The Companies Act and amendments1 thereafter have enormously increased the functions of the Central Government in relation to companies. The object of the Act and the Amendment is to give to the Government powers of control which will prevent malpractices, protect the interests of the investing public and ensure social justice; The company law has been placed under the control of the Company Law Board. The Board consists of members appointed by the Central Government up to nine. In almost all the countries a registrar appointed by the Central Government to investigate the company affairs. The registrar work under the regional directors. Registrar issues all important documents like memo, mortgages, certificate of incorporation, and certificate of the commencement of business. The registrar can under certain circumstances enquire and investigate into affair of a company.
INVESTIGATION OF THE AFFAIRS OF A COMPANY
There are six different types of enquiries and investigations into the affairs of a company provided for by the companies’ act 1. There are briefly enumerated below
- SPECIAL AUDIT: Under certain circumstances the central Government can direct a special audit of a company’s account of any period. The central Government may also direct the audit of cost accounts2.
- THE REGISTRAR’s POWER OF ENQUIRY 3 : If on perusing a document which a company is bound to submit to him under the Act, the Registrar is of opinion the further information or explanation is necessary he may , by an order in writing, call upon the company to submit the same within a fixed date. If the company fails to submit the explanation or information by the due date, the company and every official concerned may be fined. The court can, on the application of the Registrar, direct the company to give inspection of any required document to the Registrar.
If the information or explanation is not given, or if upon perusal of the information and explanation given, the Registrar is of opinion that the document in question discloses an unsatisfactory state of things or that it does not disclose a full and fair statement concerning the matter, the Registrar shall make a report of the matter to the Central Government.
INVESTIGATION BY INSPECTORS 4 :The Central Government may appoint one or more competent persons as inspectors to investigate the affairs of any company and report thereon, under any of the following circumstances:
- On the application of a certain number of members of the company- If the company is one having a share capital, the numbers applying must be at least 200 or members holding not less than one-tenth of the total voting power. If the company does not have a share capital, the number of members applying must be not less than one-fifth of total number of members. The application must be supported by evidence and the government may require the applicants to give securities for costs5.
- On the report of the Registrar: If the answer to an enquiry by the registrar is considered to be unsatisfactory, he is report to the Central Government. On his report the Central Government May Appoint inspectors.
- If the company passes a special resolution for such investigation.
- If the court declares that, the affairs of the company should be so investigation.
- If the Central Government is of opinion that (a) the company is being conducted fraudulently or unlawfully or in a manner oppressive to any of its members or that the company was formed for a fraudulent or unlawful purpose (b) the persons concerned in the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or misconduct and (3)the members of the company have not been given all the information with respect to its affairs which they might reasonably expect.
- INVESTIGATION BY OWERSHIP6: Where its appears to the Central Government that there is good reason so to do, it may appoint one or more inspectors to investigate and report on the membership of any company and other matters relating to the company, 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 materially to influence the policy of the company.
- INFORMATION ABOUT PERSONS HAVING INTEREST IN A COMPANY 7 : Where it appears to the central government that there is good reason to investigate the ownership of any shares in or debentures of a company or of a body corporate acting as its managing agents or secretaries and treasurers. It may appoint inspectors for the purpose or may call for the information from persons who are interested in the shares and debentures.
- INVESTIGATION OF ASSOCATESHIP8: Where any question arises as to whether any person, firm or body corporate is or is not, or was or was not, an associate of the managing agents or secretaries and treasurers, the Central Government may appoint inspectors for the purpose or call for the relevant information from any person who is in a position to give information on the point.
POWERS AND DUTIES OF THE INSPECTORS 9
- The inspectors appointed by the Government must enquire into the affairs of the company concerned.
- The officers of the company and the directors etc. Must preserve and produce before them all books and documents required.
- They must also give evidence on oath and answer questions put to them, by the inspectors. The inspectors may examine the affairs any other person’s oath, if so authorized by the Central Government.
- If it is considered necessary, the inspectors may also examine the affairs of the holding company of the company concerned, any of its subsidiaries, its managing agents, secretaries and treasurers and their associates and related companies.
- The inspectors can seize documents and keep them in their custody for six months.
GOVERNMENT ACTION ON THE REPORT
After considering the report, the Government may take the following steps:
- Copies of the report may be sent to all interested parties and published.
- Officials of the company and directors, managing agents etc. Who are found to be guilty of any offence, must be prosecuted.
- If it is found that the company is entitled to proceed against any person for damages, recovery of property, or misfeasance, the Central Government can institute proceeding for the purpose.
- If the investigation discloses the existence of circumstances which would I cad court to direct winding up of the company on the ground that it is just and equitable to do so, the Central Government can cause the presentation of a petition for winding up of the company.
- The Central Government may cause an application to be filed before the court for exercise of the discretionary powers which have been to the court in cases of mismanagement and oppression10.
- The expenses of the investigation may be recovered from the persons guilty of mismanagement or misconduct.
POWERS OF THE COURT:
Company Acts11 provides that in cases of oppression, the court may give relief if it is of opinion:
- that the company’s affairs are being conducted in a manner prejudicial to the public interest or in manner oppressive to any member or members; and
- that to wind up the company would unfairly prejudice such member of numbers. But that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up.
In cases of mismanagement, the court may give relief if is of opinion12:
- that the affairs to the Company are being conducted on a manner prejudicial to the public interest or the interest of the Company; or
- that a material change provides has taken place in the management and control of the Company and that by reason of such change, the affairs of the company are likely to be conducted in a manner prejudicial to the public interest or the interests of the company.
CONSEQUENCES OF AN ORDER 13:
If the order of the court makes an alteration of or addition to the company’s memorandum or articles, then the company concerned shall not make any further alteration or addition which is inconsistent with the order, without the leave of court.
A certified copy any such order altering or adding to or giving leave to alter or add to, the memorandum or articles, must compliance with this requirement renders the company and every officer in default liable to a fine which may extend to five thousand money.
1.POWERS OF THE COMPANY LAW BOARD: The company law Board in empowered to end oppression of minority and to prevent mismanagement. It has the power
- to regulate the conduct of company’s affairs in future,
- to purchase the shares and interest of any members of the company.
- to reduce consequently the share capital of the company, If the company purchase shares,
- to terminate, set aside or modify any agreement between the company and management upon such terms and condition which company thinks to be just and equitable,
- to set aside any fraudulent preference made within three months before the date of application,
- to provide far any other matter which Company Law Board thinks to be just and equitable,
- the Company Law Board may order that no change will be made in the Board of Directors or membership or the company without securing its prior approval.
2. POWER OF THE CENTRAL GOVERNMENT :
A. POWER TO REMOVE MANAGERIAL PERSONNEL: 14Here the power of the Central Government to make a reference to the high court when it is of opinion that there are circumstances suggesting the following;
- any person connected with the management of a company is guilty of fraud, misfeasance ,persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust;
- the business of the company is not or has not been managed by such person in accordance with sound business principles or prudent commercial practices; or,
- the management of the company by such person caused or is likely to cause serious injury or damage to the interest of the trade, industry or business to which such company pertains; or,
- the business of the company has been conducted by a person with intend to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest.
The person against whom the case is referred will be joined as a respondent. The high court may pass interim orders, such as, stopping the respondent from carrying on his duties and appointing a suitable person in his place.
B. POWER TO PREVENT OPPRESSION OR MISMANGEMENT15:
If an application is made by not less than 100 members of a company or members holding not less than 1/10th of the voting power, complaining of oppression and mismanagement and the Central Government is satisfied that the allegations are true it can appoint such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest. Such directors are to hold office of the company for a specified period, not exceeding 3 years. The Central Government can issue such orders of its own motion. Where any person is appointed by the Central Government to hold office at director or additional directors of a company in pursuance of the above rule, the Central Government may issue such direction to the company as it may consider necessary or appropriate in regard to its affairs.
C. POWER TO PREVENT CHANGE IN BOARD OF DIRECTION16: If any director or manager complains to the Central Government that as a result of a change in the ownership of the shares of the company, the Board of directors of the company is likely to change in a manner prejudicial to the company and the Central Government is satisfied that the allegation is true, it can direct that no change in the board shall have effect until confirmed by the Central Government.
D17 .The Central Government has been given power to frame rules regarding investment and dividends of companies. Company Acts provide restrictions upon shares designed to prevent taking control of companies by groups or combine which will be prejudicial to public interest.
The Central Government may, by order, require companies to furnish information and statistics regarding their constitution and working- The miscellaneous provisions of the Government;
Annual Report By Government: The Central Government is required to prepare an annual report regarding company law administration and submit it before the parliament.
Protection: No suit, prosecution or other legal proceeding shall lie against officers of Government for anything which is in go faith done or intended to be done in pursuance of the Act.
Condo nation of delay: If any application to the Central Government or the filing of any document with the Registrar is not made within the time prescribed by the Act, the delay may be condoned by the Government for the reasons to be recorded in writing.
- Commercial Law [Company Law] and Industrial Law [Business Law]-2008, Edited and revised by- [26th Edition]
- Prof. Sakti Mukherjee
- Arun Kumar Sen
- Jetendra Kumar Mitra
Chapter—Control over Companies (page 745 to 760)