Investigation of Ownership of Company–Company Registration in Madurai

Investigation of Ownership of Company

Section 247 of the 1956 Act provided for ownership of company. Under the 1956 Act, the Central Government was under no obligation to furnish a copy of report by the inspector appointed for investigation to the company or any other person, where it was of the opinion that there is good reason for not divulging the contents of the report. However, where the central government was of the opinion that the contents of the report or parts thereof could be disclosed, it should cause to be kept by the Registrar a copy of such report or part thereof, as the case may be. Section 247 of the 1956 Act was amended by the Companies (Amendment) Act, 1960 to replace “officers and other employees and agents” with “officers and agents” in sub-section 5(2). Later sub-section (1A) of section 247 of the 1956 Act was inserted by the Companies (Amendment) Act, 1988 to empower the Company Law Board, without prejudice to the existing powers of the Central Government, to cause investigation into the ownership of a company and to call for information in respect of the ownership of a company and to call for information in respect of the ownership of shares and debentures. Further, the terms “managing agents, secretaries and treasures” in section 247 of the 1956 Act were omitted by the Companies (Amendment) Act, 2000, and finally the powers of the “Company Law Board” under section 247 of the 1956 Act were conferred on the “Tribunal” by the Companies (Second Amendment) Act, 2002.

Investigation into ownership of the company

Section 216 of the 2013 Act corresponds to section 247 of the 1956 Act with some deviations. Section 216 of the 2013 Act, unlike the 1956 Act, does not include any provision relating to the discretionary power of the Central Government to disclose the contents of the investigation report to the company or any person. Moreover, section 216 of the 2013 Act does not clarify as to how the expenses of the investigation will be borne. Section 216 of the 2013 Act provides for investigation into the affairs of the company and its ownership. Such investigation can be conducted in the following two cases:

• If the Central Government is of the opinion that there is a reason to investigate on the matters pertaining to the company and its membership for determining the true persons who are financially interested in the company’s failure and success or who are in a position to control or influence the company’s policy.
• The Tribunal, in course of any proceedings before it, is also empowered to direct the Central Government to investigate into the affairs of the company with a view to determining its membership and ascertaining other matters related to the company.

Appointment of Inspectors

Sub-section (1) of section 216 of the 2013 Act empowers the Central Government to appoint one or more inspectors to investigate and report on matters relating to the company, and its membership. The purpose of such investigation, as mentioned earlier, is to determine true persons who are financially interested in the success or failure of the company or who are in a position to materially influence or control the company’s policy. Further, sub-section(2) of section 216 of the 2013 Act provides that the Central Government, on a direction given by the Tribunal, shall appoint one or more inspectors. However, it must be noted that the power given to the Central Government under section 216(2) of the 2013 Act is without any prejudice to its powers under section 216(1) of the 2013 Act.

Scope of Investigation by inspector

At the time of appointing an inspector under sub-section (1) of section 216 of the 2013 Act, the Central Government, as per section 216(3) of the 2013 Act (corresponding to section 247(@) of the 1956 Act) may define the scope of investigation including the period or the matters to be covered by the investigation. The Central Government has also been empowered to restrict the investigation to matters related to particular shares and debentures.

Powers of inspectors for conducting investigation

Sub-section (4) of section 216 of the 2013 Act corresponds to section 247(3) of the 1956 Act and defines the scope of the power of inspectors. An inspector is empowered to investigate all such circumstances that suggest that there exists an understanding or arrangement which is relevant for the purpose of investigation. Such understanding or arrangement may not be legally binding but may be observed as part of a practice in the company. However, it must be noted that the powers exercised by the inspector under Section 216(4) of the 2013 are subject to the terms of his appointment.

Power of investigation of ownership of Company

The investigation under section 247 of the 1956 Act can be ordered by the central government, on its own, or at the instance of the Company Law Board. No application by any member, creditor or other person is necessary to invoke the powers under section 247. Action, may however, be taken on any information made available by authentic or reliable sources, e.g. any member(s) of a company, who may assist the Central Government or the Company Law Board in arriving at a decision in this regard. No orders of investigations were passed where the affairs were already fully transparent and it was fully known that the entire fund for acquisition of shares had come from the three companies which were under the control of two warring group of a family and thus the sources were identified and it was also evident that both the parties to the case had full knowledge of the matters. Similarly an investigation was not ordered merely on the suspicion that the transferees were tools of some other corporate raiders. CLB can exercise its power under sub-section (1A) of section 247 of the 1956 Act only if there is a proceeding pending before it and which necessitates investigation. Where the CLB felt that the situation did not warrant its invention under section 250 of the 1956 Act on the basis of the facts and circumstances of the case, it held that no relief could be allowed under section 247 of the 1956 act. Death of shareholder is not a ground for ordering investigation. The application before the CLB did not disclose mismanagement of affairs or siphoning off funds or any other illegal acts or omissions necessitating investigation. The application seemed to be based on unfounded apprehensions. Where persons in management were also holding controlling interest in the company, their attempt to have the ownership of an insignificant percentage of shares investigated, did not succeed.  The courts can order by issuing the writ of mandamus to the enforcement directorate for an investigation as to whether the transfer of shares in question was in violation of FERA, 1973 but no such writ would lie for putting into action section 247 of the 1956 Act when it is already a known fact as to who is the owner of a particular block of shares.

No material change in shareholding shown

An investigation can be ordered when ostensible ownership of shares and real control of the company vest in different persons. A majority of the shares in the company in question were held by entities which were under the control of one individual. Upon the death of that individual, there to be not sufficient to show that there was a change in the shareholding of the entities or in the management of the company. Thus, there was no warrant for an order of investigation.

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