VALIDITY OF INVESTIGATION ORDER UNDER SECTION 210 OF THE COMPANIES ACT, 2013

Investigation of a company

Section 210 of the Companies Act, 2013 provides for the inspection of a company by the Authorities.  The section provides that where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company, —

1.  on the receipt of a report of the Registrar or inspector under section 208;
2. on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
3. in public interest, it may order an investigation into the affairs of the company.

 Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the Central Government shall order an investigation into the affairs of that company.

The Central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct.

It is required to conduct an investigation against a company the three essential ingredients as stated above.  Otherwise, investigation cannot be order.  This has been confirmed in the following case law-

Case law

In Ayushman Tie Up Pvt. Ltd. & Ors. Versus Union of India & Anr. - 2026 (3) TMI 1087 - CALCUTTA HIGH COURT, a notice to the petitioners under section 206 (5) of the Act was issued on the basis of a private complaint with directions to supply the required information and certain documents.  The petitioners duly complied with the said instructions and submitted all the required information and documents.  The petitioners also co-operated with the officials during inspection.

The inspection was closed and reports were also prepared.  After some time, some of the petitioners received summons from the Chief Judicial Magistrate at Alipore.  Then the petitioners came to know that the inspection report has been filed by the authorities.  In the report some minor violations of the Auditor under Section 143 read with Section 147(2) of the Companies Act, 2013, has been alleged by the respondent authorities.

The Registrar of Companies, based on the report, filed a petition for winding up of the company before the National Company Law Tribunal (‘NCLT’ for short).  The respondent authorities have accepted the report under Section 208 of the Act by the Registrar of Companies and recorded their findings that all the allegations which were made against the Company were found to be wrong and that the petitioner companies are not involved in any such business.

The petitioners filed the present writ petition challenging the notice issued by the Department for the conduct of investigation under Section 210 of the Act.  The petitioners submitted the following before the High Court-

•  There is no recommendation for any investigation under Section 210 of the Act in the report submitted under Section 208 of the Act.
• The Registrar of Companies ignoring the report filed under Section 208, only to harass the petitioners at the behest of some unknown person and some disgruntled family members without following the due process of law and ignoring the law laid down in the statute have passed an order for investigation under Section 210 of the Act, which is not permissible under law.
• None of the three requirements under Section 210 of the Act exists in this case.
• Though the respondent authorities have prepared positive report and accepted and acting on the same but now ignoring their own report in a clandestine and mechanical way proceeding for further investigation which the law does not permit.

The petitioners relied on various case laws in support of their case.  The respondents submitted the following before the High Court-

• The Regional Director, Eastern Region has submitted a proposal for investigation of all the group of companies of Sarda group of companies on 11.06.2021.
•  The matter has been considered by the Ministry and it considered  that the matter is serious in nature. Therefore, investigation of all the companies may be ordered under Section 210(1)(a)&(c) of the Act, to be conducted by the Regional Director, Eastern Region and the Regional Director, Northern Region for 162 and 24 companies respectively and to submit consolidated report by both Regional Directors for their region within 6 months in public interest.
• The Ministry has passed an order for investigation under Section 210 of the Companies Act, 2013. 
• In the winding up petition it has been clearly mentioned that no plausible narration has been given in the books of accounts and it appears that it has given to a party without any commercial basis or benefit to the companies. 
• It is a pure siphoning off funds of the company where directors have not discharged their duty with due and reasonable care, skill and diligence. 
• The directors have not acted in good faith to promote the objects of the company and its shareholders.
• The company is involved in fraud by working as a vehicle of fund round tripping.
• The petitioners requested the Department to give time to submit their reply but instead of filing reply the petitioners opted to file the present writ petition.
• The recommendation is not binding and as per Section 226 of the Act, even winding up the company, investigation cannot be stopped.
• The very purpose of an investigation is to enquire into the affairs of the company and the entirety of the material will emerge only in the course of the investigation.
• The report spelled out that-

• both the groups are maintaining large number of companies and they kept their employees as director in such companies.
• The real beneficiaries are the two brothers i.e. Govind Kumar Sarda and Ghanshyam Sarda who have basically controlled all the companies.
• The Company’s existence is only in name without serving, any economic purpose, hence, striking off the name of the Company under Section 248 of the Act is recommended.

• The Registrar of Companies, based on the report, directed to file a winding up petition before the NCLT. 
• The Registrar of Companies also filed a criminal complaint before the Chief Judicial Magistrate, Alipore.

The High Court considered the submissions of both the parties.  The High Court analysed the entire facts of the case and perused all the documents on record.

The High Court analysed the case law relied on by the petitioner in Parmeshwar Das Agarwal, Sumitra Agarwal, Sanjay Agarwal, Samta Agarwal, Ajay Agarwal, Neetu Agarwal, Rita Kamalia, Singhal Enterprises Private Limited, Sukanya Trading and Finance Private Limited, Versus The Additional Director (Investigation) & Union of India, through the Minisitry of Corporate Affairs - 2016 (11) TMI 29 - BOMBAY HIGH COURT , in which the High Court held that the Central Government, in the order under challenge, did not spell out any circumstances, except outlining its power under the above sections to order investigation into the affairs of a company in public interest.  The reports are not enough for the Central Government to exercise the drastic power. Something more was required and to be established as circumstances or material enough for exercise of the power. That is clearly lacking in this case.

The High Court observed that in the present case he Central Government also did not spell out any circumstances how the Ministry is of the view that the matter is serious in nature though the report filed under Section 208 of the Companies Act, 2013, is otherwise.  Once after inspection of books of accounts and other papers of the company no allegation was found regarding operation of shell companies, tax invasion, siphoning off funds, diversion of funds and fraud on bank loans the High Court wondered how the Regional Director has submitted proposal for investigation.

In view of the above the High Court set aside the impugned notice.