THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XIV

Inspection, Inquiry and Investigation

Sections 206–229

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Registrar's Powers • SFIO • Section 447 Fraud

— Enriched with landmark judgments and illustrative case law —

Chapter XIV — Inspection, Inquiry and Investigation

Every regulatory regime needs its enforcement arm. Chapter XIV of the Companies Act, 2013 (Sections 206 to 229) is the Registrar's and Central Government's instrument of corporate scrutiny. It provides for three calibrated levels of oversight — inspection, inquiry, and investigation — with escalating powers, ranging from call for information, examination of books, personal appearance of officers, all the way to the Serious Fraud Investigation Office (SFIO) conducting a full-fledged investigation under special powers.

Post-Satyam, this chapter has been substantially fortified. Section 212 (SFIO investigation) and Section 447 (fraud) together form the anti-fraud backbone of the 2013 Act.

Section 206 — Power to Call for Information, Inspect Books and Conduct Inquiries

(1) Call for Information

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 —

• To furnish in writing such information or explanation; or
• To produce such documents,

Within such reasonable time, as may be specified in the notice. On receipt of such notice, 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.

(3) Inspection

If the Registrar is not satisfied with the information or explanation furnished, he may, by another written notice, call on the company to produce for his inspection such further books of account, books, papers and explanations as he may require at such place and at such time as he may specify in the notice. It is the duty of the company and its officers concerned to produce such documents and furnish such information.

(5) Inquiry

Without prejudice to the foregoing provisions, the Central Government may, if it is satisfied that the circumstances so warrant, direct inspection of books and papers of a company by an inspector appointed by it for the purpose. The inspector so appointed shall have all the powers of the Registrar under this section.

(7) Powers and Duties — Officers

If a company fails to furnish any information or explanation or produce any document required under this section, the company and every officer of the company, who is in default shall be punishable with a fine which may extend to ₹1 lakh and in case of continuing failure, with an additional fine which may extend to ₹500 for every day after the first during which the failure continues.

Section 207 — Conduct of Inspection and Inquiry

During inspection or inquiry:

• It shall be the duty of every director, officer, or other employee of the company to produce to the Registrar or inspector all such books and papers of the company in his custody or control and furnish him with any statement, information, or explanation relating to the affairs of the company, as the Registrar or inspector may require of him within such time and at such place as he may specify;
• The Registrar or inspector making an inspection or inquiry under Section 206 may, during the course of inspection or inquiry, as the case may be, make or cause to be made copies of books of account and other books and papers, or place or cause to be placed any marks of identification in such books in token of the inspection having been made;
• The Registrar or inspector making an inspection or inquiry shall have the powers of a civil court under the Code of Civil Procedure, 1908 — in respect of (a) the discovery and production of books of account and other documents, at such place and such time as may be specified; (b) summoning and enforcing the attendance of persons and examining them on oath; and (c) inspection of any books, registers, and other documents of the company at any place.

Punishment for Failure to Produce Documents

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 fine which shall not be less than ₹25,000 but which may extend to ₹1 lakh. If a director or an officer of the company has been convicted of an offence 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 an office in any company.

Section 208 — 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.

Section 209 — Search and Seizure

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 —

1. Enter, with such assistance as may be required, and search, the place or places where such books or papers are kept; andSeize 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 under sub-section (1) to the company from whose custody or power they were seized within a period not later than 180 days after such seizure, provided that the books and papers may be called for by the Registrar or inspector at any time if they are needed again.

Section 210 — 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 —

1. 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; orIn public interest,

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

Section 211 — Establishment of Serious Fraud Investigation Office (SFIO)

The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a company. SFIO 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 —

• Banking;
• Corporate affairs;
• Taxation;
• Forensic audit;
• Capital market;
• Information technology;
• Law; or
• Such other fields as may be prescribed.

SFIO was originally set up by Government of India resolution dated 2 July 2003 based on the recommendations of the Naresh Chandra Committee; it has been given statutory status under the 2013 Act.

Section 212 — Investigation into Affairs of Company by SFIO

(1) When SFIO is Involved

Without prejudice to the provisions of section 210, where the Central Government is of the opinion that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office —

1. On receipt of a report of the Registrar or inspector under section 208;On intimation of a special resolution passed by a company that its affairs are required to be investigated;In the public interest; orOn request from any Department of the Central Government or a State Government,

The Central Government may, by order, assign the investigation into the affairs of the said company to the SFIO and its Director may designate such number of inspectors, as he may consider necessary for the purpose of such investigation.

(2) Exclusive Jurisdiction

Where any case has been assigned by the Central Government to the Serious Fraud Investigation Office for investigation under this Act, no other investigating agency of Central Government or any State Government shall proceed with investigation in such case in respect of any offence under this Act and in case any such investigation has already been initiated, it shall not be proceeded further with and the concerned agency shall transfer the relevant documents and records in respect of such offences under this Act to Serious Fraud Investigation Office.

(6) Cognizable Offences

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, offences covered under sub-sections (1), (2), (3), (4), and (5) of section 7, section 34, section 36, sub-section (1) of section 38, sub-section (5) of section 46, sub-section (7) of section 56, sub-section (10) of section 66, sub-section (5) of section 140, sub-section (4) of section 206, section 213, section 229, sub-section (1) of section 251, sub-section (3) of section 339 and section 448 which attract the punishment for fraud provided in section 447 of this Act shall be cognizable and no person accused of any offence under those sections shall be released on bail or on his own bond unless —

• The Public Prosecutor has been given an opportunity to oppose the application for such release; and
• 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.

(14) Report to Central Government

On completion of the investigation, the Serious Fraud Investigation Office shall submit the investigation report to the Central Government. A copy of the investigation report may be obtained by any person concerned by making an application in this regard to the court.

Section 213 — Investigation into Company's Affairs in Other Cases

The Tribunal may, on an application made by not less than one hundred members or members holding not less than one-tenth of the total voting power, where the company has a share capital, 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 appointed by the Central Government.

Alternatively, the Tribunal may also pass such an order on an application made by any other person or otherwise, if it is satisfied that there are circumstances suggesting that —

• The business of the company is being conducted with intent to defraud its creditors, members, or any other persons or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members;
• The company was formed for any fraudulent or unlawful purpose;
• 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
• The members of the company have not been given all the information with respect to its affairs which they might reasonably expect.

Sections 214-215 — Security for Payment of Costs and Expenses; Firm, Body Corporate or Association Not to be Appointed as Inspector

Section 214 — Where an investigation is ordered by the Central Government in pursuance of clause (b) of sub-section (1) of section 210, or in pursuance of an order made by the Tribunal under section 213, the Central Government may before appointing an inspector under section 210 or section 213, require the applicant to give such security not exceeding ₹25,000 as may be prescribed, as it may think fit, for payment of the costs and expenses of the investigation.

Section 215 — No firm, body corporate, or other association shall be appointed as an inspector.

Section 216 — Investigation of Ownership of Company

Where it appears to the Central Government that there is a reason so to do, it may appoint one or more inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons —

• Who are or have been financially interested in the success or failure, whether real or apparent, of the company; or
• Who are or have been able to control or to materially influence the policy of the company.

Section 217 — Procedure, Powers, etc., of Inspectors

It shall be the duty of all officers and other employees and agents, including the former officers, employees and agents of a company which is under investigation under this Chapter, and where the affairs of any other body corporate or a person are investigated under section 219, of all officers and other employees and agents, including former officers, employees and agents, of such body corporate or a person —

• To preserve and to produce to an inspector or any person authorised by him in this behalf all books and papers of, or relating to, the company or, as the case may be, of or relating to the other body corporate or the person, which are in their custody or power;
• Otherwise to give to the inspector all assistance in connection with the investigation which they are reasonably able to give.

An inspector shall also have the power to examine on oath any of the above-mentioned persons and the inspector may administer an oath accordingly. The notes of any examination shall be signed by the person examined and thereafter kept by the inspector as a record.

The inspector 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 — discovery and production of books of account and other documents; summoning and enforcing the attendance of persons and examining them on oath; and inspection of any books, registers, and other documents.

Section 218 — Protection of Employees During Investigation

Notwithstanding anything contained in any other law for the time being in force, if during the course of any investigation of the affairs and other matters of or relating to a company, other body corporate or person under section 210, section 212, section 213 or section 219 or of the membership and other matters of or relating to a company, or the ownership of shares in or debentures of a company or body corporate, or the affairs and other matters of or relating to a company, other body corporate or person, such company, other body corporate or person 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, other body corporate or person, as the case may be, 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, other body corporate or person concerned. If the company does not receive any written objection from the Tribunal within 30 days, they may proceed.

Section 219 — Power of Inspector to Conduct Investigation into Affairs of Related Companies, etc.

If an inspector appointed under section 210 or section 212 or section 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, to investigate also the affairs of —

1. 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;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;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;Any person who is or has at any relevant time been the company's managing director or manager or employee,

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.

Section 220 — Seizure of Documents by Inspector

Where in the course of an investigation under this Chapter, the inspector has reasonable grounds to believe that the books and papers of, or relating to, any company or other body corporate or managing director or manager of such company are likely to be destroyed, mutilated, altered, falsified or secreted, the inspector may —

• Enter, with such assistance as may be required, the place or places where such books and papers are kept in such manner as he considers necessary; and
• Seize books and papers as he considers necessary after allowing the company to take copies of, or extracts from, such books and papers at its cost for the purposes of his investigation.

Section 221 — Freezing of Assets of Company on Inquiry and Investigation

Where it appears to the Tribunal, on a reference made to it by the Central Government or in connection with any inquiry or investigation into the affairs of a company under this Chapter or on any complaint made by such number of members as specified under section 244(1), or a creditor having ₹1 lakh or more amount outstanding against the company or any other person having a reasonable ground to believe 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 the company or its shareholders or creditors or in public interest, it may by order direct that such transfer, removal or disposal shall not take place during such period not exceeding three years as may be specified in the order or may take place subject to such conditions and restrictions as the Tribunal may deem fit.

Section 222 — Imposition of Restrictions Upon Securities

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 are imposed, it 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.

Section 223 — Inspector's Report

An inspector appointed under this Chapter may, and if so directed by the Central Government shall, submit interim reports to that Government, and on the conclusion of the investigation, shall submit a final report to the Central Government. Every report made under sub-section (1) shall be in writing or printed as the Central Government may direct. A copy of the report made under sub-section (2) may be obtained by members, creditors or any other person whose interest is likely to be affected on payment of the prescribed fee.

Section 224 — Actions to be Taken in Pursuance of Inspector's Report

If, from an inspector's report under section 223, it appears to the Central Government that any person has, in relation to the company or in relation to any other body corporate or other person whose affairs have been investigated under this Chapter been guilty of any offence for which he is criminally liable, the Central Government may prosecute such person for the offence and it shall be the duty of all officers and other employees of the company or body corporate to give the Central Government the necessary assistance in connection with the prosecution.

If any company or other body corporate is liable to be wound up under this Act or under the Insolvency and Bankruptcy Code, 2016 and it appears to the Central Government from any such report that it is expedient so to do by reason of any such circumstances as are referred to in section 213, the Central Government may, unless the company or body corporate is already being wound up by the Tribunal, cause to be presented to the Tribunal by any person authorised in this behalf by the Central Government —

• A petition for the winding up of the company or body corporate on the ground that it is just and equitable that it should be wound up; or
• An application under section 241; or
• Both.

Section 225 — Expenses of Investigation

The expenses of and incidental to an investigation by an inspector appointed by the Central Government under this Chapter other than expenses of inspection under section 214 shall be defrayed in the first instance by the Central Government, but shall be reimbursed by the following persons to the extent mentioned below, namely —

• Any person who is convicted on a prosecution instituted, or who is ordered to pay damages or restore any property in proceedings brought, by virtue of section 224, to the extent that he may in the same proceedings be ordered to pay the said expenses as may be specified by the court convicting such person, or ordering him to pay such damages or restore such property, as the case may be;
• Any company or body corporate in whose name proceedings are brought as aforesaid, to the extent of the amount or value of any sums or property recovered by it as a result of such proceedings; and
• Unless, as a result of the investigation, a prosecution is instituted under section 224 — any company, body corporate, managing director or manager dealt with by the report of the inspector, and the applicants for the investigation, where the inspector was appointed under section 213, to such extent as the Central Government may direct.

Section 226 — Voluntary Winding Up of Company, Etc., Not to Stop Investigation Proceedings

An investigation under this Chapter may be initiated notwithstanding, and no such investigation shall be stopped or suspended by reason only of, the fact that —

• An application has been made under section 241;
• The company has passed a special resolution under section 271 for voluntary winding up; or
• Any other proceeding for the winding up of the company is pending before the Tribunal.

Provided that where a winding up order is passed by the Tribunal in a proceeding referred to above, the inspector shall inform the Tribunal about the pendency of the investigation proceedings before him and the Tribunal shall pass such orders as it may deem fit.

Section 227 — Legal Advisers and Bankers Not to Disclose Certain Information

Nothing in this Chapter shall require the disclosure to the Tribunal or to the Central Government or to the Registrar or to an inspector appointed by the Central Government —

• 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
• 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.

Section 228 — Investigation of Foreign Companies

The provisions of this Chapter shall apply mutatis mutandis to inspection, inquiry or investigation in relation to foreign companies.

Section 229 — Penalty for Furnishing False Statement, Mutilation, Destruction of Documents

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 —

• 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;
• Makes, or is a party to the making of, a false entry in any document concerning the company or body corporate; or
• 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 — i.e., imprisonment which may extend to 10 years and fine which may extend to 3 times the amount involved in the fraud (minimum 6 months' imprisonment and fine not less than the amount involved).

Section 447 — Punishment for Fraud (Cross-reference)

Though located in Chapter XXIX (Miscellaneous), Section 447 is the capstone of Chapter XIV's enforcement architecture and therefore examined often together with it. 'Fraud', in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Punishment: Imprisonment for a term which shall not be less than six months but which may extend to ten years and fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Where the fraud involves an amount less than ₹10 lakh or 1% of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to ₹50 lakh or with both.