Companies Act Section 340

Companies Act, Section 340: Tribunal’s Power to Assess Damages Against Delinquent Directors and Officers During Winding Up

Section 340 of the Companies Act, 2013 empowers the Tribunal to hold certain individuals accountable for wrongful conduct during the course of a company’s business or winding up. Specifically, the provision targets directors, officers, managers, promoters, and liquidators who have either misapplied company funds, wrongfully retained property, or breached their fiduciary duties.

This section provides for a civil remedy by which the Tribunal can investigate misconduct and order the delinquent individuals to repay, restore, or compensate the company for losses incurred due to their wrongdoing. Importantly, this action can be taken even when the same misconduct may also attract criminal liability under other laws, ensuring comprehensive redressal for aggrieved stakeholders.

1. Scope and Applicability

Section 340 comes into effect during the course of winding up of a company and applies to a broad set of persons who may have been involved in the company’s affairs at various stages:

Any person involved in the promotion or formation of the company, Any person who is or has been: A director, A manager, A Company Liquidator, or any other officer of the company.
This wide applicability ensures that anyone who held influential or fiduciary positions in relation to the company may be held accountable for their actions.

2. Grounds for Tribunal’s Intervention

The Tribunal may initiate proceedings under this section if it appears that the aforementioned persons have committed any of the following acts:

(a) Misapplication, Retention, or Wrongful Accountability of Assets

If the individual has misapplied company funds, or retained company property or assets wrongfully, or become liable or accountable for any money or property of the company (e.g., through negligent handling of funds or deliberate misappropriation).
(b) Misfeasance or Breach of Trust

If the person is found to have engaged in misfeasance, i.e., misconduct or abuse of authority resulting in loss or damage to the company, or If there is a breach of trust (fiduciary duties), where the person failed to act in the best interests of the company and its stakeholders, possibly for personal gain.
These wrongdoings may relate to both acts of commission and omission, including fraudulent decisions, negligent management of assets, or failure to safeguard the company’s interests.

3. Initiation of Proceedings: Who Can Apply?

An application under Section 340(1) can be made by:

The Official Liquidator, who is appointed by the Tribunal, the Company Liquidator, who may be appointed in a voluntary or Tribunal-led winding up, Any creditor of the company, or any contributory (i.e., a person liable to contribute to the assets in winding up, such as a shareholder).
This ensures that multiple stakeholders, not just the Liquidator, can trigger accountability proceedings if they suspect misconduct.

4. Tribunal’s Powers and Remedies

Upon receiving an application and conducting an inquiry, the Tribunal is empowered to:

Order repayment or restoration of the misapplied or wrongfully retained money or property. Order interest on the amount, at a rate deemed just and proper by the Tribunal. Direct the individual to contribute a compensation sum to the company’s assets.
The compensation may correspond to the loss caused due to misfeasance, breach of trust, or any other improper conduct.
The Tribunal has complete discretion to assess the amount of compensation or restitution in a manner it finds just and equitable, considering the circumstances and the impact on the company.
These powers are aimed at ensuring that the company and its creditors do not bear the financial burden caused by individual misconduct or negligence.

5. Time Limit for Filing Application

Section 340(2) lays down specific time limits for initiating action. The application must be filed within five years, calculated from the latest of the following dates:

The date of the winding up order passed by the Tribunal, The date of appointment of the Company Liquidator in such winding up, or the date of the occurrence of the misconduct (misapplication, retention, misfeasance, or breach of trust).
Whichever of these dates is later will be the starting point for the five-year limitation. This ensures that wrongdoing committed earlier may still be actionable as long as it is discovered within the limitation period, giving stakeholders adequate time for investigation.

6. No Bar Despite Criminal Liability

Section 340(3) makes it abundantly clear that:

Civil liability under this section is enforceable, even if the individual is also criminally liable under any other law for the same conduct.
The availability of criminal sanctions under laws such as the Indian Penal Code or Section 447 of the Companies Act (fraud), does not preclude the Tribunal from ordering repayment or compensation through civil proceedings under Section 340.
This dual mechanism ensures that both punitive and restorative justice are pursued, reinforcing the seriousness of fiduciary breaches and the protection of stakeholders’ interests.