Companies Act Section 246

Companies Act, Section 246: Application of Certain Provisions to Proceedings under Section 241 or Section 245

Section 246 of the Companies Act, 2013 establishes a procedural linkage between certain provisions dealing with fraudulent conduct and their applicability to specific types of proceedings under the Act. Specifically, this section clarifies that the provisions of Sections 337 to 341, which primarily deal with fraudulent conduct of business, misfeasance, and related matters, shall apply mutatis mutandis (i.e., with necessary changes as per the context) to any proceedings initiated before the National Company Law Tribunal (NCLT) under Section 241 or Section 245.

This ensures that individuals involved in the mismanagement or oppression of a company, or those whose conduct is fraudulent or dishonest in the context of class action proceedings, can be held accountable in a manner similar to those dealt with under winding-up proceedings.

Understanding the Sections Referred to (Sections 337 to 341)

Let us understand what each of the referred sections (337 to 341) entails and how they become applicable to proceedings under Section 241 (Oppression and Mismanagement) and Section 245 (Class Action):

Section 337: Penalty for Fraudulent Conduct of Business

This section deals with cases where, during the course of winding up a company, it appears that any business of the company was carried on with the intent to defraud creditors or for fraudulent purposes. The persons knowingly involved in such fraudulent conduct may be punished with:

Imprisonment for up to 5 years, and Fine ranging from ?1 lakh to ?3 lakhs.
Application under Section 246: Even if the company is not being wound up, but an application has been made under Section 241 (regarding oppression or mismanagement) or Section 245 (class action), and it is found that business was conducted fraudulently, the guilty individuals can be punished as per Section 337.

Section 338: Liability Where Proper Accounts Not Kept

This section applies where, during winding up, it is found that proper books of account were not maintained by the company for at least two years prior to the commencement of winding up. The responsible officers may face:

Imprisonment for up to 1 year, and/or Fine ranging from ?1 lakh to ?3 lakhs.
Application under Section 246: If, during the investigation of a complaint under Section 241 or 245, it is found that proper books of account were not maintained, the relevant officers can be penalised under this provision, despite the company not being under liquidation.

Section 339: Liability for Fraudulent Conduct of Business (Civil Liability)

This section imposes civil liability on any person (including directors, managers, officers, etc.) who is knowingly a party to the fraudulent conduct of business. The Tribunal can order such persons to be personally responsible for all or any of the debts or liabilities of the company.

Application under Section 246: Even in cases not involving winding up, such as proceedings under Section 241 or 245, individuals involved in fraudulent business conduct may be made personally liable for the company’s debts.

Section 340: Power of Tribunal to Assess Damages Against Delinquent Directors, etc.

This section empowers the Tribunal to order any person who has:

Misapplied company property, Retained company money wrongly, or Been guilty of misfeasance or breach of trust, to repay or restore the money or property with interest, or to contribute by way of compensation.

Application under Section 246:  In proceedings under Section 241 or 245, if it is found that a director or officer has misused their position or breached their fiduciary duty, the Tribunal may invoke this section to direct restitution or compensation.

Section 341: Liability Under Sections 339 and 340 to Extend to Partners or Directors in Firms or Companies

This section clarifies that if a person who is found liable under Section 339 or 340 was a partner in a firm or director in another company, then the liability can extend to such firm or company, and not just the individual.

Application under Section 246: This allows the Tribunal to extend liability beyond the individual wrongdoer to the wider network of entities involved, even in proceedings under Section 241 or 245.