Companies Act Section 213

Companies Act, Section 213: Investigation into Company’s Affairs in Other Cases

Section 213 of the Companies Act, 2013 empowers the National Company Law Tribunal (NCLT) to order an investigation into the affairs of a company in specific situations that suggest fraudulent conduct, mismanagement, or suppression of information from members. The section lays down who may apply for such an investigation and the grounds on which the Tribunal may intervene.

1. Powers of the Tribunal to Order Investigation

The National Company Law Tribunal (hereinafter referred to as "the Tribunal") may, after examining the facts and circumstances, direct that the affairs of a company be investigated by one or more inspectors appointed by the Central Government. Such an order may be passed under any of the following scenarios:

A. Investigation Based on Application by Members

The Tribunal may act upon a formal application made by a specified number of members of the company. The eligibility criteria for such an application depend on whether the company has a share capital or not:

In case of a company having a share capital:
The application must be made by not less than 100 members of the company, or
By members holding at least one-tenth (10%) of the total voting power of the company.
In case of a company not having a share capital:
The application must be made by not less than one-fifth (20%) of the total number of persons listed in the register of members of the company.
In both cases, the application must be supported by relevant evidence to demonstrate that there are valid and reasonable grounds for seeking an investigation into the affairs of the company.

B. Investigation Based on Circumstantial Evidence or Other Applications

Apart from member applications, the Tribunal may also act on an application made by any other person, or on its own motion, if it is satisfied that there are circumstances suggesting any of the following:

1. Fraudulent Conduct or Oppression:
The company’s business is being conducted with the intent to defraud:
Its creditors,
Its members, or
Any other person, or
The business is being run for any other fraudulent or unlawful purpose, or
The business is being managed in a manner oppressive to any of its members, or
The company itself was formed with a fraudulent or unlawful intent.
2. Fraud, Misfeasance, or Misconduct by Founders or Managers:
Persons involved in the formation of the company, or
Persons managing its affairs,
Have committed acts of fraud, misfeasance, or other misconduct in relation to:
The company itself, or
Any of its members.
3. Suppression or Withholding of Key Information from Members:
The members have not been provided with the full information reasonably expected regarding the company’s affairs. This includes, but is not limited to:
Information relating to how the commission payable to a managing director, other directors, or the manager of the company is calculated.
2. Procedure for Ordering Investigation

Before issuing any such order, the Tribunal is required to provide a reasonable opportunity of being heard to all concerned parties. Only after considering their submissions can it conclude whether an investigation is warranted.

If the Tribunal finds it appropriate to proceed, it will issue an order directing that the company’s affairs be investigated. Once this order is passed:

The Central Government is required to appoint one or more competent persons as inspectors to carry out the investigation.
These inspectors will conduct a detailed inquiry into the matters specified in the Tribunal’s order and report their findings to the Central Government in the manner prescribed.
3. Consequences of Findings of Fraud

If the investigation by the appointed inspectors confirms any of the following, further consequences follow under the law:

(i) That the company’s business is being conducted:
With the intent to defraud creditors, members, or others;
For a fraudulent or unlawful purpose; or
That the formation of the company itself was rooted in fraud or illegality.
(ii) That any person involved in:
The formation of the company, or
The management of its affairs,
Has committed fraud in connection with such formation or management.
Then, in such cases, every officer of the company who is in default, as well as the persons involved in the formation or management, shall be liable to punishment for fraud under the provisions of Section 447 of the Companies Act, 2013.

4. Punishment under Section 447

Section 447 prescribes stringent penalties for fraud, including imprisonment and fines, depending on the nature and scale of the fraudulent activity. The inclusion of Section 447 as the punishment mechanism ensures that those found guilty of fraud under an investigation initiated under Section 213 face significant legal consequences.