Freezing, Reports and Consequences

In one line

While an investigation runs the Tribunal can freeze a company's assets for up to three years and restrict its securities; when it ends the inspector reports, the report is admissible in evidence, and on it the Central Government may prosecute, petition for winding up or oppression relief, sue for damages or recovery in the company's name, and apply to the Tribunal for disgorgement and unlimited personal liability.

In exam wording: under section 221(1), where it appears to the Tribunal, on a reference by the Central Government or in connection with any inquiry or investigation, or on a complaint by the requisite members, a creditor with one lakh rupees outstanding or any other person having reasonable ground to believe, that the removal, transfer or disposal of funds, assets or properties of the company is likely to take place in a manner prejudicial to the interests of the company, its shareholders or creditors, or in public interest, it may direct that such transfer, removal or disposal shall not take place during a period not exceeding three years, or may take place subject to such conditions and restrictions as the Tribunal may deem fit.

Why the law has this at all

An investigation takes months. In that time two things can defeat it, and this chapter is built around preventing both and then making the result count.

The assets can leave. A company whose affairs are being investigated can pay away its cash, transfer its property and move its business, so that a finding of fraud arrives after everything worth recovering has gone. Sections 221 and 222 answer that, the first by freezing funds, assets and properties, the second by restricting securities.

The evidence can be destroyed. Section 229 answers that, and it does so at the highest level the Act has: destruction, mutilation, falsification, concealment, tampering, unauthorised removal, a false entry, or a false explanation, all make the person punishable for fraud under s.447.

And then the result has to be usable. Section 223 makes the report admissible in evidence; section 224 lists the five things the Central Government may do with it; section 225 decides who pays; section 226 stops a company from escaping by winding itself up; and section 228 applies the whole chapter to foreign companies.

The one countervailing provision is s.227, which protects legal professional privilege and bank customer confidentiality, and it is worth noticing that in an Act otherwise so willing to override contracts and other laws, these two confidences survive.

Sections 221 and 222: freezing and restriction

221(1): freezing assets. Where it appears to the Tribunal:

on a reference made to it by the Central Government, or