C.V. Karuppunni v/s Joint Director Case

Introduction

This Article eplains C.V. Karuppunni v/s Joint Director case.

Chapter XIV of the Companies Act, 2013 deals with inspection, inquiry and investigation of any company registered under the act. The Companies Act provides that Inspection can be carried out in any company by either the registrar of companies or by any officer appointed by the Central Government. Sections 206 to 208 of the Companies act, 2013 deal with inspection and inquiry. Inspection and inquiry can be carried out simultaneously. However, investigation can only take place once the inspection and inquiry have been completed and a report is duly submitted to the Central Government by the registrar of companies or the inspector authorized to conduct such inspection.

Section 209A of the Companies act, 1956 deals with the inspection of books of accounts of a company. It states that all the books of accounts as well as other books and documents of a company can be inspected at any time during the business hours. It is the duty of the directors and employees to furnish any such document which is required by the inspecting officer along with an explanation or assistance as and when required. On the other hand, the inspecting officer has the liberty to make copies of any document or mark any document during the course of inspection. Sub section 5, further confers the same power on the inspecting officer as of any civil court under the Code of Civil Procedure. If any officer fails or refuses to comply with the provisions of this section then he may be liable to pay a sum of five thousand rupees and can also be imprisoned for a term not exceeding one year.

In addition, if a director or any other employee of a company is convicted of an offence under this provision, he must resign from his position. He will also be barred from assuming such a position in any other organization for the next five years. Section 209A only deals with the inspection of documents of a company stating its accounts, which limits its scope and reach. It is pertinent to make sure that under the premise of document inspection, the officer isn’t conducting a broad investigation into the affairs of the company.

Facts Of The Case

Sudarshan Trading Company Ltd. Is a Non Banking Financial company based in Calicut present day, Kozhikode. C.V. Karuppunni is one of the several directors of the company and the petitioner no. 1 in the instant case. The respondent no. 1 is the Joint Director, Inspection, Company Law Board of the Southern India Area, Madras.

The Company Law Board initiated the investigation into the affairs of the company under section 237B of the Companies Act, 1956 on the grounds that the company is indulged in fraudulent activities. However, the Hon’ble High Court of Delhi had passed an order in Civil Writ Petitions No. 143 and 848 of 1974 directing stay on the proceedings and an undertaking was given by the counsel representing the Central Government that no further actions would be taken in the matters challenged in the above mentioned writ petitions.

Contravening the court’s order, respondent no. 1 proceeded to inspect the company’s books of accounts while the writ petitions no. 143 and 848 were pending before the Hon’ble High court and summons for inspecting the books and documents of the company were issued and served on the petitioners under section 209A on November 30th, 1981.

Thereafter, three petitions were filed in the Hon’ble court challenging the legality of the summons.

• O.P 7197 of 1981 was filed by C.V Karuppunni, the Director of the company.
• O.P 77 of 1982 was filed by V.P Balaram, the Chief Executive of the company.
• O.P 3949 of 1982 was filed by Sri. M. Velayudhan, the Managing Director of the company.

O.P 7197 of 1981 filed by C.V Karuppunni was dismissed by the Hon’ble court. Aggrieved by the court’s order, Mr. Karuppunni filed an appeal in the Hon’ble High court of Kerala.

Issues Involved In The Case

The issues involved in the case were:

1. Whether the summons issued to the petitioners for the inspection of documents of the company were legal and not in contravention with the court’s orders?
2. What is the scope of section 209A?

Contentions Of the Party in the case

The counsel representing the petitioner/appellant, Mr. K.K. Venugopal did not lay much stress on the legality of summons. Instead, his focus of attention was on the scope of section 209A that is, inspection of books of accounts and other books of the company. He contended that this particular section falls within the head “accounts” and therefore, the inspection of the documents in this section is restricted to the documents and books of accounts. Any inspecting officer in the guise of inspection cannot investigate into the private documents or records of the company as it would be similar to encroaching upon the privacy of the company.

His other contention was that the documents or books of accounts of the company or any physical attendance of any employee, officer or the director of the company can only be summoned once the inspection by the respondent no. 1 that is the Joint director of the Company Law Board or by any of his subordinates is completed and if they are not satisfied and want to carry on the inspection further then only they can summon the documents of the company. In this regard, the phrase “making inspection” in the sub section (3) of section 209A receives a lot of attention which states that it is the duty of the director, employee or any officer of the company to provide all the assistance to the person “making inspection” under section 209A.

Judgment/ Summary Of Court’s Decision

All the three petitions that is W.A No. 51 of 1982 (O.P 7197 of 1981), O.P 77 of 1982 and O.P 3949 of 1982 were disposed of by this common judgment. The Hon’ble bench was of the view that the second contention by the counsel representing the petitioners/ appeallent is erroneous. The expression “making inspection” is also present in another sub section (2) which states that it is the duty of the director, employee or any other officer of the company to produce the documents, books or any other records of the company to the person “making inspection” along with any explanation or information as and when required by such person.

The Hon’ble court observed that relying upon the contention put forward by the counsel of the petitioner, the sub section (2) of section 209A would mean that the company’s directors, officers, or employees are only required to produce books of accounts and other books and documents to the officer or registrar who are authorized in that capacity and who intend to inspect the books after the inspection is completed. That would mean that the inspection would have to be conducted without the use of books, documents or other records, which would be highly impractical and impossible.

The Hon’ble court further shed light on the scope of section 209A. In agreement with the petitioner’s counsel, the court was of the view that it is pertinent to apply the principle of ejusdem generis to determine the types of books and documents which can be inspected under this provision. The Hon’ble court was of the view that the documents and books referred to in this provision must have an impression of the books of accounts. Therefore, the inspecting officer cannot investigate into the affairs of the company in the guise of inspection. The court by restricting the scope of inspection under this section has made a distinction between inspection under section 209A and investigation provided under section 237 of the 1956 Act. The court reaffirming the counsel’s contention held that the inspecting officer can carry out the inspection at the office of the company where they are free to inspect the books of accounts and other documents of the company. However, they cannot summon these documents as it will impose a threat on the confidential information of the company. The appeal was therefore disposed of with the following directions:

1. The board shall serve a notice listing all the documents, ledgers and other records on the petitioner company at least four weeks preceding the date of inspection and the inspection will be carried out as rapidly as feasible.
2. The respondents can inspect the books, documents and other records including the ledgers and vouchers as mentioned in Item 1 of the summon dated November 30th, 1981 of the company at any of the offices of the company.
3. To inspect other documents of the company which are not mentioned in the summon dated November 30th, 1981, the board shall seek a prior approval from the company court.
4. If after the inspection of the books of accounts of the company, the respondent would require any explanation or further inspection into the affairs of the company then they can exercise their rights provided under sub section 2 and 5 of section 209A.
5. To determine the scope of section 209A, facts and circumstances of each of the cases has to be considered separately and no particular order was passed in that regard.

Analysis Of the Judgment

Sub section 5 of section 209A of the Companies Act, 1956 vests the power to issue summons or notice on the registrar or any other inspecting officer. In the new Act, that is the 2013 Act, the same power is conferred under section 206 (1). The courts have often emphasized that such power must not be abused and that there must be a compelling purpose to issue notice. Apart from this a specific reason must also be provided when any notice is issued for further inspection of documents. In the Court’s opinion, the Hon’ble judge was correct in its holding that summons to produce the documents shall only be served once the inspection is complete in the office of the company and a further more detailed inspection is required. The documents of a company contain some confidential information which, if leaked, can lead to serious consequences for the company.

Hence, it is important to handle such documents with extreme caution, and they should not be summoned by the inspecting officer until and unless they are absolutely necessary. Also, the requirement of stating the purpose for issuing a notice acts as a safeguard for the companies against the arbitrary actions of the registrar or any other inspecting officer. This will prevent the officer from misusing his powers on the pretense of inspection. However, sub section (5) of section 206 gives powers to the Central government to warrant inspection of documents without issuing any notice which gives them arbitrary powers. Such powers are against the principle of Natural Justice as they can be easily misused by any person. In my view, the powers vested in the Central Government for inspection of a company’s document must also be curtailed like that of the registrar.

Furthermore, the court did not deal with the legality of summons served under section 209A as such a contention was not made by the counsel representing the petitioner. Here it must be noted that the proceedings or investigation by the Company Law Board under section 237B was stayed by the Hon’ble court. When a court orders a stay on the proceedings then the parties or any other court cannot continue with such proceedings which involve the same matter. In layman’s terms, it means halting the further proceedings until the court resumes it. Inspection of documents of a company is also a part of the investigation of the company and since such investigation is stopped by the court’s order, the respondent cannot issue any notice or summon any document for the inspection purposes. Such action on the part of respondent is in contravention with the court’s order and therefore is ultra vires.

The Hon’ble court in determining the scope of section 209A applied the principle of ejusdem generis. It is a latin phrase which means ‘of the same kind’. According to this rule, the words, phrases or statements should be given its natural or exact meaning unless otherwise required. When general terms are followed by specific terms then specific meaning would be given to such general words.

It is important that this principle is applied in a restricted manner. The evolution of Ejusdem generis dates back to the year 1859 when it was first applied in the case of Regina v/s Edmundson where Lord Campbell stated, “Where there were general words following particular and specific words, the general words must be confined to things of the same kind as those specified.” Section 209A begins with, ‘Inspection of books of accounts of companies, etc.’, here the general term is ‘books’ which can include any of the books or documents of a company but it is followed by the term ‘accounts’ which restricts its meanings to- all of the books, documents and records of the company which shows the company’s accounts and not any other confidential documents of a company.

However, this restriction is not present in the Companies Act, 2013. Construing the provisions of the new act which talks about inspection, there is nowhere mentioned that only the documents relating to the accounts of the company shall be open to inspection. Section 207 states that a registrar or any other inspecting officer can summon ‘any books of accounts or any other books or documents under section 206’ which covers all the documents of a company.

Conclusion

The powers to inspect the documents of a company are vested in the Registrar of Companies (ROC) or any other officer appointed to carry out the inspection by the Central government. The registrar can conduct the inspection if he suspects that the company is indulging in some fraudulent activities or on the receipt of a complaint against the company. The powers of a registrar are restricted to ensure that there is no misuse of powers whereas, the powers of the central government do not have any restriction to it and they can warrant any document for inspection as and when required without stating any reasons which is completely against the principle of natural justice.

This case primarily deals with the scope of section 209A which provides for Inspection of books of accounts, etc. of companies. The reach of this section is limited and such limitation is observed in this case of Kerala high Court. The only rationale behind such limitation is to safeguard the companies from the arbitrary powers of the registrar or any other inspector authorized to carry out the inspection. The judgment pronounced by the Acting Chief Justice, K. Bhaskaran placed reliance on the words used in the provision and held that the inspection under section 209A can only be carried out on the documents involving the accounts of the company and no other documents containing any confidential information of the company will be open for inspection so that any inspecting officer cannot investigate into the affairs of the company in the guise of inspection.

However, this can also constitute a roadblock, preventing the officer from properly conducting the inspection and may allow a company implicated in fraudulent activities to flee.