The Central Government has been empowered to conduct investigation into the affairs of the company in the following circumstances:
- On the Report of Registrar
Section 235(1) of the Companies Act, 1956 empowers the Central Government to order investigation into the affairs of the company on the report of the Registrar. Accordingly, the Central Government may, where a report has been made by the Registrar under Section 234(6) and (7), appoint one or more Inspectors to investigate the affairs of the company and to report thereon in such manner, as the Central Government may direct.
As per Section 234(6), the Registrar shall report in writing, the circumstances of the case, to the Central Government in the following cases:
- where the information or explanation required by the registrar has not been furnished to him within the specified time.
- where, after perusal of such information or explanation or of the books and papers produced before him, the Registrar is of the opinion that the state of affairs of the company is unsatisfactory.
- where, after perusal of such information or explanation or of the books and papers produced before him, the Registrar is of the opinion that the required documents do not disclose a full and fair statement of any matter.
- On the application of Members
Under Section 235(2) of the Companies Act, 1956, the Company Law Board may, on the application from a specified number of shareholders and after giving the parties an opportunity of being heard, declare that the affairs of the company ought to be investigated by an inspector or inspectors and on such declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of company and to report thereon in such manner as the Central Government may direct. The shareholders competent to make an application to the Company Law Board are:
- in case of company having a share capital, not less than two hundred members or members holding not less than one-tenth of the total voting power therein, and
- in case of company having no share capital, not less than one-fifth of the persons on the company’s register of members.
In terms of Section 236 of the Companies Act, 1956 the aforesaid application by members of a company must be supported by such evidence as may be required by Company Law Board for the purpose of showing that applicants have good reasons for requiring the investigation and the Central Government may before appointing an Inspector, require the applicants to give security, for such amount not exceeding one thousand rupees, as it may think fit, for meeting the expenses of the investigation.
- On the passing of special resolution or Order of the Court
According to Section 237(a)(i) and (ii) of the Act, if the company, by special resolution, or the Court by order, declares that the affairs of the company ought to be investigated by an Inspector appointed by the Central Government, then it is obligatory for the Central Government to appoint one or more competent persons as Inspectors to investigate the affairs of company and to report thereon in such manner as the Central Government may direct.
It may be noted that the type of the general meeting in which the resolution is passed and the number of persons (members as well as proxies) present at such meeting (as compared to the total number of members of the company) are immaterial so long as the meeting is validly called and constituted, and the resolution is passed in accordance with the provisions of the Companies Act, 1956.
The order of the court in respect of investigation of the affairs of the company may be passed in any proceeding in which the Court is seized of the company’s affairs or in independent proceedings for investigation of the company’s affairs. The Court has no power to appoint an inspector; it can only make an order directing the Central Government to do so. The power of the Court in this regard is not subject to the conditions stipulated in Section 235 or Section 237(b) of the Act. “The Legislature in its wisdom has not thought fit to circumscribe the discretion or jurisdiction of the Court in any manner”. [In Re. Alembic Glass Industries Ltd., (1972) 42 Comp. Cas. 63 (Guj.)]. See also in Re. Delhi Flour Mills Co. Ltd., (1975) 45 Comp. Cas. 33 (Del.).
It had been contended in several cases that the power and discretion of the Court were uncontrolled and the Court could direct an investigation whenever it suspected that all was not well with the company, and it was not necessary for the petitioner to prove his allegations before the Court for, he could prove them before the Inspectors. For instance, in Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P) Ltd., (1983) 53 Comp. Cas. 493 (Ker.), the contention was on the above lines. While dismissing the contention, the Kerala High Court observed:
“No doubt, clause (a)(ii) of Section 237 does not lay down what circumstances are to be proved before the Court and on what materials, the Court could act. But that does not mean that mere allegations are sufficient. A Court can act only on the materials placed before it, and those materials should at least be such as to satisfy the Court that a deeper probe into the Company’s affairs is desirable in the interest of the company itself.” [See also P. Sreenivasan v. Yoosuf Sagar Abdulla & Sons (P) Ltd., (1983) 53 Comp. Cas. 485].
In proceedings under Section 237(a)(ii), the Court will look into only those allegations which have a bearing on the fiduciary obligation of the majority to abide by law. The Court has also to satisfy itself that the petitioner has come to Court bona fide. An isolated instance of mismanagement already remedied may not justify the passing of an order under Section 237(a)(ii).Kusumasursi v. Mathru Bhumi Printing & Publishing Co. Ltd., 1982 Tax. L.R. 2431 (at p. 2434); (1983) Comp. Cas. 370 (Ker.).
The jurisdiction of the Court is only confined to passing of the order to declare that affairs of company require an investigation. Thereafter, it is for the Central Government to do the rest, namely to appoint Inspector and to take up the matter in its hand after receiving the investigation report and do such other things as are necessary and expedient in public interest.
