Companies Act Section 344

Companies Act, Section 344: Mandatory Disclosure of Liquidation Status in Company Communications 

Section 344 of the Companies Act, 2013, prescribes the legal obligation to disclose the liquidation status of a company once winding-up proceedings have commenced. Whether the company is being wound up by the Tribunal (compulsory winding up) or through a voluntary process, it is essential for the company and all persons managing its affairs to clearly inform all stakeholders that the company is in liquidation.

This requirement ensures transparency, protects the interests of creditors, suppliers, and customers, and helps prevent any misrepresentation that might otherwise arise during the winding-up process.

1. Requirement to State That the Company Is in Liquidation

Once a company enters the process of winding up either by a Tribunal order or voluntarily the law imposes a specific obligation on the company and the parties handling its affairs. Specifically:

Scope of the Disclosure Requirement

Every official document issued on behalf of the company must contain a clear and legible statement that the company is being wound up. This includes documents such as:

Invoices: Bills or statements issued to customers or clients reflecting amounts due for goods or services.
Orders for Goods: Purchase orders or requisitions sent to suppliers or vendors,
Business Letters: Any formal correspondence issued in the name of the company, including: Letters of intent, Proposals, Notices, Confirmations of transactions or agreements.
These documents must explicitly state that the company is undergoing winding up proceedings. This requirement extends to documents issued by or on behalf of:

The company itself, The Company Liquidator, appointed to carry out the winding-up process, Any receiver or manager managing or holding custody of any property of the company.
Purpose of the Requirement: The primary objective of this disclosure mandate is to:

Notify the public and third parties engaging with the company of its legal status, Prevent the company from continuing commercial transactions under the false impression that it is a going concern.
Warn creditors and other stakeholders so they can exercise caution in dealings, Uphold the integrity of the liquidation process by ensuring all external interactions are conducted transparently.
2. Penalty for Non-Compliance

Failure to comply with the disclosure requirement in sub-section (1) attracts penal consequences. If the company or any responsible individual wilfully fails to ensure the inclusion of the required liquidation statement, the following persons can be held liable:

The company itself, Every officer of the company responsible for issuing such documents, The Company Liquidator, Any receiver or manager of the property of the company,
Conditions for Liability

The above individuals are liable only if they wilfully authorise or permit the omission of the required statement from such documents. In other words, there must be intentional or conscious negligence in omitting the liquidation disclosure.

Punishment: The punishment prescribed under this sub-section is a monetary fine:

The minimum fine is ?50,000, The fine may extend up to ?3,00,000 depending on the gravity and duration of the violation.
This penalty reflects the seriousness of failing to inform external parties about the winding-up status of the company and seeks to deter concealment or misrepresentation during the liquidation phase.

3. Practical Implications

The requirements under Section 344 carry significant practical implications for companies and those involved in their winding-up, including:

Mandatory Compliance: It becomes the responsibility of the Liquidator and other authorized personnel to ensure that every outgoing document is appropriately labeled with the winding-up declaration.
Document Review and Amendment: Companies must revise all templates for invoices, official letters, and orders to include the necessary disclosure.
Training and Oversight: The Liquidator and company officers must ensure that staff responsible for documentation and correspondence are aware of this requirement and are trained to enforce it consistently.
Avoidance of Legal Consequences: Non-compliance, even if unintentional, may invite penalties if it is found to be the result of wilful omission.
4. Example Scenario

ABC Textiles Ltd. enters voluntary winding up, and the Company Liquidator begins managing its affairs. However, several purchase orders and invoices are issued to vendors and clients without stating that the company is being wound up.

Upon discovering the omission, the Tribunal or Registrar may initiate proceedings against:
The Company Liquidator, The officer who approved the documentation, The company itself. If it is found that the omission was wilfully authorized or knowingly permitted, each of them may be fined between ?50,000 and ?3,00,000.