LIMITED LIABILITY PARTNERSHIP-PART-XXII - Investigations

[Dr. Sanjiv Agarwal]

Application by partners for investigation [Section 44]

An application by partners of the limited liability partnership under clause (a) of sub-section (1) of section 43 shall be supported by such evidence as the Tribunal may require for the purpose of showing that the applicants have good reason for requiring the investigation and the Central Government may, before appointing an inspector, require the applicants to give security, of such amount as may be prescribed, for payment of costs of the investigation.

This section seeks to provide that an application by partners of the LLP for investigation of the LLP shall be supported by such evidence as the Tribunal may require and that the Central Government may require the applicants to give security of such amount as may be prescribed for payment of the costs of the investigation.

Section 44 of LLP Act, 2008 provides for application to be made by partners for investigation of a LLP in pursuance of provision of section 43 (1)(a) wherein on application of partners of LLP, Tribunal can, by order, declare that the affairs of a LLP shall be investigated. This section provides for supporting documentary evidence to show that there exists good reasons for ordering an investigation and payment of prescribed amount as security towards costs of investigation

Thus, application under section 43(1) (a) -

(a) shall be supported by evidence.

(b) such evidence should be to satisfy the Tribunal to form an opinion.

(c) such evidence should show that applicants have good reason (sufficient reason) for requesting or seeking investigation.

(d) shall be accompanied by payment of amount of security deposit as Central Government may prescribe towards costs of investigation.

If the application is devoid of any or both of the above, it may not be entertained by the Tribunal .

In Andhra Pradesh State Civil Supply Corporation Ltd v Delta Oils & Fats Ltd (1997) 12 SCL 277 (CLB Delhi), where main reason for petitioner seeking an investigation was on the basis of findings of the management auditor and auditor of the company and other than observations of these auditors the petitioner, who was controlling the board of directors of company in question had not substantiated alleged irregularities either by comparing with earlier years or with similar companies, it was held that no order for investigation was required and hence not padded passed.

In Punjab Agro Industries Corporation Ltd v Superior Genetics ( India) Ltd (2002) 108 Comp Cases 349 (CLB), it was held that when there is no material suggesting that there could be instances of siphoning of funds requiring investigation, Company Law Board (CLB) cannot order investigation. It was further held that in view of the petitioner having majority on the Board, it can have a special audit carried out and can take further action on the basis of that report.

Firm, body corporate or association not to be appointed as inspector [Section 45]

No firm, body corporate or other association shall be appointed as an inspector. This section seeks to prohibit a firm, body corporate or other association to be appointed as an inspector.

Section 44 of LLP Act, 2008 provides that inspectors appointed should not be a firm, body corporate or other association. It appears that any person other than these three qualifications, ie, a firm , a body corporate (includes company) or association may be appointed as inspector.

It appears that only individuals may be appointed as inspectors. Though Act is silent on whether LLP can also not be appointed as inspector, it appears that since it falls under the definition of the body corporate, it can not be appointed as inspector for investigating the affairs of a LLP.

Who can not be appointed as Inspectors-

(i) firms

(ii) company

(iii) limited liability partnership

(iv) other body corporates

(v) association of persons, by whatever name called.

It may be noted that sub-section (1) and (2) of section 43 state that the persons appointed as inspectors should be competent persons. Who shall be a competent person has not been prescribed in the Act or rules framed there under.

Power of Inspectors to carry out Investigation into Affairs of related Entities, etc [Section 46]

Section 46 of the LLP Act, 2008 seeks to provide that the inspector appointed by the Central Government to investigate the affairs of the LLP under this Act, may carry out investigation into the affairs of other entities associated with the LLP in the past or present or of partner or designated partner, after seeking prior approval of the Central Government.

Section 46 provides discretion to the inspectors investigating the affairs of LLP to extend the investigation or to cover in its scope the investigation of affairs of other entities associated with LLP in past or presently as also of former or present partners or designated partners subject to prior approval of the Central Government, if he feels that it is necessary for his investigation.

Powers of Inspectors [Sub section (1)]

Sub section (1) empowers inspectors to carry out investigation into the affairs of related entities and persons, if the inspector thinks that it will be necessary for the purpose of his investigation. For such an extended investigation by the inspector, following are important -

(a) For such exercise of power, it is a pre requisite that inspector of LLP should think that it is necessary of the purpose of investigation of LLP to also investigate the affairs of other related entities.

(b) Related entities would cover entities which are presently or have been associated in the past with the LLP under investigation.

(c) Associated entities could be firms, body corporates or other associations

(d) Related entities would also cover present and former partners or designated partners of LLP.

(e) If the inspector exercises the power, he shall report on the affairs of such other entities, partners or designated partners to such extent as he thinks that result of such investigation are relevant for the investigation of affairs of the LLP.

Such an investigation should facilitate in the meaningful investigation of the LLP. The fact that he had carried out such investigation of related entities, partners or designated partners shall be disclosed in the report of investigation of LLP.

The inspector shall report to the Central Government on the affairs of the other entities or the designated partner or partner, whose affairs are also investigated under this section, so far as he thinks that the result of such investigation are relevant to the investigation of the affairs of the company for which he was appointed.

The term 'entity' has been defined in clause (k) of section 2 of LLP Act to mean any body corporate including a partnership firm.

The provision does not describe the 'association' but one may draw reference from Accounting Standard AS-18 on related parties or section 370 (1B) of the Companies Act, 1956.

Restrictions on Exercise of Powers [Sub -section (2)

Sub-section (2) puts some restrictions on exercise of power to investigate affairs of associated entities, partners and designated partners by the inspector by requiring him to obtain prior approval of the Central Government before investigating and reporting thereon. The requirement of obtaining approval of Central Government is 'prior' to commencement of such investigation. The proviso to sub-section (2) requires that Central Government shall give a reasonable opportunity to the entity, partner or designated partner whose affairs are sought to be investigated, to show cause as to why such approval should not be accorded. The Central Government on being satisfied after show cause been shown that it is necessary to grant such permission for the purpose of investigation of affairs of LLP, grant such approval. Upon approval, inspector may proceed with investigation of past or present associated entity, present partners or designated partners or former partners or designated partners.

The inspector who wants to investigate the affairs of any other body or persons mentioned above, must obtain the prior approval of the Central Government to do so and the Central Government must provide the concerned body or person a reasonable opportunity to show cause why such approval should not be accorded. Thus, the Government is bound to observe the principles of natural justice before granting approval.

Approval of Central Government under sub-section (2) is a mandatory pre- condition and inspector can not proceed with the investigation of associated entities without prior approval.