section 223 of the Companies Act, 2013, in relation to his report.
Answer:
Duties of Inspector enumerated in Sec. 223 in relation to Inspector’s Report:
Section 223 dealing with the Inspectors report provide the followings:

An inspector appointed under this Chapter may, and if so directed by the C.G. shall, submit interim reports to that Government, and on the conclusion of the investigation, shall submit a final report to the C.G. ’
Every report shall be in writing or printed as the C.G. may direct.
A copy of the report may be obtained by making an application in this regard to the C.G.
The report of any inspector appointed under this Chapter shall be authenticated either:

(a) by the seal 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, and such report shall be admissible in any legal proceeding as evidence in relation to any matter contained in the report.

Question 25.
M/s Genesis Paper Ltd. has been incurring business losses for past couple of years. The company, therefore, passed a special resolution for voluntary winding up. Meanwhile, complaints were made to the Tribunal and to the Central Government about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as the public. In this situation advise whether investigation may be initiated against the company under the provisions of the Companies Act, 2013. [Nov. 17 (4 Marks), RTP-May 18, MTP-Oct. 18]
Answer:
Voluntary winding up of company, etc., not to stop investigation proceedings

Sec. 226 of Companies Act, 2013 provides that an investigation may be initiated notwithstanding, and no such investigation shall be stopped or suspended by reason only of, the fact that:
(a) an application has been made u/s 241 (claiming relief from oppression and mismanagement);
(b) the company has passed a special resolution for voluntary winding up; or
(c) any other proceeding for the winding up of the company is pending before the Tribunal.

In the present case, M/s Genesis Paper Ltd. has been incurring business losses for past couple of years. The company, therefore, passed a special resolution for voluntary winding up. Meanwhile, complaints were made to the Tribunal and to the C.G. about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as the public.

Conclusion: Considering the provisions of Sec. 226, investigation may be initiated. It will not be stopped or suspended by the reason of the fact that the company has passed a special resolution for voluntary winding up.

Question 26.
Origin paper Ltd. has been incurring business losses for past couple of years. The company therefore, passes a special resolution for voluntary winding up. Meanwhile, complaints were made to the tribunal and to the Central Government about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as public.
(a) In this situation advise whether investigation may be initiated against the company under the provision of the Companies Act, 2013.
(b) Further decide whether application can be made to Tribunal for Relief in the above affairs of
the company once the investigation is initiated against the company. [MTP-April 18, RTP-May 18]
Answer:
(a) Voluntary winding up of company, etc., not to stop investigation proceedings:

(b) Application to Tribunal for relief in cases of Oppression, etc.
Sec. 241 ofCompanies Act, 2013 provide that any member of a company may apply to the Tribunal if he complains that:

(i) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive, to him or any other member or members or in a manner prejudicial to the interests of the company; or

(ii) the material change taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.

The C.G., if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order.

Where any members of a company are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

Conclusion: Considering the provisions of Sections 226 & 241, it can be concluded that though investigation was initiated against the company, it shall not bar members to file an application to Tribunal for Relief u/s 241 of the Companies Act, 2013.

Question 27.
State the provisions relating to professional immunity to legal advisors and bankers under the Companies Act, 2013.
Answer:
Professional immunity to legal advisors and bankers:
Sec. 227 of the Companies Act, 2013 provides that nothing in this Chapter (Sections 206 to 229) shall require the disclosure to the Tribunal or to the C.G. or to the Registrar or to an inspector appointed by the C.G.:

(a) by a legal adviser, of any privileged communication made to him in that capacity, except as respects the name and address of his client; or
(b) by the bankers of any company, body corporate, or other person, of any information as to the affairs of any of their customers, other than such company, body corporate, or person.

Question 28.
Decide the liability of the person for commission of the act during the course of inspection, inquiry or investigation under the Companies Act, 2013:
(i) A person who is required to make statement during the course of investigation pending against its company, is a party to the manipulation of documents related to the transfer of securities and naming of holders in the register of members by the company.
(ii) An employee of the company publicized among his social networking of sound financial position of his organization in order to incite them to purchase the shares of its company. In actuality, the company was running in loss. [RTP-May 19]
Answer:
Liability of the person for commission of the act during the course of inspection, inquiry or investigation
As per Sec. 229 of the Companies Act, 2013 where a person who is required to provide an explanation or make a statement during the course of inspection, inquiry or investigation, or an officer or other employee of a company or other body corporate which is also under investigation,-

(a) destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly removes, or is a party to the destruction, mutilation or falsification or concealment or tampering or unauthorised removal of, documents relating to the property, assets or affairs of the company or the body corporate;
(b) makes, or is a party to the making of, a false entty in any document concerning the company or
body corporate; or
(c) provides an explanation which is false or which he knows to be false, he shall be punishable for fraud in the manner as provided in section 447.

Conclusion: Considering the provisions of Sec. 229 as stated above, following conclusions may be drawn:

(i) Concerned person shall be liable for fraud as he is a party in the manipulation of documents relating to the transfer of securities and in the register of members of the company which is under investigation.

(ii) Employee shall not be liable, as the said company in which he is an employee, is not undergoing investigation. Secondly, the person purchasing the shares can act with due diligence before – purchasing shares rather fully relying on the publicity made on social networking.

Inspection, Inquiry and Investigation – CA Final Law Study Material

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