Companies Act Section 339

Companies Act, Section 339: Liability for Fraudulent Conduct of Business during Winding Up

Section 339 of the Companies Act, 2013 provides a powerful legal mechanism to impose personal liability on individuals involved in the fraudulent conduct of business, especially during the course of winding up a company. When it becomes apparent that the business of a company was carried on with intent to defraud creditors or for any fraudulent purpose, the Tribunal is empowered to disregard the corporate veil and hold directors, managers, officers, and other responsible individuals personally accountable for the debts or liabilities of the company without any limitation of liability.

This provision acts as a deterrent against misuse of the corporate structure and ensures that those responsible for misconduct do not escape liability behind the shield of limited liability status.

1. Trigger for Application of Section 339

The section becomes applicable during the winding up of a company, when:

It comes to light that any part of the business was conducted fraudulently, either:
With intent to defraud the company’s creditors or others, or for any fraudulent purpose in general. This discovery may arise during the proceedings initiated by the Tribunal, often based on the application of:

The Official Liquidator, The Company Liquidator, Any creditor of the company, or Any contributory (a person liable to contribute to the assets of the company in winding up).
The section grants discretion to the Tribunal to assess the facts and determine whether it is appropriate to pierce the corporate veil and impose personal liability.

2. Who Can Be Held Personally Liable?

The following individuals may be held personally accountable for debts or other liabilities of the company if they are found to have been parties to the fraudulent conduct:

Directors of the company, Managers, or officers, Any person who has knowingly participated in or facilitated the fraudulent business conduct.
The liability imposed is without any limit, meaning these individuals may be required to personally repay the debts of the company to the extent directed by the Tribunal.

3. Procedure and Tribunal’s Powers

Once an application under this section is filed, and the Tribunal is satisfied that fraud has taken place, it may:

Declare that any of the above persons shall be personally responsible for all or any portion of the company’s debts or liabilities, Permit the Official Liquidator or the Company Liquidator to:
Give evidence, Call witnesses in support of the application to establish fraudulent conduct. This evidentiary process is designed to ensure due process and a fair opportunity for both sides to present their case before the Tribunal passes any binding declaration.

4. Further Directions by Tribunal to Enforce Liability

If the Tribunal declares a person personally liable, it may issue additional orders to give effect to such a declaration, including:

(a) Imposition of a Charge on Amounts Due or Assets Held

The Tribunal may order that the liability of such a person becomes a charge on:
Any debt or obligation owed by the company to the person. Any mortgage or charge or interest held by the person in the company’s assets, Assets held by the person either directly or on behalf of another person, Assets or interests claimed by an assignee from the person liable.
(b) Enforcement of the Charge

The Tribunal is further empowered to make orders necessary to enforce any such charge, ensuring that the financial burden is recovered for the benefit of the company and its creditors.
These directions enable the practical recovery of assets or funds that might otherwise remain beyond reach if left solely to traditional civil remedies.

5. Criminal Liability under Section 447

In addition to civil liability under Section 339(1) and (2), sub-section (3) makes it clear that any person who was knowingly involved in the fraudulent conduct of business shall also be liable for penal action under Section 447 of the Companies Act.

Section 447 provides for severe punishment for fraud, including:

Imprisonment of up to 10 years (minimum of 6 months), and Fine, which may extend to three times the amount involved in the fraud. Thus, Section 339 ensures dual accountability civil and criminal for individuals involved in fraudulent business operations.

6. Overriding Nature of the Provision

Sub-section (4) of Section 339 clarifies that the liabilities and penalties imposed under this section are in addition to any other legal consequences the individual may face under other applicable laws.

This means that even if the person is being prosecuted under another statute (e.g., the Indian Penal Code, Prevention of Corruption Act, etc.), proceedings and liability under Section 339 will still apply independently.