Introduction
The Companies Act, 2013(“The Act”) has various provisions for investigation into the affairs of the company on satisfaction of different conditions.
s.210 provides for powers of Central Government to order an investigation into the affairs of the company upon receipt of a report of the Registrar or inspector under section 208, on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated or in the public interest if it is, in the opinion of Central Government, necessary to investigate into the affairs of the company.
If Central Government forms an opinion on similar grounds that investigation is required by the Serious Fraud Investigation office established u/s.211 of Companies Act, it can so order an investigation by SFIO u/s.212 of the Act.
S.213(b) provides with a right to aggrieved individuals or entities, on satisfaction of certain conditions, to move an application to the NCLT for direction for investigation into the affairs of the company. In last year, we have received increased number of queries on this aspect put to us by both, the companies facing such application and also by the persons aggrieved and in this article, we aim to write on the investigations u/s.213(b) of the Act therefore.
Investigation on an Application u/s.213(b) of the Act
In terms of s.213(b) of the Act, an application could be made by ‘any other person or otherwise.
If the NCLT is satisfied that there are circumstances that suggest that:-
- the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose;
- persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or
- the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company, order;
it can pass an order of investigation into the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government.
Who can file an application u/s.213(b)
Apparently, this provision is intended to provide a remedy to persons who are not members holding 1/10th of voting power or who are not 100 in number to have an investigation into the affairs of the company, if business is conducted with intent to defraud its creditors, members or other person or on existence of certain other circumstances as highlighted above. NCLAT, in the case of R.S. India Wind Energy Pvt. Ltd. V. PTC India Financial Services Ltd. holds that any other person will include any individual who is aggrieved and it includes a member who does not otherwise satisfy the conditions prescribed in s.213(a)(i) and s.213(a)(ii).
Important Judicial Pronouncement
While there are various decisions of NCLTs and NCLAT on the subject matter of s.213(b) of the Act, intend to highlight an important decisions on the subject matter.
In the case of (Capt.) Vadlamannati Jaya Pushpakumar v Madras Race Course Club, NCLAT dealt with the issue of s.213(b) application based on allegations of modus operandi of respondent company to alienate lands over which it possessed only leasehold rights, respondent company being a habitual tax evader having evaded income tax and GST of crores of rupees, Tahsildar’s claim against respondent club for unpaid lease rentals etc.
Rejecting the appeal, NCLAT laid down important guidelines for dealing with s.213(b) petition. We seek to summarize the important aspects emerging from the NCLAT decision that could be helpful in defending frivolous applications, as under:-
- The tribunal dealing with an application must do so based on available cogent material which must establish at least prima facie that circumstances suggested that business of the company was being conducted with an intent to defraud its creditors, members or any other person or other eventualities postulated in s.213(b)(i) to s.213(b)(iii).
In other words, there must be a nexus between material presented to the tribunal and making out of the circumstances as postulated in s.213(b)(i) to s.213(b)(iii).
- If the claim of petitioner of being a creditor of the company or related to company in some other capacity, the same is required to be given with due consideration in deciding maintainability of s.213 petition at the instance of petitioner.
- Petitioner could not base its petition on the matters to which he is alien e.g. outstanding income tax or GST dues.
- If the petitioner / application seeking such relief suffers from delay and laches, the same is not maintainable and although a plea of ‘Limitation’ may not be specifically raised before a tribunal, plea of ‘delay and laches’ will squarely apply and delay/ laches will begin from ‘date of knowledge’ of petitioner.
- Power of the NCLT for order u/s.213(b) has to be exercised with utmost care, caution and circumspection, based on sound application of judicial mind and discretion.
- NCLT cannot exercise its power under companies act on mere asking of the alien/ stranger, simply on the basis of allegations made by a ‘Non-shareholder’
- If allegations also give a ground for availing any other remedies under Companies Act, 2013, whether the same is availed by the petitioner or not will be a relevant factor in deciding a petition u/s.213(b) of the Act.
Another important decision on the subject is that of NCLAT in the case of R.S. India Wind Energy Pvt. Ltd. V. PTC India Financial Services Ltd.
OUR VIEWS
S.213(b) power will be exercised with care and caution by NCLTs. This section, unlike s.213(a) gives remedy to any other persons (who are not members or not the members satisfying the tests u/s.213(a) of the Act) to move an application for directions for investigation when the business of the company is being carried out with intent to defraud creditors, members or other persons. However, s.213(b) provides a higher threshold for initiation of investigation at the instance of ‘any other person’ and material placed by petitioner on record must at the least, prima facie, establish circumstances prescribed in s.213(b)(i) to s.213(b)(iii) as against s.213(a) where applicant ‘member/s’ may place material only showing that the applicants have good reasons for seeking an order for conduct of investigation.
In practice, we have seen applications with allegations that a company failed to convene AGMs, or that a company claimed that AGM was conducted on a given date but the forms filed with ROC did not indicate convention of an AGM on such date which amounted to false certification, alleged non-maintenance of statutory records, illegal appointment of directors, alleged irregularities in increase in capital of the company, appointment of directors, transfer of share capital, outstanding dues/ demands of income tax/ GST etc.
In terms of the position of law however, petition on ground of outstanding dues to tax authorities or similar matters will not be entertained as petitioner will be a stranger to such matters. Although a petition may be maintainable on count of contravention of provisions of Companies Act, 2013, contravention must have nexus to establish circumstances as enshrined u/s.213(b)(i) to s.213(b)(iii), without which mere allegations or even the material indicating not holding AGMs, not following process for increase in capital etc. will not help ‘any other person’ to obtain an order of investigation under this section.