Investigation under Companies Act, 1956

The lenders to a company are expected to notify themselves with memorandum and articles of association of the company as they are public documents but they cannot be expected to undertake an investigation so as to check the legitimacy, aptness and reliability of what directors do.[1] The management of the company is in hands of the BOD. In order to avoid the abuse of power by the directors, Central Government has been empowered to conduct investigation into the affairs of the company[2], into the affairs of the related companies[3]and into the ownership of the companies[4].

When investing into the affairs of the company, the Central Government has certain powers which are on its discretion to exercise, like it may, where a report has been made by the Registrar[5], appoint one or more competent persons as inspectors to investigate the affairs of a company.[6] It may also appoint inspectors if the CLB[7] is of the opinion that the affairs of the company are being conducted in a fraudulent manner or with unlawful purpose.[8] The central government also has certain powers which are mandatory to exercise, like it has to appoint inspectors when the company, by special resolution (which is very unlikely to happen), or the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government.[9]

The CLB[10] can also make a declaration to the central government for the appointment of inspectors to investigate the affairs of a company, if application is made by a company having a share capital (where an application has been received from not less than 200 members[11]or from members holding not less than one-tenth of the total voting power therein)[12] and in case of a company having no share capital (where an application has been received from not less than one-fifth of the persons on the company's register of members)[13].

An investigation can be ordered only when public interest or shareholders’ interest is involved not merely on the basis of shareholders dissatisfaction.[14] Court does not normally interfere with the exercise of discretion by the Central Government.[15] But where the discretion is not properly exercised and all the facts and circumstances taken together would show that no reasonable authority would have taken the view that the Central Government adopted, the Court may interfere and set aside the order.[16]

When the Central Government has directed investigation into the affairs of the company, the inspector can also, in course, inspect into the affairs of any related company or person i.e, any company or person or body corporate which are relevant to the company.[17] For this the inspector has to obtain a prior approval of the Central Government[18] so that the government could issue a notice to such body corporate or person to give a reasonable opportunity to show why the approval should not be granted.[19]

If the central government believes that there is a need to investigate into the ownership of the companies, it can appoint one or more competent persons as inspectors to investigate and report on who really are financially interested[20] and control policy decisions of the company.[21] The Central Government may or may not appoint such Inspectors if it has reasons to believe so[22] but it has if the Company Law Board, declares that the ownership of the Company needs to be investigated.[23]

The inspector has certain other powers as well such as to examine on oath Officers, Employees and Agents of the Company. He, if so directed by the Central Government shall, make interim reports to that Government, and on the conclusion of the investigation shall make a final report to the Central Government.[24] But the report by itself cannot be admitted as proving the facts contained therein.[25] Inspector’s report is protected by absolute privilege.[26] In Swadeshi Cotton Mills Ltd. v Swadeshi Polytex[27], the objection of the Company Law Board to produce the report of the inspector appointed u/s 236 and 237 on the ground of privilege under sec 124 of the Indian Evidence Act, 1872 was held to be well founded and was upheld.

Article by Shivam Hargunani of Grayscale