Scope of inspection under Cos Ord: SC sets aside IHC judgment

ISLAMABAD: The Supreme Court has set aside the Islamabad High Court’s judgment for not differentiating the scope of inspection under Section 231 and investigation under sections 263 and 265 of the Companies Ordinance.

A two-judge bench comprising Justice Syed Mansoor Ali Shah and Justice Ayesha A Malik declared the provisions (Section 231, 263 & 265) of the Ordinance, which relate to inspection and investigation, are distinct. The SECP, on 26-07-2012, issued a notice to Saif Power Limited, a public limited company, and passed an order against the company on the same date that it wanted to inspect its books of account and books and papers in terms of Section 231 of the Ordinance. The order also said that the inspection was to be carried out to scrutinise the record and books of account of the company with reference to the causes of concern stipulated within the order.

The petitioner (Saif Power) challenged the order before the IHC, which was dismissed on 6-6-2022.

Effectively, the SECP issued a notice and order under Section 231 of the Ordinance, while, in fact, exercising powers under Section 265 of the Ordinance, without meeting the necessary requirements of the said section.

The High Court allowed the investigation on the understanding that no auditors were appointed under Section 252 of the Ordinance, hence, the SECP could appoint its own auditors/inspectors to look into the violations and illegalities contained in the order.

At the same time, the High Court finds that an inspection under Section 231 of the Ordinance is administrative in nature to look into the affairs and accounts of the company; that it is for conducting a preliminary inquiry into the affairs and accounts of the company, and so concluded that the petitioner’s challenge that it is an investigation under the garb of an inspection is not made out and the petition was dismissed.

The judgment found that the IHC has misconstrued the requirements of an inspection under Section 231 of the Ordinance and that of an investigation, and has blurred the difference between the two.

The judgment authored by Justice A Malik said an inspection under Section 231 is an administrative power exercised by the SECP to ensure compliance with regulatory requirements. This power is limited to the inspection of books of account of a company after the recording reasons for the inspection in this regard.

Whereas, an investigation against a company is a serious matter, as it is capable of entailing consequences both financial and penal, which will impact the goodwill of the company.

Consequently, an investigation cannot be ordered except on statutory grounds which include allegations of fraud, illegalities into the affairs of the company, or misuse and misappropriation of funds of the company.

It is then the duty of the SECP to consider and weigh multiple factors, such as the nature of the complaint and its source, ensure due process and follow the statutory process in good faith, without any bias, prejudice or ulterior motives.

The Ordinance does not prescribe the same process for an inspection simply because its scope is limited as are its consequences.

We find that the order contains specific allegations, for which, it seeks to investigate the matter in order to ascertain the merits of the allegations, this is beyond the scope of Section 231 as the SECP is clearly looking to investigate into the allegations contained in its order dated 26.07.2012 and not to inspect books of account.

An inspection is not into the affairs of the company and only limited to books of account and related books and papers. As already stated, inspection is administrative in nature where regulatory compliance is the objective and not a probe into allegations against how the affairs of the company are being managed.

The SC’s judgment noted that the IHC’s verdict has not appreciated the scope of inspections under the Ordinance and its difference from an investigation. The Supreme Court, therefore, set aside the IHC’s judgment. It also declared the order of the SECP dated 26.07.2012 and actions taken thereunder illegal being in excess of the authority under Section 231 of the Ordinance.

Copyright Business Recorder, 2023