• MERWIN RICHARD

Liability for fraudulent conduct of business.

Updated: Oct 3

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This article talks about the fraudulent conduct of business in the course of the business period which is laid down under section 339 of the Companies Act 2013.


Section 339(1) of the Act says that “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.”


“If a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospects of the creditors ever receiving payments of those debts, it is, in general, a proper inference that the company is carrying on business with the intent to defraud.” Winding up of the company does not absolve the directors from their criminal liability.


Section 339 provides that in case any director, manager, officer, or any persons knowingly carried on the business with the intent to defraud creditors or for any fraudulent purpose, the Tribunal may order that such persons will be personally responsible, without any limitation of liability, for all or any of the debts or liabilities as the Tribunal may direct. The Tribunal may also make provisions for the liability of such persons to be a charge on any debt, obligation, mortgage, or any interest in any mortgage or charge on any assets.


Requirements for affixing liability to the Directors of the Company for fraudulent conduct of business during winding-up proceedings under the Companies Act, 2013

  1. There must be a prima facie case that the business of the company is being carried out with the intent to defraud creditors of the company.

  2. An application is required to be made to the Tribunal by the Official Liquidator or creditor or contributory to the company.

  3. That the fraudulent trading is with the knowledge of the Director and such intent to defraud is attributable to him. Such a person who knowingly does such fraudulent activity is liable for action under Section 447 of the Companies Act, 2013 which prescribes punishment for persons guilty of fraud.

  4. Such fraudulent trading took place at a time when the concerned Director was responsible for managing the affairs of the company.


As per Section 339 of the Companies Act, 2013, on fulfillment of the above requirements for affixing liability to the Directors of the Company for fraudulent conduct of business during winding-up proceedings under the Companies Act, 2013, the Tribunal may declare that the Director, Manager or any other people so involved will be liable and personally responsible, without any limitation of liability, for all such debts and liabilities as directed by the Tribunal and also is empowered to pass an order under Section 339 and Section 340 of the Act against the partner of the firm or director of the company.

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