LIMITED LIABILITY PARTNERSHIP-PART-XXI - Investigation

[Dr. Sanjiv Agarwal]

Investigation of the affairs of limited liability partnership (Section 43)

Section 43 of the LLP Act, 2008 seeks to provide the circumstances under which investigation of the affairs of an LLP may be ordered and the inspectors appointed by the Central Government to carry out such investigation.

Section 43 empowers Central Government to order for investigation into the affairs of LLP in certain circumstances if ordered by the Tribunal or any court or on application by requisite number of partners of LLP or the circumstances suggest for such investigation in the opinion of the Central Government

Appointment of Inspectors [Sub-section (1)]

Sub-section (1) of section 43 provides for appointment of inspectors to carry out the investigation into the affairs of LLP in the following circumstances -

(a) Tribunal, suo moto, by order declares that the affairs of the LLP ought to be investigated, or

(b) Tribunal by order on an application received from not less than one-fifth (20 percent or atleast one fifth or more) number of partners, declares that affairs of LLP be investigated, or

(c) Any court, by an order, declares that the affairs of LLP ought to be investigated.

Thus, Central Government is required to act on Tribunal's or Court's order for appointment of inspector or inspectors.

The manner of application has been prescribed in rule 29 and it should be supported by prescribed deposit and supporting evidences. Such application, if made by partners of LLP should be by atleast 20 percent or more of partners, ie, one fifth or more of the total strength of partners of LLP.

Central Government shall appoint inspectors for investigating the affairs of LLP who could be one or more persons. Such inspectors must be competent persons. It has not been mentioned what does 'competent person' imply. These persons may be either drawn from the officers of Ministry of Company Affairs or other offices including independent professionals. Central Government shall also give directions on manner of investigation and report thereof.

Under sub-section (1), the Tribunal's power to investigate can be exercised either suo moto or on an application received from one-fifth or more of total partners. Unlike Companies Act, 1956 suo moto powers are not to be exercised in public interest. The use of words 'in public interest' is not there in provisions of section 43(1).

The following objectives may generally form the perquisites for the ordering of an effective investigation-

(a) Whether an inspector can bring to light any major contravention of company law or any other law on the basis of which necessary corrective or remedial measures can be applied.

(b) Whether the application of such measures alone will be enough to lend succor to the aggrieved parties, where necessary, or to set right the affairs of companies so as to bring them in conformity with the accepted principles and standards of goods and efficient management; and

(c) Whether the allegations bring out clearly or by implication, a charge of irregular accounting, the truth of which can be established only by analysis of the books by a qualified Chartered Accountant.

[Reproduced from 'A guide for Departmental Officers']

The inspectors appointed by the Central Government to investigate the affairs of the company, shall find out whether irregularity have been committed in the management of the affairs of the company. The investigation under this section is the work of fact finding. The power of Central Government to direct investigation is neither judicial nor quasi-judicial. But the inspector should act fairly in accordance with natural justice: Pargenon Press Ltd (1970) 3 All ER 535 where two inspectors are appointed to act jointly or severally, it is not necessary that they should conduct investigation together: Sushil Kumar Sanghi v R. R. Kini (1956) 36 Comp. Cas. 201 (Punjab). An investigation cannot be stopped nor can Article 20(3) of the Constitution be invoked on vague allegation that the question asked may have a bearing on charges pending against person in Criminal Court: Sushil Kumar case (supra)

Appointment of Inspectors by Central Government [Sub -Section (2)]

Sub-section (2) of section 43 provides that Central Government may appoint one or more competent persons to act as inspectors to investigate into the affairs of LLP and to report on them. The reporting shall be done as per the directors of Central Government.

While appointment of inspectors in sub-section (1) is obligatory, the appointment of inspectors under sub section (2) is discretionary and Central Government shall take into account the grounds and conditions as stipulated in sub-section (3).

Circumstances for Appointment of Inspectors by Central Government [Sub-Section (3)]

Sub section (3) of section 43 prescribes the circumstances or conditions in which Central Government may appoint inspectors under sub-section (2).

Investigation could be ordered under following circumstances-

(a) not less than one-fifth of the partners make an application along with supporting evidence and security amount as prescribed under rule 28.

(b) The LLP makes an application that the affairs of it ought to be investigated.

(c) In the opinion of the Central Government, there are circumstances suggesting that -

(i) the business is being or has been conducted with an intent to defraud creditors, partners or others.

(ii) The affairs are not being conducted in accordance with the provisions of this Act.

(iii) On receipt of a report of the Registrar or any other investigating or regulatory agency, there are sufficient reasons suggesting that the affairs of the LLP ought to be investigated.

Thus, application for appointment of inspectors can be made either by the requisite number of partners or by the LLP itself. Central Government, without any application being made, is also empowered to appoint inspectors if it is of the opinion that there are circumstances which suggest that investigation ought to be ordered in the affairs of LLP. These circumstances could be-

(a) Circumstances suggesting that-

(i) business of the LLP has been or is being conducted with fraudulent intention to defraud

* its creditors, or

* its partners, or

* any other persons

(ii) business has been or is being conducted otherwise for a fraudulent or unlawful purpose, or

(iii) business has been or is being conducted in an oppressive manner or unfairly prejudicial to some or any of its partners, or

(iv) LLP was formed for any fraudulent or unlawful purpose

(b) Affairs of LLP are not being conducted in accordance with the provisions of the LLP Act which would include rules also. Thus, major or serious and continuous contraventions of LLP Act or rules may warrant an investigation

(c) There exists sufficient reasons in any report of the Registrar or any other investigating agency or regulatory agency which call for an investigation.

It may be noted that the provisions of section 43 do not create any bar against an investigation by a police officer if cognizable offences punishable under the Indian Penal Code (IPC) are suspected to have been committed with by partners of LLP.

Oppression and Oppressive

The words 'oppression or oppressive' have not been defined in the LLP Act but inefficient management will not amount to oppression. Section 397 of Companies Act, 1956 deals with application to Company Law Board for relief in cases of oppression.

An act of oppression must go beyond what is required to make out a case for winding up order and must indicate some lack of probity or fair dealing towards one or more members of the company. In re Fildes Bros. Ltd., (1970) 1 All ER 923 (Ch. D.): 1 WLR 592: 114 5J 301; Lundie Bros Ltd, (7965) 1 WLR 1051: (1965) 2 All E. R. 692; Five Minutes Car Wash Services Ltd., (1966) 1 WLR 745, 752: (1966) 1 All ER 242. This section covers oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure. In re., H R. Harmer Ltd., (1959) 1 WLR 62: (1958) 3 All ER 689:103 5J 73. It is not essential that the alleged oppressor is oppressing in order to obtain a financial benefit; conduct may be oppressive even if it is simply due to overwhelming desire for power and control. In re., K.R.S. Narayan lyengar v. T.A. Mani, AIR 1960 Mad. 338, H.R. Harmer Ltd, (1958) 3 All ER 689: (1959) 1 WLR 62: 103 SJ 73.

An act of omission might amount to oppressive conduct if it is shown that it was designed to achieve some unfair advantage. In re, Five Minutes Car Wash Services Ltd.,(1966) I WLR 745: (1966) 1 All ER 242. Where after the life insurance business of a company was nationalized and the majority wanted to use the assets in some other business, it was held that this amounted to oppression on the minority. In re, Hindustan Cooperative Insurance Society Ltd., 65 CWN 68 : (1961) 31 Comp Cas. 193; (Cal) AIR 1961 Cal. 443. Similarly, it is an oppression to pass a resolution prejudicing the interest of the company or its shareholders generally. In re, A. M..Varkey v J. R. Motishaw, AIR 1964 Ker. 114. Further, unreasonable conduct of directors of a private company in refusing, owing to private disputes, to register transfer of some shares while transferring some other shares bequeathed under a will, : involves the violation of the condition of fair play and amounts to oppression. In re, Mrs. Gajarabai V. Patny Transport P. Ltd., (1965) 2 Comp LJ 234: (1966) 36 Comp Cas; 745 (AP). Similarly, over-throw of the majority by physical force through a single act, its effect is likely to persist indefinitely and amounts to oppression of the majority by a minority and an order should be made under this section. In re, Ramshankar Prasad v. Sindri Iron Foundry Pvt. Ltd., AIR 1966 Cal. 512: (1966) CWN 520. Isolated acts of oppression will not normally be sufficient to justify relief under this section. In re, Clive Mills Co. Ltd., 68 CWN 884: (1964 34 Comp. Cas 731 (Cal).

An oppressive act may not in itself be continuous, but if the circumstances indicate that the effect is continuous, the Court will interfere. In re, Rameshwar Prasad v Sindri Iron Foundry Private Ltd., 68 CWN 118.

Fraudulent

The term 'fraud' has been defined under section 174 of the Contract Act, 1872. Accordingly, a 'fraud' is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another's loss. It is a cheating intended to get an advantage. Therefore the non-production or non-mention of a document which had material bearing on the case was held to be a fraud on the process of the court and the decree obtained by such fraud was a nullity.

Unlawful

The word 'unlawful ' implies that which is contrary to law or unauthorized by law, prohibited by law or against law or rules, something contrary to the law laid down in the statute. The formal difference between an act that is unlawful and an act that is illegal is that an illegal act is forbidden by law, whereas an unlawful act is not protected by law. For example, most forms of wagering are unlawful.

Unfairly Prejudicial

In Indian Contract Act, 1872, 'unfair' means being not fair, marked by injustice, partiality or deception or not equitable in business dealings.

Webster defines prejudice as a opinion or decision of mind formed without due examination prejudgment a bias or leaning toward one side or another of a question, from other consideration than those belonging to it, an unreasonable predication or prepossession for or against anything especially an option or leaning adverse to anything formed without proper grounds or before sufficient knowledge.

Prejudice signifies a prejudgment strictly speaking, but as generally understood imports some ill will, as preconceived opinion.