Section 340 Companies Act: Power of Tribunal to assess damages against delinquent directors, etc

Section 340 of Companies Act: Corporate Governance & Statutory Compliance

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

1. If in the course of winding up of a company, it appears that any person who has taken part in the promotion or formation of the company, or any person, who is or has been a director, manager, Company Liquidator or officer of the company—

a. has misapplied, or retained, or become liable or accountable for, any money or property of the company; or

b. has been guilty of any misfeasance or breach of trust in relation to the company, the Tribunal may, on the application of the Official Liquidator, or the Company Liquidator, or of any creditor or contributory, made within the period specified in that behalf in sub-section (2 ), inquire into the conduct of the person, director, manager, Company Liquidator or officer aforesaid, and order him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Tribunal considers just and proper, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Tribunal considers just and proper.

2. An application under sub-section (1 ) shall be made within five years from the date of the winding up order, or of the first appointment of the Company Liquidator in the winding up, or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer.

3. This section shall apply, notwithstanding that the matter is one for which the person concerned may be criminally liable.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 340

Section 340 governs the power of the Tribunal to assess damages against delinquent directors, promoters, liquidators, and officers of a company in liquidation, providing a summary mechanism to compel restitution of misapplied funds or compensation for misfeasance.

Summary Statutory Inquest: Authorizes the Tribunal, on the application of the Liquidator, creditor, or contributory, to examine the conduct of any promoter or officer alleged to have misapplied corporate funds.
Scope of Delinquency and Breach of Trust: Encompasses any misapplication, retention of company property, or actionable misfeasance resulting in wrongful depletion of the corporate estate.
Personal Disgorgement Decree: Empowers the Tribunal to compel the delinquent officer to restore the property with interest or contribute compensatory sums to company assets.

Key Landmark Precedents:

Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602: Supreme Court held that a Section 340 misfeasance summons allows personal recovery against directors whose negligence or breach of trust caused financial loss to the company.
Deloitte Haskins & Sells LLP v. Union of India 2023 SCC OnLine SC 577: Supreme Court affirmed that statutory investigatory and restitutionary liabilities of auditors and officers survive resignation or corporate dissolution.
Shalimar Works Ltd. v. Their Workmen AIR 1959 SC 1217: Supreme Court expounded on the distinction between regular civil suits and summary statutory assessment of damages in company winding up.

Courtroom Practice & Strategic Litigation Guidance:

In filing a misfeasance summons under Section 340, attach an independent forensic audit report specifying exact fund diversions; plead specific individual acts of director misconduct to overcome claims of collective board oversight.

Section 340: Power of Tribunal to assess damages against delinquent directors, etc

Section 340 of Companies Act: Corporate Governance & Statutory Compliance

Legal Commentary & Landmark Judgments: Section 340