Investigations VI Semester CLCG

8/6/2019 Investigations VI Semester CLCG

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Investigations

Investigation into affairs of a company

means an investigation of all it business

affairs- profits and losses, assets,including goodwill, contracts and

transactions, investments and other

property interest, its management and also

the affairs of its subsidiaries.


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The need for investigation may arise due tovarious reasons, the most important ofthese being the protection of investors i.e.,

shareholders and creditors.In most cases, the persons who are in real

control of the affairs of a company manage

its affairs in such a way that theshareholders are rendered almostineffective.


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Why have the shareholders

receded to the background?1. The shareholders are normally investors

and are only interested in dividends they

get.2. They are widely spread over and are not

in a position to organise themselves. This

may be either because they are too many

and their holdings are small or they are

indifferent to voting and controlling.


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3. They are ill-equipped to challenge thewisdom and experience of the personswho really control the affairs of the

company, i.e., its directors and officers.4. Being unorganised, they normally do not

have the means or ability to act against

the management. Moreover it is difficult forthem to find out the facts leading to thepoor financial condition of a company.


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Types of Investigations

Secs. 235 to 246 deal with the subject of

investigation of the affairs of a company

by the Central Government which maycarry out the following types of

investigation, viz.,

1. Investigation of the companys affairs

(Sec. 235 to 246).


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1. Investigation of a Companys

Affairs (Secs. 235

to 246)a. Investigation on Registrars report/ members

application (Secs. 235 and 236).

Investigation on Registrars report (Sec.235(1)).

The Central Government may, where a report

has been made by the Registrar under Sec.

234, appoint one or more competent persons

as inspectors to investigate and report to CG.


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Investigation on members application (Sec.235 (2)). An aplication for investigating theaffairs of the company may be made to the

Company Law Board.Power of CG discretionary.

It is not obligatory for the CG to direct an

investigation. It has a discretion to appointor not to appoint inspectors forinvestigating the affairs of a company.


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Application by members to be supported by

evidence (Sec.236)

An application by the members of acompany for investigation shall be

supported by such evidence as the

Company Law Board may require for the

purpose of showing that applicants havegood reason for requiring the investigation.


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Under Sec. 234, the Registrar has power to

call for information or explanation in

relation to any documents submitted to

him within such a time as he may specify.

If the required information or explanation is

not furnished within the specified time or it

disclosed an unsatisfactory state of affairs,the Registrar shall report in writing to CG

for action.


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b) Investigation in other cases (Sec. 237)

Sec. 237 requires the CG to appoint one or

more competent persons as inspectors toinvestigate the affairs of a company and to

report thereon in such a manner as the

CG may direct without prejudice to its

powers under Sec. 235.


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i) Investigation obligatory for the CG(Sec.237(a))

ii) Investigation discretionary for the CG(Sec.237)

a) Fraud, oppression or illegality, i.e., thatbusiness of the company being

conducted with intent to defraud itscreditors or members or any otherpersons.


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b) Fraud, misfeasance or misconduct, I,e.,

that persons concerned in the formation of

the company or the management of its

affairs have in connection therewith been

guilty of (a) fraud, or (b) misfeasance, or

(c) other misconduct towards the company

or towards any of its memebers.


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iii) Inadequate information, i,e., that the

members of the company have not been

given all the information with respect to

affairs which they might reasonably expect

including calculation of commission

payable to (a) a MD or other Directors, or

(b) the manager of the company.


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II. Investigation of Ownership of,

and Interest in a CompanyInvestigation of Ownership (Sec.247)

Sometimes, the identity of the beneficial

owners of the shares of a company maybe concealed by vesting shares in trustees

or nominees who are registered in the

companys register of members. Same

may happen in case of debenture also.


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The real beneficial owners of the shares or

debentures may be few in number, and

one of them, or a group of them acting

together, may, by giving directions to their

trustees or nominees, be able to control

the voting at members or debenture

holders meetings.


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Some of the beneficial owners may have

interest inimical to the company, and may

direct their trustees or nominees to vote in

a way which will harm the interests of the

company. Some may be using the device

of a trust in order to buy the companys

shares in the market in small amountswithout attracting attention and without

causing sellers to ask for a higher price.


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Appointment of Inspectors

When it appears to the CG that there is a

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.

In particular, it may do so for the purpose

of determining the true persons-


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a) Who are or have been financially

interested in the success o failure,

whether real or apparent, of the

company; or

b) Who are or have been able to control or

materially influence the policy of the

company.


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Information regarding persons

having an interest in co. (Sec.248)

In certain cases, it may appear to the CG or

to the CLB in any proceedings before it

that there is a good reason to investigate

the ownership of any shares in or

debentures of a company, or of a body

corporate which had acted as the

managing agent (now abolished) orsecretaries and treasures (now abolished)

of a company.


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When is a person deemed to have aninterest in a share or debenture-

(a) If he has any right to acquire or disposeof the share or debenture or any interesttherein or to vote in respect thereof;

(b) If his consent is necessary for the

exercise of any of the rights of otherpersons interested therein; or


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(c) If other persons interested therein can be

required, or are accustomed, to exercise

their rights in accordance with his

directions or instructions.

Penalty. Any person-

(a) Who fails to give any information

required of him, or


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(b) Who, in giving any such information,makes any statement which he knows tobe false in a material particular, or

recklessly makes any statement which isfalse in a material particular.

Shall be punishable with imprisonment for aterm which may to 6 months, or with a finewhich may extend to Rs. 5,000, or withboth.


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Investigation of Share and

Debenture Dealings (Sec. 250)

A reference made by the CG to the CLB inconnection with any investigation underSec. 247, 248 or 249 o find out relevant

facts about any shares.Restrictions. So long as any shares are

directed to be sbject to restrictionsimposed-

(a) Any transfer of these shares shall bevoid.


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(b) Where these shares are to be issued, theyshall not be issued; and any issue thereof or anytransfer of the right to be issued therewith shall

be void.(c) No voting right shall be exercisable in respect

of these shares.

(d) No further shares shall be issued in right of

these shares ; and any issue of such shares orany transfer of the right to be issued therewithshall be void.


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(d) Except in a liquidation, no payment shall be

made of any sums due from the company on

those shares, whether in respect of dividend,

capital or otherwise.Where shares in any company are issued in

contravention of any of the above restrictions,

the company, and every officer of the company

who is in default, shall be punishable with finewhich may extend to Rs. 5,000.


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Change in the composition of Board ofDirectors As a result of any transfer ofshares of a company a change may take

place in the composition of the BOD andsuch a change may be prejudicial to tepublic interest.

In such a case, the CLB may restrain suchchange from taking place from threeyears.


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Restriction on transfer of shares where the

CLB has reasonable ground to believe that

a transfer of shares in a company is likely

to take place and it is of the opinion that

any such change would be prejudicial to

the public interest, it may by order direct

that any transfer of shares in the companyduring the specified period (not exceeding

3 years) shall be void.


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Variance of rescission order- the CLB may,by order at any time, vary or rescind anyorder made by it. The order made by the

CLB shall be served on the companywithin 14 days of the making of the order.

Consent of CG required A prosecutionunder Sec. 250 shall not be institutedexcept by, or with the consent of, theCentral Government.


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Sec. 250 applies in relation to debentures as

it applies in elation to shares.

Voluntary winding up of company, etc., notto stop investigation proceedings (Sec.

250-A) any investigation proceedings

has started and te company has applied

for voluntary winding even theninvestigation will not stop.


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Saving for legal advisers and bankers (Sec.251) A legal advisor need not disclose tothe CLB or to the CG or to the Registrar or

to any Inspector appointed by the CG, aprivileged communication made to himexcept as respects the name and addressof his client. Again a banker of the

company need not disclose anyinformation as to the affairs of hiscustomers other than the company.


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Non-disclosure of information in certain

cases (Sec. 635-AA) Notwithstanding

any thing contained in any other law for

the time being in force, the Registrar, any

Officer of the CG or any other person shall

not be compelled to disclose to any Court,

Tribunal or other authority whence he gotany information which


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(a) Has led the CG to direct a special audit

under Sec.233-A or to order an

investigation under Secs. 235, 237, 247,

248 or 249; or

(b) Is or has been material or relevant in

connection with such special audit or

investigation.

Documents

Investigations VI Semester CLCG