Companies Act Section 346

Companies Act, Section 346: Right of Creditors and Contributories to Inspect Company Records During Winding Up 

Section 346 of the Companies Act, 2013 governs the right of inspection of a company’s books and papers by creditors and contributories after a winding-up order has been made by the Tribunal. This provision ensures transparency and enables relevant stakeholders to access important records, which may assist them in understanding the status of the winding-up proceedings and safeguarding their legal and financial interests.

The section also balances this right with safeguards and limitations, ensuring that the inspection is conducted in accordance with prescribed rules and does not interfere with the rights of the government or other authorities under other laws.

1. Applicability of Section 346

Section 346 becomes applicable:

Only after the Tribunal has passed an order for the winding up of a company, and remains applicable throughout the winding-up process.
It applies regardless of the nature or size of the company being wound up, and is relevant in all cases of winding up initiated by the National Company Law Tribunal (NCLT).

2. Right of Inspection by Creditors and Contributories

Who Can Inspect: After the winding-up order is passed, the following stakeholders are entitled to seek inspection:

Creditors: Persons or entities to whom the company owes money or other obligations.
Contributories: Persons liable to contribute to the assets of the company in the event of its winding up (usually members or shareholders).
This right is particularly important for:

Assessing the status of the company’s assets and liabilities, Monitoring the conduct and progress of the liquidation proceedings,Ensuring that the Company Liquidator is acting lawfully and in the best interests of all stakeholders.
Verifying the correctness of claims, dues, and payments, Supporting any legal proceedings or objections raised by creditors or contributories.
Scope of Inspection: The right of inspection extends to:

All books of account, statutory registers, and financial statements, Papers, documents, contracts, and correspondence maintained by the company, Records maintained by the Company Liquidator as part of his statutory duties.
However, this right is not absolute. It must be exercised:

Only in accordance with the rules prescribed under the Act or by the Tribunal, Under conditions that may be imposed to ensure orderly access and protect sensitive information. These rules may relate to:

The timing and manner of inspection, Authorized locations or persons entitled to accompany the stakeholder, Confidentiality or data protection norms.
3. Protection of Governmental and Statutory Rights

Section 346(2) ensures that the inspection rights granted to creditors and contributories do not override or restrict any existing rights under other laws that are conferred on:

(a) The Central Government or State Governments

Both the Union and State Governments may have rights under various statutes to access, examine, or take possession of company records during winding up for example, for tax recovery, investigation of fraud, or regulatory enforcement. Section 346 does not affect any such lawful entitlement.

(b) Any Authority or Officer of the Government

This includes agencies such as:

The Registrar of Companies (RoC), The Serious Fraud Investigation Office (SFIO), The Income Tax Department, GST authorities, or enforcement directorates, Any regulatory authority such as SEBI, RBI, or IRDAI.
These authorities may, under the relevant laws, inspect, seize, or request production of books and records, even after a winding-up order is made.

(c) Any Person Acting Under the Authority of the Government or Officers

This covers persons authorized by government officers or authorities, such as:

Appointed inspectors or auditors, Forensic accountants or professionals acting on behalf of an investigative agency, Legal representatives or enforcement officers.
Their powers of inspection are preserved, and Section 346 does not impose any restriction on them.

4. Purpose and Significance of the Provision

Section 346 promotes accountability and stakeholder participation in the winding-up process. Its key purposes include:

Ensuring transparency in the handling of company affairs by the Liquidator, Empowering creditors and contributories to examine and verify the company's financial position and progress of liquidation.
Supporting equitable treatment of all stakeholders through access to critical records, Preventing concealment of information or fraud during winding up, Maintaining a system of checks and balances through statutory and stakeholder oversight.
It also ensures that governmental and regulatory functions are not hindered due to the winding-up process, preserving the public interest.

5. Compliance by the Company and Liquidator

To facilitate inspection under Section 346:

The company and the Company Liquidator must maintain books and papers properly and in an accessible manner, They must comply with inspection requests made in accordance with the prescribed rules.

They must not obstruct access to records by legitimate creditors, contributories, or statutory authorities. Failure to permit inspection where entitled may result in penal consequences or adverse findings by the Tribunal.