First Notes - 16 September 2016

First Notes - 16 September 2016

The central government notified more sections of the 2013 Act relating to NCLT/NCLAT

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The Ministry of Corporate Affairs (MCA), on 1 June 2016, constituted the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) to exercise and discharge the powers and functions as conferred on it under the Companies Act, 2013 (2013 Act). The constitution of NCLT/NCLAT resulted in the dissolution of the Company
Law Board (CLB) constituted under erstwhile Companies Act, 1956 and all matters or proceedings pending before the CLB have been transferred to NCLT from 1 June 2016. Additionally, on 1 June 2016, the MCA notified certain related sections of the 2013 Act to enable the NCLT/NCLAT exercise their powers. 

Further, MCA on 21 July 2016, notified the rules corresponding to the sections relating to NCLT/NCLAT. They are as follows:

  1. National Company Law Tribunal Rules, 2016 (NCLT Rules) and 
  2. National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules).

New development

The MCA on 9 September 2016 notified certain more sections of the 2013 Act relating to functioning of NCLT and NCLAT. The recently notified sections enable the NCLT and NCLAT to exercise their powers in the specified cases. 

There are certain sections that still need to be notified e.g. those relating to
compromise, amalgamation and capital reduction, and winding up have not been notified.

Overview of the recently notified sections

The following table provides a brief description of the newly notified sections.

Sections notified Overview of the sections
Section 227 Legal advisers and bankers not to disclose certain information: This section provides that the legal adviser or
bankers of the body corporate or person, not to disclose to the NCLT/central government/ registrar/inspector any information as to the affairs of any of their customers, other than such company or body corporate.
Section 242(1)(b) and
242(2)(c) and (g)]

Powers of tribunal*: This section provides powers to NCLT to pass specified orders for prevention of oppression and mismanagement by a company in prescribed cases.

*Other clauses of the section were notified earlier on 1 June 2016, so now with this notification the entire section is notified.

Section 246

Application of certain provisions to proceedings under Section
241 or 245: This section provides that the provisions of Sections 337 to 341 (both inclusive) shall apply mutatis mutandis, in relation to an application made to the NCLT under section 241* or section 245**.

*Section 241, Application to Tribunal for relief in cases of oppression, etc. Any member of the company can file complaint to the tribunal for matters prejudicial to the interests of the company and the central government has the power to issue order to the tribunal if it is of the same opinion.

**Section 245, Class action: Members or depositors can file an application before NCLT and seek order on matters specified in Section 245.

Section 337 Penalty for frauds by officers: This section prescribes the situations where any person who has given false pretences or by means of any other fraud, induced any person to give credit to the company to defraud creditors concealed or removed any part of the property of the company to be wound up may be punishable with imprisonment for a term of at least one year
which may extend to three years or charged with fine ranging from INR1 lakh to INR3 lakh.
Section 338 Liability where proper accounts not kept: This section provides that the company which is being wound up should keep proper books of account throughout the period of two years immediately preceding the commencement of the winding up. Additionally, it identifies the situations where it will be deemed that proper books of account have not been kept by the
Section 339

Liability for fraudulent conduct of business: The section imposes penalty for the fraudulent conduct of the company’s business for the cases where it has been assessed that the business of the company has been carried on with the intent to defrauding the creditors of the company or any other person or for any fraudulent purpose. The application under the section can be made by the official liquidator, the company liquidator, any creditor or any contributory of the company. The NCLT on the basis of such application can hold persons responsible for all the debts and liabilities of the company. Additionally, it provides powers to tribunal to fix the responsibility of directors, managers or officer of the company for fraudulent conduct of business and that shall be liable for action under Section 447*.

*Section 447, Punishment for fraud, provides penalty for the person who is found to be guilty of fraud and also provides definitions for fraud, wrongful gain and wrongful loss.

Section 340 Power of Tribunal to assess damages against delinquent directors, etc.: This section provides powers to NCLT to assess the damages against delinquent director, manager, liquidator or officer of the company for misapplication, retainer, misfeasance or breach of trust.

Section 341 Liability under sections 339 and 340 to extend to partners or directors in firms or companies: The section provides powers to the NCLT to extend the liability of partners or directors of the company under Section 339 relating to fraudulent conduct of business or under Section 340 relating to misfeasance or breach of trust.

Our Comments

The MCA is acting swiftly by notifying more sections of the 2013 Act to set up NCLT and NCLAT.  These sections provide powers to NCLT for holding management of a company responsible in case of frauds and defaults. 

Companies should assess how the newly notified sections impact them as certain sections levy penalties or liabilities on the officers or management of the company in case of frauds or fraudulent practices.

To access the text of the MCA notification, please click here.

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