2020 (10) TMI 340 - HC - Companies Law

Court upholds legality of inspection and summons under Companies Act, 2013.

The court dismissed both writ petitions, upholding the legality of the inspection ordered under Section 206 and the validity of the summons issued under ... Validity of action of the 3rd respondent-the Registrar of Companies in ordering inspection through the impugned notice - inspection of books and documents of the Company by an Inspector - HELD THAT:- In the instant case, the complaint is lodged by a person (4th respondent) who has been a director of the Company alleging oppression and mismanagement of the affairs of the Company besides questioning his removal as director of the Company unceremoniously, not noticing him of the annual general body meetings for three consecutive years, which according to the 2nd petitioner itself is made a ground for removal from the post of director of the Company, which the 4th respondent refutes and states that there was no annual general body conducted at all and the question of absenting himself on such occasions does not arise, are all matters to be examined by the respondent-authorities being statutory functionaries under the 2013 Act. Whether there exists grounds in ordering inspection and the authorities are prima facie satisfied that there exists grounds for such an inspection? - HELD THAT:- It is to be seen that recording satisfaction to take action means to form an opinion which again is traceable to the nature of allegations against the person/Company or both. In this case respondents on even number of occasions received complaints from the 4th respondent alleging mis-management, oppression and fraudulent acts on the part of the 2nd petitioner, who has been the director of the Company, which itself are to be construed as the basis for forming opinion to record satisfaction for ordering inspection under Section 206 of the 2013 Act. Non recording of reasons for satisfaction in the order itself or if not manifestly appear from the order, is not fatal and the impugned order cannot be invalidated on that ground alone when the allegations are serious in nature touching upon the very functioning of the Company that too by a share holder group of 50% of the Company, now as per the orders of the NCLT, subject to orders the Appellate Tribunal. Admittedly, apart from the ROC, the Central Government (Ministry of Corporate Affairs) has the authority to direct the Registrar or an inspector appointed for the purpose, to initiate an inquiry into the affairs of the Company under Section 206(4) of the 2013 Act. The Central Government has the power to authorise any statutory authority to carry out the inspection of books of account of a company or class of companies by an order, general or special, under Section 206(5). In a petition for prevention of oppression and mis-management and where there is a prayer to investigate into the affairs of the Company, though sometimes it is called a motivated complaint, if there are serious allegations made in it, there is no reason why inspection, inquiry be not ordered against such a Company. Section 206 of the 2013 Act corresponds to Sections 209A and 234 of the repealed Companies Act, 1956. Section 206 of the 2013 Act is a combination of Sections 209A and 234 of the Act 1956. The scope of sub-Sections (1) and (3) of Section 206 of the 2013 Act read together provides enlarged powers to the Registrar as compared to the provisions of the 1956 Act. The Central Government may pass order of inspection either by the Registrar or an Inspector or any statutory authority, appointed for this purpose under Section 206 of the 2013 Act - In the present case after initiation of action under Section 206, next step under Section 207 has already been undertaken which is subject matter in WP No. 12296 of 2019 and, therefore, cause in the writ petition, WP No. 10201 of 2017 which challenged the issuance of notice under Section 206 does not survive and almost has become infructuous. However, it is for the Central Government to take further steps in the matter under Section 208 after considering the inspection report submitted under Section 207. But the issue has not come to that stage as it is for the Central Government, on receipt of report of inspection, for the best reasons, to order investigation or not, as such the 2nd writ petition, WP No. 12296 of 2019 is also premature. Petition dismissed. Issues Involved:1. Legality of the inspection ordered by the Registrar of Companies under Section 206 of the Companies Act, 2013.2. Validity of the summons issued under Section 207(3)(b) of the Companies Act, 2013.3. Allegations of oppression and mismanagement within the company.4. Whether parallel proceedings are permissible when similar issues are pending before the NCLT.Issue-Wise Detailed Analysis:1. Legality of the Inspection Ordered by the Registrar of Companies:The petitioners challenged the inspection ordered by the Registrar of Companies (ROC) through notice No. RAP/INS/206/2016, dated 15-03-2016, as being illegal and arbitrary, contrary to Chapter XIV, particularly Section 206 of the Companies Act, 2013, and violative of Articles 14 and 19 of the Constitution of India. The court noted that under Section 206 of the 2013 Act, the ROC has the authority to call for information, inspect books, and conduct inquiries if it is satisfied that the business of a company is being carried on for a fraudulent or unlawful purpose, or not in compliance with the provisions of the Act. The court observed that the ROC acted within its powers as complaints were received from the 4th respondent alleging serious mismanagement and fraudulent activities. The satisfaction for ordering inspection need not be explicitly recorded in the order itself if the allegations are serious and touch upon the very functioning of the company.2. Validity of the Summons Issued Under Section 207(3)(b):The petitioners also challenged the summons issued under Section 207(3)(b) of the 2013 Act, dated 27-05-2019, as being illegal and ultra vires. The court noted that Section 207 deals with the conduct of inspection and inquiry, and it empowers the ROC or inspector to call for books of account and other documents, summon and enforce the attendance of persons, and inspect any books, registers, and other documents of the company. The court found that the summons issued were in accordance with the statutory powers vested in the ROC and were aimed at ensuring compliance with the provisions of the Act. The court held that the summons were valid and did not find any violation of legal provisions.3. Allegations of Oppression and Mismanagement:The 2nd petitioner alleged that the 4th respondent, along with their brother-in-law, colluded and fabricated documents to claim a 50% stake in the company, leading to disputes and legal proceedings. The 4th respondent had filed a company petition (CP No. 40 of 2011) before the NCLT, which was disposed of, and the petitioners appealed against it. The court noted that the allegations of oppression and mismanagement were serious and warranted an inspection and inquiry by the ROC. The court observed that the ROC's actions were aimed at protecting the interests of the stakeholders and preventing any prejudicial actions in dealing with the affairs of the company.4. Parallel Proceedings and NCLT:The petitioners contended that the ROC should not have conducted parallel proceedings when similar issues were pending before the NCLT. The court held that the scope of inquiry by the ROC and the proceedings before the NCLT were different. The NCLT proceedings were related to the transfer of shares and the ratio of shareholding, while the ROC's inspection was aimed at investigating allegations of mismanagement and fraudulent activities. The court found no statutory bar or violation of principles of natural justice in conducting parallel proceedings, as the ROC's actions were based on valid reasons and statutory powers.Conclusion:The court dismissed both writ petitions, holding that the inspection ordered under Section 206 and the summons issued under Section 207(3)(b) of the Companies Act, 2013, were valid and within the statutory powers of the ROC. The court found no merit in the petitioners' contentions and upheld the actions taken by the ROC to investigate allegations of mismanagement and fraudulent activities within the company. The court also noted that the pendency of proceedings before the NCLT did not preclude the ROC from conducting its inspection and inquiry.