Companies Act Section 338 — Liability where proper accounts not kept
CHAPTER XX WINDING UP
Commercial / Corporate
Summary
Sub-section (1) deals with a company that is being wound up. If it is shown that proper books of account were not kept during the two years before the winding up started, or since the company was incorporated, whichever period is shorter, then every officer of the company who is in default can be punished. The punishment is imprisonment of at least one year and up to three years, plus a fine of at least one lakh rupees and up to three lakh rupees. However, an officer can avoid this punishment if he proves that he acted honestly and that the failure to keep proper books was excusable given the circumstances in which the company's business was carried on.
Sub-section (2) explains what counts as not keeping proper books of account for the purpose of sub-section (1). Under clause (a), proper books are deemed not to have been kept if the company did not maintain books that are necessary to show and explain its transactions and financial position. This includes books with day-to-day entries, in sufficient detail, of all cash received and all cash paid.
Under clause (b), where the company's business involved dealing in goods, proper books are deemed not to have been kept if the company did not maintain statements of the annual stock takings. Also, except for goods sold through ordinary retail trade, the company must have kept statements of all goods sold and purchased, showing the goods, the buyers, and the sellers in enough detail to identify them. If these statements were not kept, proper books are considered not to have been kept.
Official Text
(1) Where a company is being wound up, if it is shown that proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter, every officer of the company who is in default shall, unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable, be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.
(2) For the purposes of sub-section (1), it shall be deemed that proper books of account have not been kept in the case of any company,—
(a) if such books of account as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing entries made from day-to-day in sufficient detail of all cash received and all cash paid, have not been kept; and
(b) where the business of the company has involved dealings in goods, statements of the annual stock takings and, except in the case of goods sold by way of ordinary retail trade, of all goods sold and purchased, showing the goods and the buyers and the sellers thereof in sufficient detail to enable those goods and those buyers and sellers to be identified, have not been kept.