Companies Act Section 214

Companies Act, Section 214: Security for Payment of Costs and Expenses of Investigation

Section 214 of the Companies Act, 2013, establishes the power of the Central Government to require applicants to provide security for the payment of costs and expenses incurred during an investigation into the affairs of a company. This provision ensures that frivolous or vexatious applications for investigations are deterred and that a reasonable mechanism exists to cover investigative costs unless wrongdoing is ultimately established.

1. Applicability of the Provision

This section applies in two specific scenarios where an investigation into the affairs of a company is being initiated:

a. When an investigation is ordered by the Central Government under clause (b) of sub-section (1) of Section 210. This refers to cases where the Central Government initiates an investigation based on an application received from a specified number of members or other parties.
b. When an investigation is ordered by the Tribunal under Section 213, which may be based on a request by a prescribed number of shareholders, or where the Tribunal independently concludes that circumstances justify an investigation due to suspected fraud, misconduct, or suppression of information.
In both cases, the actual initiation of the investigation by way of appointing inspectors is contingent on the next step: furnishing security.

2. Requirement to Furnish Security

Before proceeding to appoint an inspector for carrying out the investigation under:

Sub-section (3) of Section 210 (in the case of Central Government-initiated investigation), or
Clause (b) of Section 213 (where the Tribunal orders an investigation),
the Central Government has the discretion to require the applicant(s) that is, the individuals or entities who have petitioned for the investigation to provide a monetary security deposit. This security serves as a safeguard to cover the costs and expenses involved in conducting the investigation.

3. Limit on the Security Amount

The maximum amount of security that may be demanded under this provision is not to exceed ?25,000 (twenty-five thousand rupees), or such amount as may be prescribed by the relevant rules under the Companies Act. This limit ensures that the requirement is reasonable and not prohibitive, particularly for smaller shareholders or applicants acting in good faith.

4. Refund of Security in Case of Prosecution

In the event that the investigation leads to the initiation of prosecution that is, if the investigation reveals sufficient evidence of fraud, misconduct, or other legal violations warranting criminal proceedings then:

The security amount deposited by the applicant shall be refunded.
This acts as a safeguard for genuine complainants who raised concerns in the public interest or in the interest of shareholders, ensuring they are not financially penalised for seeking accountability and legal redress.
Purpose and Rationale

The core objective of Section 214 is to strike a balance between encouraging legitimate applications for investigations and discouraging misuse of the legal framework through baseless or malicious petitions. The ability of the Central Government to seek security:

Acts as a filter against frivolous claims.
Ensures that public resources are not misused for investigations that lack merit.
Provides a fair remedy by allowing refunds when wrongdoing is established and prosecution follows.