20 June 2024 Business Laws >> Business & Commercial Law  

In a recent judicial review, the court addressed the procedural adherence required under Section 206 of the Companies Act, 2013, during the issuance of orders aimed at gathering information from companies. The petition at the heart of this matter has been pending since 2018 and culminated in a decision to dispose of it at the admission stage.

The petitioner challenged an order from October 4, 2018, which directed them to furnish various details and documents under Section 206(4) of the Act. The petitioner argued that before such an order could be issued, the Registrar (respondent no.1) must first comply with the procedural requirements outlined in subsections (1) and (3) of Section 206. This includes forming an opinion based on scrutiny of relevant documents or information that warrants further inquiry into the company's affairs, particularly if there are allegations of fraud or unlawful practices.

Mr. Tulzapurkar, representing the petitioner, emphasized that the impugned order lacked any findings of satisfaction or specific allegations that would justify its issuance. The order merely cited complaints about the company’s operations without specifying any fraudulent activities or failures to address investor grievances.

Interestingly, the affidavit submitted by respondent no.1 acknowledged a failure to follow the prescribed procedures in subsections (1) and (3), claiming that an order under subsection (4) could be issued directly. This assertion raises significant questions about the authority's interpretation of its powers. Respondent no.1 maintained that the order aimed to gather information rather than establish fraud; however, such a claim contradicts the necessity for preliminary findings as mandated by the Act.

The court meticulously examined the statutory framework of Section 206, outlining the Registrar’s responsibilities and the necessity for a robust basis before issuing orders under subsection (4). Notably, the court pointed out that the impugned order did not specify any particular complaints or fraudulent activities, rendering it devoid of the necessary prima facie connection between the information sought and the alleged unlawful conduct.

Furthermore, the proceedings appeared to be based on an email regarding a different entity, highlighting a fundamental flaw in the grounds for initiating action against the petitioner. The reliance on a newspaper report concerning a former employee's misconduct, for which the petitioner had already initiated criminal proceedings, further underscored a lack of due diligence by the Registrar.

Ultimately, the court concluded that the prerequisites for issuing an order under Section 206(4) had not been met, leading to the decision to quash the impugned order. The ruling underscores the essential requirement for regulatory bodies to adhere to established legal procedures and maintain a transparent basis for any inquiries or actions taken against companies.

This case serves as a critical reminder of the balance between regulatory oversight and the rights of companies, ensuring that any action taken is both justified and grounded in due process. The court’s ruling not only protects the petitioner but reinforces the need for regulatory authorities to operate within the confines of the law, safeguarding against arbitrary decisions that could impact businesses without proper foundation.

  COMPANIES ACT, 2013