Sections 337 and 338 of the Companies Act, 2013: Fraud by Officers and Liability for Improper Accounts
Sections 337 and 338 form part of the winding-up provisions of the Companies Act, 2013. Section 337 deals with specified fraudulent acts committed by an officer of a company that is subsequently ordered to be wound up by the Tribunal under the Act. Section 338 deals with the responsibility of officers where proper books of account were not kept before winding up.
Current-law note: Section 337 was amended through the Insolvency and Bankruptcy Code, 2016 framework. The earlier reference to a company subsequently passing a resolution for voluntary winding up was replaced so that the provision now refers to a company subsequently ordered to be wound up by the Tribunal under the Companies Act.
Section 337 - Penalty for frauds by officers
Section 337 applies where a person was an officer of the company at the time of the alleged offence and the company is subsequently ordered to be wound up by the Tribunal under the Companies Act, 2013. The provision targets fraudulent conduct connected with obtaining credit, dealing with company property to defraud creditors or others, and concealment or removal of company property in the circumstances specified by the section.
Acts covered by Section 337
Obtaining credit by fraud: inducing a person, by false pretences or other fraud, to give credit to the company.
Fraudulent dealing with property: with intent to defraud creditors or another person, making or causing a gift, transfer or charge over company property, or causing or conniving at execution against that property.
Concealment or removal: with intent to defraud creditors, concealing or removing company property since an unsatisfied judgment or order for payment, or within two months before that date.
Punishment under Section 337
The punishment prescribed is imprisonment for not less than one year and up to three years, together with a fine of not less than Rs. 1 lakh and up to Rs. 3 lakh.
Section 338 - Liability where proper accounts not kept
Section 338 applies when a company is being wound up and proper books of account were not kept throughout the relevant period. The relevant period is the two years immediately preceding commencement of winding up, or the period from incorporation to commencement of winding up where that period is shorter.
Every officer of the company who is in default is exposed to the punishment prescribed by the section unless the officer shows both that he acted honestly and that, in the circumstances in which the business was carried on, the default was excusable.
When are books deemed not to have been properly kept?
For Section 338, proper books are deemed not to have been kept where books necessary to exhibit and explain the company's transactions and financial position, including sufficiently detailed day-to-day records of cash received and paid, have not been maintained.
Where the company deals in goods, the section also requires statements of annual stock-taking and, except for goods sold by ordinary retail trade, sufficiently detailed records of goods sold and purchased so that the goods, buyers and sellers can be identified.
Punishment under Section 338
An officer in default, subject to the statutory defence described above, is punishable with imprisonment for not less than one year and up to three years, and with a fine of not less than Rs. 1 lakh and up to Rs. 3 lakh.
Section 337 and Section 338 - key difference
| Provision | Primary subject | Core requirement |
|---|---|---|
| Section 337 | Fraud by officers | Specified fraudulent conduct, including the required intent to defraud where stated in the provision. |
| Section 338 | Failure to keep proper accounts | Failure to maintain the books and records specified for the relevant pre-winding-up period, subject to the statutory defence. |
Meaning of important terms
Officer: The Companies Act uses a statutory definition of "officer" in Section 2(59), covering a director, manager or key managerial personnel and specified persons whose directions or instructions the Board or directors are accustomed to act upon.
Officer who is in default: Section 2(60) identifies the categories of officers who may be treated as officers in default for contraventions for which the Act imposes liability.
Books of account: Section 2(13) defines "books of account" and covers records maintained in respect of sums received and spent, sales and purchases, assets and liabilities, and prescribed cost items where applicable.
Official legal resources
For the authoritative statutory text and subsequent amendments, refer to the Companies Act, 2013 on India Code. Corporate-law notifications, rules, forms and regulatory updates are available from the Ministry of Corporate Affairs.
This article is a general explanation of the statutory provisions. For a particular winding-up, prosecution or officer-liability matter, the applicable amendments, notifications, facts and judicial decisions should also be examined.