Liability Where Proper Accounts Not Kept: s. 338

Liability where proper accounts not kept is the marginal heading of section 338 of the Companies Act, 2013, and it is one of the few provisions that turns a bookkeeping failure into a personal criminal liability. It bites only once a company is being wound up, it looks back two years from that point, and it leaves every officer in default exposed unless he can make out a two limbed defence. This page reads section 338 as printed.

What creates liability where proper accounts not kept?

A single showing in a winding up. Sub-section (1) applies where a company is being wound up, if it is shown that proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter.

The lookback is not always two years. It is the shorter of two years and the company's entire existence, so a company wound up eighteen months after incorporation is judged across all eighteen months. The commencement of a Tribunal winding up is itself pushed back to the presentation of the petition by section 357, which is discussed in exclusion of time in limitation, so the two year window is measured from the petition rather than from the order.

The word throughout matters. The default is a failure to keep proper books across the whole period, not a lapse on a particular day.

Who is liable, and what is the defence?

The section exposes every officer of the company who is in default, and gives them one way out, with two limbs joined by and. The officer escapes unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable.

Read the burden. The section says unless he shows, so once the failure to keep proper books is established the officer has to make out the defence rather than the prosecution having to negative it. Honesty alone is not enough: the default must also have been excusable in the circumstances in which the business was actually carried on.

The punishment is a compound one: imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees. Both floors are mandatory on the face of the section.

When are books deemed not to have been kept?

Sub-section (2) supplies a deeming rule with two clauses, and the connector between them decides how widely it applies. Books are deemed not kept:

• (a) if such books of account as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing entries made from day-to-day in sufficient detail of all cash received and all cash paid, have not been kept; and
• (b) where the business of the company has involved dealings in goods, statements of the annual stock takings and, except in the case of goods sold by way of ordinary retail trade, of all goods sold and purchased, showing the goods and the buyers and the sellers thereof in sufficient detail to enable those goods and those buyers and sellers to be identified, have not been kept.

Clause (b) opens with its own condition, where the business of the company has involved dealings in goods, so it has nothing to bite on in a business that does not deal in goods. Inside it sits a further carve out: the record of buyers and sellers is not required in the case of goods sold by way of ordinary retail trade, which is the drafter conceding that a retailer cannot name every customer.

The clauses are joined by and, not or, which is a point a reader should notice rather than smooth over. The section prints them as a conjoined pair.

How does section 338 fit with the rest of the winding up Chapter?

It is one of a run of officer facing provisions in Part III. Section 337 punishes frauds by officers of a company subsequently ordered to be wound up, section 338 punishes the accounts failure, and section 339 lets the Tribunal declare persons personally responsible for the company's debts where the business was carried on with intent to defraud creditors. The broader set of offences committed in the course of a liquidation is covered in offences by officers in liquidation.

The books that section 338 says should exist are the same books that later become evidence and later still become disposable. Their evidential status is set by section 345, covered in company books as evidence in winding up, and creditors' and contributories' right to see them is in how to inspect company books in winding up.

Liability where proper accounts not kept is therefore the front end of a chain that runs from the duty to record, through the right to inspect, to the evidential weight the records carry once a liquidation is under way.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.