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Under Chapter XIV of the Companies act, 2013, any company registered under the act is subject to inspection, inquiry and investigation. Sub section (1) of section 206 confers power on the registrar to issue notice to summon documents or to seek additional explanation, if required. Sub section (2) provides an opportunity to the company to furnish the required information, and only if the registrar believes that the documents or clarifications are insufficient, or if the conduct of the company is unacceptable, can the registrar issue a written notice. To ensure that the registrar does not misuses his rights, it is mandatory that the ROC records his reasons for furnishing additional information. However, this condition is not required if the Central Government directs an inspection into the affairs of the company. Upon non- compliance of such orders, the director or any other member of the company will be punished under sub section (7) of section 206.
Furthermore, section 207 talks about the conduct of inspection and inquiry. Sub section (1) of section 207 states that employees as well as other members of the company must comply with the orders of the Registrar of Companies and the Central Government and furnish all the information and explanation as required by them. It also confers the power on the registrar as well as on the inspector to make copies of any relevant document or to mark any document for identification purposes. The statute vests the powers of the Civil court in the registrar as well as in the inspector who are carrying out an inspection or an inquiry. Sub section (4)(i) provides the punishment for disobeying the orders of the Registrar of companies or the Central Government. Furthermore, if any person is convicted under section 207, then he has to vacate his office on the date of his conviction and he is disqualified from holding any position in any office.
Facts of the Case
M/s Hyderabad Pollution Control Ltd. is a company established in the year 1978 and is engaged in the business of manufacturing industrial fans and allied items. Petitioner no. 2 is the Managing Director of the company. The suit is instituted against his brother who is respondent no. 4 and his brother- in- law. Petitioner no. 2 holds 42 per cent shares in the company whereas his younger brother is respondent no. 4 holds 28 per cent shares. The remaining 30 per cent shares are held by their brother -in-law.
On February 27, 2007; their brother-in-law sold his 30 per cent shares to petitioner no.2 (16 per cent) and respondent no. 4 (14 per cent) and thereafter retired from his position as a director. After the transfer of shares, the petitioner no. 2 became the owner of 58 per cent shares whereas respondent no. 4 became the owner of 42 per cent shares in the company.
Thereafter, it is alleged by the petitioner no. 2 that the respondent no. 4 conspired with their brother-in-law and stole the share transfer deed and several other relevant documents of the company and later on expressed his intention to become a 50 per cent stakeholder in the company by stating that all the documents of share transfer are in his custody. As a result, the petitioner no. 2 unwillingly, by signing the documents on April 8, 2010 made respondent no. 4 an equal stake holder.
The petitioner no. 2 later realized new share certificates and share transfer agreements were created illegally by the respondent no. 4 with the help of their brother- in- law. The share transfer agreement states that the shares transferred on February 27, 2007 were newly created share certificates when the actual transfer occurred on February 27, 2007 and therefore, the transfer on April 8, 2010 is fake and void as per law. Later when the petitioner no. 2 obtained the share certificates from respondent no. 4’s custody and questioned him, then in fear of legal consequences respondent no. 4 agreed to be bound by the transactions which occurred on February 27, 2007. Thereafter, petitioner no. 2 took away the powers of respondent no. 4 to deal with the company’s affairs. After the powers of respondent no. 4 were withdrawn, he absconded from the company and as he was absent from three board meetings, his name was removed from the Board of Directors in compliance with the provisions of the Companies act, 2013.
Hence, respondent no. 4 filed a petition being CP No. 40 of 2011 before the Company Law Board, Chennai which was disposed of. The petitioners filed an appeal against the order (AT) No. 20 of 2017 before the NCLAT. Another petition was filed by the petitioners OS No. 896 of 2015 for cancellation of share certificates. The respondent no. 4 also made several complaints regarding the affairs of the company before the respondent no. 3 i.e., the Registrar of Companies and therefore, proceedings were initiated against the petitioner company under section 206(5) of the Companies act, 2013.
Issues involved in the case
The following issues are raised in the present case:
- Whether the inspection proceedings under section 206(5) were in violation with the law?
- If a company suit is filed before the National Company Law Tribunal and simultaneously the inspection proceedings have been initiated by the Registrar or Central government under section 206 and 207, then whether it would amount to parallel proceedings?
Contentions of the Parties
Sri K. Rajendran, the learned counsel appearing on behalf of the petitioners contended that the inspection of books and documents of a company can be initiated if the Registrar or the Central Government are of the opinion that the complaints received by them have some credibility. He further contended that no reason has been recorded to order inspection of the documents of a company or any further inspection in the proceedings. For his submission, the counsel also placed reliance on the Hon’ble Supreme Courts judgments in the case of Moolchand Gupta v/s Jagannath Gupta, AIR 1979 SC 1038; Rohtas Industries v/s S.D. Agarwal, 1969 AIR 707; and Barium Chemicals Ltd. v/s Company Law Board, 1967 AIR 295. Another contention was raised by the learned counsel that as the proceedings of the suit were already pending before the National Company Law Tribunal, parallel proceedings should not have been commenced by the Registrar and the Central Government under section 207 of the Companies Act, 2013.
Sri. N. Rajeswara Rao, learned Assistant Solicitor General of India appearing for the official respondents, that is the Union of India; contended that the subject matter of the suit pending before the National Company Law Tribunal is completely different from the proceedings initiated under section 207 of the act. Furthermore, the Central government has the power to conduct an inquiry or inspection if they believe that the complaint received by them has some credibility. In this present case, the allegations made by the respondent no. 4 included acts of oppression and mismanagement in the company’s affairs which were detrimental to the interests of the stakeholders and therefore, the respondent -authorities initiated the proceedings under section 206 to safeguard the interest of the stakeholders.
Sri B. Chandrasen Reddy, learned counsel appearing on behalf of the petitioners contended the inspection was initiated in order to safeguard the interest of the stakeholders and to reveal the fraudulent acts of the petitioner no. 2 and his sons.
Summary of the Judgement
In the instant case, the Hon’ble court shed light on the powers of the registrar and the Central government granted to them under section 206 of the Companies Act, 2013. The registrar is vested with the powers of a civil court and has the authority to inspect the documents of the company as well as make copies of the relevant documents. According to the 2013 act, the shareholders have the power to seek inspection, inquiry or investigation into the affairs of the company to ensure that the company is not involved in any fraudulent activity. Now, taking into account the contentions of both the parties, the Hon’ble court observed that the notice issued by the Central Government under section 206(5) of the Companies Act, 2013 is to direct inspection of certain documents of the company.
Furthermore, the documents were summoned by the registrar under section 207(3)(b) for the very same reason. The respondent – authorities received a number of complaints from the respondent no. 4 alleging that the company is involved in fraudulent activities as well as in acts of oppression and mismanagement and therefore the authorities directed inspection of books and documents of the company by exercising their rights under section 206 of the act. The Hon’ble court was of the view that when the allegations made are serious in nature and considering that they are made by a shareholder holding 50 per cent shares of the company in the present case, mere absence of reasons for satisfaction in the order is not essential and the impugned order cannot be rejected only on that basis. The proceedings of inspection under section 206 and 207 can also be commenced without any court’s order and therefore, it was held that the registrar as well as the central government by ordering the inspection proceedings have not acted in violation of the law.
Addressing the second issue, The Hon’ble Court observed that despite the fact that the proceedings that are challenged in both the writ petitions are based on the same set of claims made by respondent no. 4 and included in the pleadings in CP no. 40 of 2011, the scope of inspection in both the cases is distinct. The proceedings of inspection which are challenged by the petitioners are not susceptible to any statutory bar or even to the ground of violation of the principle of Natural Justice. The fact that there are proceedings which are pending before the National Company Law Tribunal, would not preclude the institution of new proceedings if they are initiated for good and valid reasons.
Moreover, because respondent no. 6 and 7 were incorporated companies by the petitioner and an inspection into the company was ordered against them. As a result, the nature of the proceedings in the suit filed before National Company Law Tribunal and the registrar are different and as the scope of the proceedings is different, it does not constitute parallel proceedings.
Analysis of the Judgement
Examining sub section (3) of section 206 of the Companies act, 2013 which gives the registrar the authority to issue notice for inspection, it is clear that the registrar is required to give reasonable grounds for issuing such notices. However, under sub section (5), which vests power to the central government to issue notice, there is no requirement to record any reasons. The Central government has broad powers under section 206 (5) to order inspection into the affairs of the company without stating any reasons. This provision, in the Court’s opinion, goes absolutely against the principle of Natural Justice which states that there must be fairness, reasonableness and equality so that justice can prevail.
In this provision, sweeping powers have been given to the Central government limiting the scope of judicial intervention. The concepts of Natural Justice which were present in the previous four sub sections of section 206 are purportedly wiped away in this sub section. In the instant case, the respondent no.1 ordered the inspection of the company’s books and other documents, despite the fact that the registrar had already conducted the inspection at the office. Further scrutiny into the affairs of the company can be a source of concern for the firm because it impacts the company’s day- to- day operations.
This provision also breaches article 14, 19 and 21 of the Indian Constitution, as the Central Government has been given wider and unrestrained powers, which infringes the basic fundamental rights of the people. In the case of Kishan Prakash Sharma v/s Union of India (2001) 5 SCC 212; it was held by the apex court that the legislature must define the scope of power delegated by them by establishing certain standards and guidelines for those who are given such powers. Therefore, the delegation of power is valid only when the legislative policy and the criteria to implement them are framed by the legislator and the delegate is authorized to carry out the policy within those limitations only. However, this sub section is in violation of the rule set forth above, as it grants undue powers to the central government to carry out the proceedings of inspection.
Apart from this, as the inspection proceedings were not ordered by the National Company Law Tribunal while adjudicating upon the matter dealing in the similar set of claims, it does not bar the Central Government or the Registrar of Companies from carrying out inspection proceedings upon receipt of a complaint. The proceedings can also be initiated by the respondent authorities independently if they find some credibility in the complaints by exercising their powers under section 206 of the Companies Act, 2013.
Furthermore, the author believes that the Hon’ble court was correct in holding that the inspection carried out by the inspecting officer in the present case is not in violation with the suit filed before the National Company Law Tribunal. The subject matter of the suit must be the same in parallel proceedings. The scope of the suit brought before the National Company Law Tribunal is different from the scope of inspection proceedings.
Under the new companies act, the Central Government is vested with wide powers to order an inspection or inquiry if they have the reason to believe that the complaint made before them has some credibility. Unlike the Registrar of Companies (ROC), the Central Government need not record any reasons to issue notice for such inspection. Furthermore, as the powers of the Central Government is wider than that of a registrar, the inspection carried out under section 206 (5) would supersede the inspection carried out under section 206 (3).
In the present case, the Central Government provided no justification for conducting an inspection of the company’s documents, which was challenged by the petitioners. However, the Hon’ble High Court of Telangana held that the powers of the Central Government’s are broad and unconstrained and that the complaints made by the respondent were severe in nature. It must also be highlighted that such complaints were made by a person who is a 50 per cent stakeholder in the petitioner- company, therefore non- recording of reasons for carrying out inspection would not merely violate the notice or make it ultra vires.
The judgment also highlights the importance of the company’s shareholders and how their rights are infringed by the officers of the company simply because they are unaware of their rights. However, the 2013 Act gives shareholders the power to order an inspection into the affairs of the company, which is exercised by the respondent no. 4 in this case.