Sir John Dalberg-Acton is perhaps best known for immortalising the words "Power tends to corrupt, and absolute power corrupts absolutely". One of the cardinal principles of jurisprudence of any leading legal system across the world, is that the power vested in the State to take certain actions, which impact the rights of its citizens, must have sufficient checks and balances.
The inter-play between the rights of the State vis-à-vis its citizens is always a subject matter of much debate. While the State may justify its actions based on superseding public interest and order; the citizens resist the actions of the State, by claiming that their basic rights are being infringed upon. The privilege against self-incrimination and right of privacy of the citizens find deep roots in jurisprudence.
Section 206 of the Companies Act, 2013 (the "Act") gives the Registrar of Companies (the "ROC") the power to call for information, inspect books and conduct inquiries in respect of any company. This provision was largely similar to section 234 of the Companies Act, 1956 (the "1956 Act"). However, the Government has inserted a seemingly innocuous sub-clause (5)1 to section 206 of the Act, which, on a closer examination, reveals that the power vested with the Government authorities are now very wide and far reaching, without any adequate fetters being placed on the powers conferred to the ROC.
This article analyses section 206(5) of the Act which appears to give wide, unbridled and unrestricted rights to the central government to direct inspection of books and papers of a company.
2. ERSTWHILE POSITION UNDER SECTION 234 OF THE COMPANIES ACT, 1956
Section 234 of the 1956 Act was narrower in scope compared to the corresponding new provisions under the Act. section 234 of the 1956 Act gave powers to the ROC to call for information or explanation as regard the affairs of the company. The law under the 1956 Act imposed more fetters on the powers of the ROC to call for information, documents and explanation.
Firstly, the Registrar was required to peruse the documents which were submitted by the Company to him, and only if he felt that the company was required to furnish any additional information or explanation with respect to the documents as submitted by the company to the Registrar, can he call upon the company, in writing, to furnish such additional written information. The scope for seeking further documents was therefore limited and based on the documents submitted by the company.
Secondly, section 234(2) of the 1956 Act gave the company an opportunity to provide the information or explanation as sought for by the ROC. It is only when the ROC is of the opinion that the information or explanation as provided by the company is inadequate, that the ROC may issue another written order calling upon the company to produce before him such books and papers as he deems necessary (section 234(3A)).
Thirdly, under section 234(7), if it is represented to the ROC, on materials placed before him by any contributory or creditor or any other person interested, that the business of a company is being carried on in fraud of its creditors or of persons dealing with the company, or otherwise for a fraudulent or unlawful purpose, the ROC may, after giving the company an opportunity of being heard, by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order.
Interestingly, if any action was taken by the ROC against a company, based on representation that was frivolous or vexatious, the ROC was required to disclose the identity of the informant to the company.
3. ANALYSIS OF SECTION 206 OF THE COMPANIES ACT, 2013
A common feature of section 234 of the 1956 Act and section 206 of the Act, is that it gives the ROC, the power to order for production of documents, explanation or information from the company. Section 234 of the 1956 Act provided for safeguards against the arbitrary use of power by the ROC, as the company was required to be given written notice and an opportunity to respond to such notice. Similarly, under section 206 of the Act, the ROC is required to issue a written notice and provide an opportunity to the company to show-cause and respond to the request for documents or information or explanation.
Section 206(2) of the Act gives the company an opportunity to respond to such notice, and only if the ROC is of the opinion that the documents or information or explanation are inadequate or if unsatisfactory state of affairs exists at the company, that a written notice can be issued by the ROC. With an intention of ensuring that the power of the ROC to call for inspection of the books and papers of the company is not misused in an arbitrary and unreasonable manner, the proviso to section 206(3) provides that before any notice is issued under this sub-section, the ROC shall record his reasons in writing for issuing such notice.
Similarly, even under section 206(4) of the Act, the ROC is required to issue a notice in writing if he is satisfied, on the basis of information available with him, or furnished to him on a representation made to him by any person that the business of a company is being carried on for a fraudulent or unlawful purpose or not in compliance with the provisions of the Act, or if the grievances of investors are not being addressed.
The above provisions have ensured that there are checks and balances on the use of power by the ROC. So far so good!
However, quite inexplicably, the central government has also inserted sub-section 5 to section 206 of the Act, which starts with the words "Without prejudice to the foregoing provisions of this section...". The non-obstante clause gives wide powers to the central government, "if it is satisfied that the circumstances so warrant", to direct inspection of books and papers of a company by an inspector appointed by it for the purpose.
Since the provision starts with a non-obstante clause, it is possible for the central government to proceed against a company under section 206(5) of the Act, without relying on the other provisions of section 206 of the Act. As result of this inclusion, going strictly by a reading of this provision, the requirement of the central government to issue a notice and specifying the reasons for issuance of any notice calling upon the company to produce documents or furnish explanation/information, has been completely done away with.
The provision also does not specify any guidelines or criteria explaining the circumstances under which the powers under section 206(5) of the Act could be exercised by the central government. The over-reaching powers granted to the central government under sections 206(5) is troubling as it aims to grant the central government very wide powers to inspect the books of a company without any apparent checks or balances, and appears to be in contravention of established constitutional safeguards.
The central government can unilaterally proceed to take action under section 206(5) of the Act and direct inspection of the books and papers of the company by an Inspector appointed by it, in violation of the principles of natural justice2. Even assuming that the requirements of issuing a written notice has to be read into section 206(5) of the Act, there is much scope for the authorities to take an interpretation in favour of the State and trumping over the rights of companies. There is also scope for great abuse of power and use of this provision by vested third parties who want to act against the interests of the company.
4. INDIAN LAW ON THE INTER-PLAY BETWEEN RIGHT TO PRIVACY, AND SEARCH AND SEIZURE OF BOOKS AND DOCUMENTS OF A COMPANY
The inter-play between the right of privacy and the power of the State of search and seizure finds place in the English Law, as early as 1603, in Semayne's Case3, where it was held that "Every man's house is his castle". In another case, the action of the State in using its powers to forcibly collect incriminating evidence in the residence of John Wilkes, as a retaliatory measure for having spoken against the Government and the King of England, was also set aside by the courts4.
The United States Constitution does not expressly provide for right to privacy, but the courts have culled out this right from other rights that are enshrined in the United States Constitution. While initially the United States law was limited and based on "property", it was later expanded to "person"5.
The Indian courts have relied extensively on foreign jurisprudence and recognized the right to privacy vis-à-vis the power of the State for search and seizure in several cases6. The recent judgment of the Supreme Court of India in Justice K.S. Puttaswamy vs. Union of India (UOI)7 has also made it clear that the right to privacy is an intrinsic part of the Constitution of India.
It would be relevant to refer to the seminal case of Distt. Registrar and Collector, Hyderabad vs. Canara Bank8 ("Canara Bank case"). A challenge was made to the constitutional validity of the amendment made by the State of Andhra Pradesh to section 739 of the Indian Stamp Act, 1899 ("Stamp Act"), among others, on the ground that it resulted in excessive delegation, as it gave wide and over-reaching powers to the State to search and seize documents from any person, without any checks and balances.
The Supreme Court of India struck down the provision as being unconstitutional and violative of the right to privacy of citizens. It was held that under the garb of the power conferred by section 73 of the Stamp Act, the State may go on rampage searching house after house, that is, residences of the persons or the places used for the custody of documents, and that though the possibility of any wild exercise of such power may be remote, on the framing of section 73 of the Stamp Act, the possibility cannot be ruled out.
The Apex Court noted that any number of documents may be inspected, may be seized and may be removed, and at the end the whole exercise may turn out to be an exercise in futility, and that the exercise may prove to be absolutely disproportionate with the purpose sought to be achieved. Therefore, a reasonable nexus between stringency of the provision and the purpose sought to be achieved ceases to exist.
In a similar scenario, the Madhya Pradesh High Court in ICICI Bank vs. State of Madhya Pradesh10, followed the decision of the Supreme Court of India in the Canara Bank case, and struck down section 73(1) of the Stamp Act as applicable in the State of Madhya Pradesh, as being beyond the scope of the Constitution of India. This provision enabled the Collector to enter any premises, to inspect books and records and if necessary, seize and impound them.
In Senairam Doongarmal Agency (P.) Ltd. vs. K.E. Johnson11, ("Senairam Case") the full bench of the Gauhati High Court held that section 37(2) of the Income Tax Act, 1922, which gave the powers to the State to conduct search on any premises and seizing documents without the intervention of the Magistrate and without warrant from him, would constitute an invasion of the fundamental right guaranteed under Articles 19(1)(g) and 19(1)(f) of the Constitution of India.
The court held that even a temporary seizure of books and documents of a concern may cause great dislocation to trade or business and highlighted the effect of such unwarranted search and seizure on the goodwill of a company. While recognizing that a search and seizure may completely destroy the goodwill of a concern and may bring about its ruin, the court aptly noted "... It is said that credit is like fire. If it is once extinguished, it is difficult to rekindle it. A reputation once broken may perhaps be repaired but the public eyes will always be on the spot where the crack was. In such circumstances, a search and seizure is a restriction on the fundamental right guaranteed by Article 19(g) of the Constitution to every, citizen of India to carry on business or trade...".
Similarly, in the Bengal Immunity Company Limited vs. the State of Bihar12, it was held that a provision laying down a condition of search and seizure to which a dealer must submit and other like provisions of the Bihar Sales Tax Act, are restrictions on the fundamental right to trade and business under Article 19(1)(g) of the Constitution of India.
Another aspect which needs to be considered is a company's privilege against self-incrimination. Article 20(3) of the Constitution of India guarantees every citizen of India the right against self-incrimination.13 This principle is derived from the Latin maxim "nemo teneteur prodre accussare seipsum", which translates to "No man is bound to accuse himself." The privilege against self-incrimination would apply when the company has been named as an accused.
However, the question of whether such a right extends to a company as well has been the subject matter of debate across the world. The jurisprudence can be traced to the leading judgments of the United Kingdom. In Triplex Safety Glass Co Ltd vs. Lancegaye Safety Glass Ltd.14 ('Triplex Safety Glass case") it was held that a corporation could take advantage of the privilege against self-incrimination. Similarly, the House of Lords in Rio Tinto Zinc Corporation vs. Westinghouse Electrical Corporation15 adopted the reasoning of the Court of Appeal in the Triplex Safety Glass case and confirmed the availability of the privilege against self-incrimination to corporations.
However, the United States Supreme Court in Hale vs. Henkel16 ("Hale case") took a different view and restricted the right of privilege against self-incrimination to natural persons, and denied the benefits of the Fifth Amendment privilege against self-incrimination to a corporation.
The Bombay High Court in the State of Maharashtra vs. The Nagpur Electric Light and Power Co. Ltd.17, after considering the decisions of Triplex Safety Glass case and the Hale case referred to above, came to the conclusion that under Indian Law the protection against self-incrimination is available to companies as much as to natural individuals. The court considered the legality of summons that were issued calling upon the company to produce certain documents. Therefore, if the company has been named as an accused, it is clear that any action taken under section 204 of the Act, without following the due process of law, would be in contravention of law.
It is evident that the central government is now vested with the wide, sweeping and unrestricted powers to conduct a roving enquiry and inspection into the books and papers of a company if "the circumstances so warrant". On a reading of the provision as it stands today, the central government is neither under any obligation to issue a notice and disclose the circumstances warranting such exercise of power, nor are there sufficient checks and balances in section 206(5) of the Act to prevent the central government from misusing its power in an arbitrary and mala fide manner.
Even if the requirement to issue a notice is to be read into the Statute, the provision still gives unbridled powers to the State to direct inspection of books of a company for any reason whatsoever if "the circumstances so warrant". Testing section 206(5) of the Act against the back-drop of the above legal principles, a case can be made out that the power of the central government to appoint an inspector to inspect books and papers of a company without prejudice to section 206(1) to (4) of the Act, would result in vesting wide and unbridled power to the State of conducting inspection of books, thereby infringing the fundamental right of companies to carry on trade and business.
The central government cannot be emboldened with the powers to conduct a wide, far reaching, sweeping and an unrestricted roving enquiry and inspection into the books and papers of a company. There ought to be checks and balances with regard to the same. As observed by the Apex Court in the Canara Bank case, even if the possibility of exercise of such power is remote, the very existence of any provision that infringes the fundamental rights of citizens, cannot be legally sustainable.
To create a sound eco-system for business, regard must be given to the fact that the company may have sensitive and confidential data that can be compromised on account of any wide and unrestricted access to its books and papers. Such sensitive and confidential information is crucial for the functioning of any company. If the powers of the central government under section 206(5) of the Act are not curtailed, situations may arise where a company may be forced to disclose such confidential and proprietary information without any rationale or basis for the same.
There have also been instances of this provision being mis-used by unscrupulous litigants or competitors of a company, who petition the ROC to exercise powers under this provision to obtain certain documents from the company, to further their own interests. Since there are no safeguards in this provision, this acts as a tool of harassment and an unwanted interference in the business of the company. The reputational damage caused to companies on account of misuse of powers under this provision would be very significant and, in some cases, irreparable.
Considering this, the central government may either consider deleting section 206(5) in its entirely, as the State is otherwise sufficiently safeguarded in its right and ability to seek for documents and information from a company under the other sub-sections of section 206 of the Act. In the alternative, the central government may amend the provision to delete the words "Without prejudice to the foregoing provisions of this section" in the first part of the provision, and also add the requirements to (i) issue a written notice to the company disclosing the reasons and justifications for issuing any order of inspection of the books and papers of a company (ii) provide an opportunity to the company to respond to such notice, and thereafter (iii) pass an order on such representation in accordance with law.
This will help ensure that the fundamental rights of the company to carry on its trade and business is treated as sacrosanct. In a country that has created enviable jurisprudence protecting the fundamental rights of citizens, section 206(5) of the Act is perhaps an aberration; but not paying heed to such an aberration, may result in this becoming a norm, which our country can lest afford!
1. Section 206(5) of the Companies Act, 2013 reads as follows - "Without prejudice to the foregoing provisions of this section, the Central Government may, if it is satisfied that the circumstances so warrant, direct inspection of books and papers of a company by an inspector appointed by it for the purpose."
2. Please see Dhakeswari Cotton Mills Ltd. vs. Commissioner of Income Tax, West Bengal, AIR 1955 SC 65, where the Supreme Court of India held that every person before an administrative authority exercising adjudicatory powers has the right to know the evidence to be used against him, and in the absence of furnishing such information, the person is denied a right to a fair hearing.
3. (77 Eng. Rep. 194) (KB).
4. Entrick v. Carrington, (1765) 19 HST 1029.
5. Please see Katz v. United States (1967) 389 US 347.
6. Please see M.P. Sharma v. Satish Chandra, 1954 SCR 1077; Kharak Singh v. State of UP, 1963 CriLJ 329; Govind v. State of MP, 1975 CriLJ 1111.
7. AIR 2017 SC 4161.
8. AIR 2005 SC 186.
9. Section 73 of the Indian Stamp Act, 1899 as amended by
the State of Andhra Pradesh read as follows:
"(1) Every public officer or any person having in his custody any registers, books, records, papers, documents or proceedings, the inspection whereof may attend to secure any duty, or to prove or lead to the discovery of any fraud or omission in relation to any duty, shall at all reasonable times permit any person authorized in writing by the Collector to enter upon any premises and to inspect for such purposes the registers, books, records, papers, documents and proceedings, and to take such notes and extracts as he may deem necessary, without fee or charge and if necessary to seize them and impound the same under proper acknowledgement...."
10. 2014 (I) MPJR 144.
11. Civil Rules Nos. 195, 196, 197 and 198 of 1962, MANU/GH/0094/1963.
12. AIR 1955 SC 661.
13. Clause (3) of Article 20 of the Indian Constitution, 1950 states: "No person accused of any offence shall be compelled to be a witness against himself."
14. (1939) 2 All ER 613.
15. (1978) AC 547.
16. 202 US 43 (1906).
17. AIR 1961 Bom 242.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.