Where it is shown that a more in-depth investigation is required in relation to a company’s affairs to protect its interests, the court may at the request of a shareholder issue a declaration stating that it should be investigated by an inspector appointed by the Council of Ministers. The discretion of the court must be exercised sparingly, since such an order is a drastic measure deviating from fundamental principles of the company law and has an impact on the company.
The law states these inspectors are appointed if circumstances indicate its activities are carried out with the intent of defrauding creditors or otherwise for a fraudulent or unlawful purpose; that the persons involved in the establishment or management of its affairs are responsible for fraud, misconduct or other misdemeanour towards the company or its members; or that not all the information was given to its members about its affairs. The term ‘company affairs’ has been interpreted to include its goodwill, its profits and losses, its contracts and assets including its shareholding and its ability to control the affairs of a subsidiary.
The Supreme Court examined such a judgement earlier this month in a civil appeal filed by a company indicating that such an investigation of the company’s affairs has the character of an administrative remedy while it does not even constitute a remedy, but a mechanism that can provide useful or necessary information to those seeking a remedy. It added that the possibility to conduct such an investigation is recognised as one of the instances provided in the law protecting the minority shareholders of a company.
The appointment of an inspector is compulsory once the court has issued a relevant order. The case in question concerned a family company, the shareholders of which were former spouses and the wife was a minority shareholder. In that capacity, claiming improper, fraudulent and illegal conduct by the husband as director of the company, she applied to the court for an order for the investigation of the company’s affairs. The court of first instance issued the order and the company filed an appeal.
The Supreme Court held that in the course of issuing the aforesaid order, the court shouldn’t be convinced that fraud or other misconduct has been committed, since the object of the procedure is not to prove such a behaviour, but to carry out an investigation proving whether there was such a misconduct. On the other hand, the court will not act based on mere suspicion, but it should depend on a solid and substantial basis. This procedure cannot be used for fishing for evidence if there is not enough to give rise to reasonable suspicion of fraud or other misconduct. If the evidence adduced is inadequate, then the application must be dismissed.
In the aforesaid case, the evidence adduced by the wife supported by relevant documents convinced the court of first instance there was a need for the investigation of the company’s affairs regarding the conduct of her ex-husband and in particular regarding matters relating to bad management of the company, such as non-convening general meetings, the appointment and the termination of the appointment of directors, omission to prepare and submit financial statements, omission to pay dividends, loans to and from the company by mortgaging its assets without the necessary consent of its shareholders and the increase of the husband’s personal assets.
The Supreme Court concluded that the court of first instance correctly exercised its discretionary power and issued the order for the appointment of an inspector by the Council of Ministers; there was no valid or objective reason for the Supreme Court to intervene in the manner the court had acted, so it dismissed the appeal.