Companies Act Section 339 — Liability for fraudulent conduct of business
CHAPTER XX WINDING UP
Commercial / Corporate
Summary
Sub-section (1) deals with fraudulent business conduct during winding up. If, while a company is being wound up, it appears that the company's business was carried on with the intent to defraud creditors or any other persons, or for any fraudulent purpose, the Tribunal may declare certain people personally responsible for the company's debts or liabilities without any limit on that responsibility. This declaration can be made on the application of the Official Liquidator, the Company Liquidator, any creditor, or any contributory of the company. The people who can be held responsible are those who are or have been directors, managers, or officers of the company, as well as any persons who knowingly took part in carrying on the business in that fraudulent manner. The Tribunal has discretion to decide whether it is proper to make such a declaration and can direct that the person be responsible for all or only some of the debts or liabilities. The proviso to this sub-section states that, when the application is being heard, the Official Liquidator or the Company Liquidator may personally give evidence or call witnesses.
Sub-section (2) allows the Tribunal to give further directions to give effect to a declaration made under sub-section (1). Under clause (a) of sub-section (2), the Tribunal can make the liability of the person declared responsible a charge on any debt or obligation owed by the company to that person, or on any mortgage, charge, or interest in a mortgage or charge on the company's assets that is held by or vested in that person, or held by someone on that person's behalf, or held by someone claiming as an assignee from or through the liable person or someone acting on that person's behalf. Under clause (b) of sub-section (2), the Tribunal can make any further order necessary to enforce any charge imposed under this sub-section.
Sub-section (3) states that when a company's business is carried on with the intent or for the purpose mentioned in sub-section (1), every person who knowingly was a party to carrying on the business in that manner shall be liable for action under section 447.
Sub-section (4) clarifies that this section applies even if the person concerned may be punishable under any other law currently in force for the matters on the ground of which the declaration is to be made.
The Explanation defines certain terms used in this section. Under clause (a) of the Explanation, the expression "assignee" includes any person to whom, or in whose favour, by the directions of the liable person, the debt, obligation, mortgage, or charge was created, issued, or transferred, or the interest was created. However, it does not include an assignee for valuable consideration, not including consideration by way of marriage, given in good faith and without notice of any of the matters on the ground of which the declaration is made. Under clause (b) of the Explanation, the expression "officer" includes any person in accordance with whose directions or instructions the directors of the company have been accustomed to act.
Official Text
(1) If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct:
Provided that on the hearing of an application under this sub-section, the Official Liquidator or the Company Liquidator, as the case may be, may himself give evidence or call witnesses.
(2) Where the Tribunal makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that declaration and, in particular,—
(a) make provision for making the liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf;
(b) make such further order as may be necessary for the purpose of enforcing any charge imposed under this sub-section.
(3) Where any business of a company is carried on with such intent or for such purpose as is mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be liable for action under section 447.
(4) This section shall apply, notwithstanding that the person concerned may be punishable under any other law for the time being in force in respect of the matters on the ground of which the declaration is to be made.
Explanation.—For the purposes of this section,—
(a) the expression “assignee” includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest was created, but does not include an assignee for valuable consideration, not including consideration by way of marriage, given in good faith and without notice of any of the matters on the ground of which the declaration is made;
(b) the expression “officer” includes any person in accordance with whose directions or instructions the directors of the company have been accustomed to act.