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SCOPE OF SECTION 213 OF COMPANIES ACT

HISTORICAL VIEW

The company laws in India have undergone several amendments with time to adjust to the changing business patterns. The laws were formulated to keep in check the companies and firms which started developing in the nation. Companies embrace a mammoth value in the economy and their advancement also impacts the growth of the country. Hence it is important to regulate these organizational structures. Although the principle of ‘laissez-faire’ is followed vastly in business, there is still a need in prescribing the framework of basic moral and governmental orders and law for the businesses. The government, in this case, merely puts forward the structure to run the business and interferes only when it is called for. The Indian company law administers the organizations which are formed as per Section 2(20) of the Companies Act, 2013 In addition to the companies act, the organizational structures are also regulated by the Ministry of Corporate Affairs.

In the history of company law, the formation and the enactment of the Companies Act, 2013 which superseded the companies act 1956, has been quite turbulent. The companies act of 1956 has been amended 25 times to accommodate the different business scenarios and yet it was still considered to be outdated, inadequate in comparison to other jurisdictions. The amendments suggested in the 1956 act were first introduced as a companies bill in the year 2009, and it took 4 years to implement the changes and to officially amend the 1956 act into the 2013 act. Yet, it has to be noted that not all the provisions which were proposed in the amendment will come into force immediately, as it requires the Indian Government to draft rules and regulations for their implementation. However, the companies which are registered currently are regulated through the Companies Act, 2013 itself.

ESSENCE OF THE ACT

Companies Act 2013, as mentioned above looks after the transactions of the business. It provides certain rights for the owner, employees, shareholders and also puts forth the guidelines pertaining to running the business and the course of action to be taken when there is an infringement of the rights or wrongdoings in the business. This blog, focuses on the latter feature of the companies act, that is, what will be the course of action in case there is a wrongdoing?

The answer to the above-posed question is a very simple one. Firstly, the allegation has to be thoroughly scrutinized. Assessing the inspection an action must be taken. This process of inspection, inquiry, and investigation of the affairs of the companies are dealt with within chapter XIV of the Companies Act, 2013. (ACT) In the companies act four provisions deal with the investigation of the company’s affairs, although these four sections (210, 212, 213, 216) run parallelly, they are interlinked at one of the other stages. This blog aims to highlight and analyze the scope of section 213 of the companies act by understanding the areas which are shadowed.

SCOPE OF SECTION 213

The purview of section 213 of the companies’ act puts forth the circumstances that result in an investigation into the company’s affairs in other cases by the order of the tribunal. As per this section the tribunal may order for an investigation into the affairs of the company in three circumstances. Before understanding these situations, there has to be a conceptual clarity of the section.

APPLICATION BY MEMBERS

Section 213 (a) (i) and (ii) mentions who is eligible to request an application of investigation. Under these clauses, the people who can make the application are directly related to the company itself. Clause (i) mentions who can file an application in case the company has a share capital whereas clause (ii) indicates who can file an application when the company doesn’t have a share capital.[1]

  1. In the case of a company having a share capital, the application should be made by not less than 100 members or members holding not less than one-tenth of the total voting power.
  2. In the case of a company not having a share capital, then the application should be made not less than one-fifth of the persons on the company’s register of members.
APPLICATION BY PEOPLE OTHER THAN THE MEMBERS

Further, Section 213 (b) also brings up that ‘other person’ can make an application for the investigation as well. Now the question which arises here is, who can be considered in the ambit of ‘other person’ as per section 213 (b). The term ‘other person’ should be examined in the context of the ‘Ejusdem Generis’ rule of construction. As per the rule of ‘Ejusdem Generis,’ the general words that follow the specific words derive their meaning and take the colour of the specific words that precede it.

 Here when we are considering the phrases’ other person’ or ‘any other person’ under the companies act, the focus should be on the preceding words of such phrases. The below paragraph analyses section 213(b) of the act. Section 213(b)(i) provides that an application for an investigation into the affairs of a company can be made if the business of the company is being conducted with the intent to defraud its creditors, members or any other person – Here, ‘any other person’ refers to the category of persons having an interest in the company and who may potentially have been defrauded by such company. On applying the principle of ‘Ejusdem Generis’ the extent of the term ‘other person’ can be clarified upon.

OTHER CIRCUMSTANCES FOR INVESTIGATION

Now based on the above section it is clear that who can file for an application of the investigation, depending upon the type of the company (share capital, no share capital) and based on the relation (other person’s relation). Section 213 also lies down three different circumstances based on which an application may be filed. The three circumstances are as follows: 

  1. Conduct of the company is with intent to defraud its creditors,
  2. The management of the company is involved in misfeasance or misconduct.
  3. Lack of transparency in the company with respect to its affairs.

It has to be carefully noted that people who are directly related to the company, that is, people who are eligible in filing an application as per section 213(a) of the act, should have a good reason for seeking an investigation and should also provide evidence to back up their claim. Whereas ‘other person’ can only seek for filing an investigation application based solely on the three grounds mentioned above. These three grounds are mentioned in section 213 (b) (i) (ii) (iii) of the companies act.

NOTICE TO THE CONCERNED PARTIES FOR BEING HEARD

Once the application for the investigation is filed. The concerned parties are given a reasonable time and opportunity to be heard. The tribunal before ordering the investigation should issue a notice to the related parties to hear from their side as to why the affairs of the company should not be investigated.  After the period of notice is over, it is at the discretion of the tribunal to pass an order to further probe into the affairs of the company. Once such an order is passed the central government should appoint one or more competent person as the inspector of the case to investigate the affairs of the company, in respect of the issues and matters raised, and to report it in such a manner as the central government may direct.

PUNISHMENT

Section 213 also provides for the punishment in case the investigation reveals that the company is indeed involved in fraud misconduct, misfeasance or if the management is guilty of fraud or have a connection to the fraud. It mentions that every officer of the company who is in default and other persons involved in the management or formation of the company shall be punished for fraud as per section 447 of the Companies Act, 2013 if the investigation reveals any fraudulent or unlawful activities.

CONCLUSION

Section 213 of the companies’ act is in place in order to keep a check on the practices of the companies, the section itself is exhaustive in nature with the matters pertaining to the eligibility to file an application and the consequences for the same. But when the investigation is filed under the same, one might wonder what will happen to the employees, although there exists a punishment for the people involved in the misconduct, the investigation takes place for the entire organization. The section 218 of the companies act provides for the protection of employees during such investigation. And in case the employee has to be suspended, the same notification should also be put across the tribunal. During the time period of investigation, the company singlehandedly cannot take any decision without putting it across the tribunal.

Author(s) Name: Ananya K (Presidency University, Bangalore)

Reference: 

[1] Guide to the companies act, 2013, A Ramaiya, nineteenth edition.

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