Companies Act Section 225

Companies Act, Section 225: Expenses of Investigation

Section 225 of the Companies Act, 2013 addresses a crucial financial aspect of corporate investigations specifically, how the expenses related to an inspector’s investigation are to be managed and recovered. While investigations are carried out by inspectors appointed by the Central Government under Chapter XIV of the Act, this section outlines who ultimately bears the cost and under what conditions reimbursement is required.

It reflects the principle that while the government may initially cover the costs to ensure timely and effective investigation, those responsible for misconduct or those who benefit from the outcome of such investigations should bear the financial burden.

1. Initial Burden of Investigation Costs

Under this provision, the Central Government is responsible for defraying (i.e., paying) the expenses of, and incidental to, the investigation conducted by an inspector it appoints under this Chapter.

This initial funding by the Central Government ensures that the investigation process is not delayed or obstructed due to cost-related issues.
However, the provision excludes expenses related to inspections under Section 214, which are governed separately.
2. Reimbursement by Responsible Parties

Although the government covers the costs initially, Section 225 clearly sets out that certain persons or entities must reimburse the expenses, either partially or wholly, depending on the outcomes of the investigation and the role played by such parties. These are:

(a) Persons Convicted or Ordered to Pay Damages or Restore Property

If a person is:

Convicted as a result of prosecution initiated under Section 224, or
Ordered to pay damages or to restore property as part of civil proceedings brought under that section,
Then, such person may be directed by the court to reimburse the investigation expenses, either fully or partially, as specified by the court in its judgment or order.

The amount to be reimbursed is determined and specified by the court that either convicts the person or orders them to compensate for wrongdoing.
This ensures that those found guilty of misconduct bear the financial consequences of the investigation leading to their conviction or liability.
(b) Company or Body Corporate in Whose Name Proceedings Were Brought

If the Central Government or any other authorized party initiated legal proceedings in the name of a company or body corporate (e.g., to recover damages or property as a result of misconduct), and such proceedings result in a recovery of any amount or asset, then that company or body corporate is liable to reimburse the government.

The extent of reimbursement is limited to the amount or value of the money or property recovered through the legal proceedings.
This ensures that the company benefiting from the recovery pays back the costs incurred to achieve it, up to the value of the benefit obtained.
(c) Other Liable Parties (If No Prosecution Follows the Investigation)

If, after the investigation, no prosecution is initiated under Section 224, the Central Government may still require reimbursement of investigation costs from certain parties:

(i) The Company or Body Corporate (or Its Officers) Covered in the Report

This includes the company, body corporate, managing director, or manager whose conduct was investigated and featured in the inspector’s report.
Even if no formal legal action follows, these entities may still be directed to bear part of the investigation expenses.
(ii) Applicants for the Investigation (if Initiated Under Section 213)

In cases where the investigation was initiated based on an application under Section 213 (for example, by shareholders), the applicants themselves may be required to bear some of the costs.
The extent of reimbursement in such cases is determined at the discretion of the Central Government, based on the circumstances and findings of the investigation.
This provision ensures that parties who prompted or were the subject of the investigation share the responsibility of funding it, especially when it does not result in prosecution but still required government resources.

3. Priority of Government’s Reimbursement Claim

In cases where clause (b) of sub-section (1) applies i.e., where a company or body corporate has benefited by recovering money or property through proceedings initiated on its behalf the law ensures that the government’s right to reimbursement takes precedence.

The amount the company owes to the Central Government becomes a first charge on the money or property recovered.
A “first charge” means that the government’s claim has priority over other creditors or claims against that recovered amount.
This statutory charge ensures the government’s recovery is secured and not diluted by competing claims, reinforcing the principle of cost accountability in regulatory enforcement.