Section 338 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 338 makes officers personally answerable when a company being wound up turns out not to have kept proper books of account. If proper books were not kept throughout the two years before the winding up began (or since incorporation, if shorter), every officer in default can be punished, unless he shows that he acted honestly and that the default was excusable in the circumstances.
If it is shown that proper books of account were not kept throughout the two years immediately before the commencement of the winding up (or the period from incorporation, whichever is shorter), every officer in default faces imprisonment of not less than one year and up to three years, and a fine of not less than one lakh and up to three lakh rupees. The officer escapes only if he shows that he acted honestly and that, in the circumstances of the business, the default was excusable.
What the section requires
Section 338(1) applies "where a company is being wound up". The look-back period is the shorter of:
- the two years immediately preceding the commencement of the winding up; and
- the period between incorporation and the commencement of the winding up.
A young company is therefore tested only from incorporation. The books must have been kept "throughout" the period, so gaps matter.
The persons liable are "every officer of the company who is in default". The consolidated text does not define "officer in default" in this section, so read it with the general definitions in the Act. If you are an officer facing a liquidator's inquiry, our legal dispute resolution team can help you assess the exposure.
| Item | What section 338(1) provides |
|---|---|
| Trigger | Company being wound up; proper books not kept throughout the look-back period |
| Look-back | Two years before commencement of winding up, or incorporation to commencement, whichever is shorter |
| Who | Every officer of the company who is in default |
| Penalty | Imprisonment not less than one year, up to three years; fine not less than one lakh rupees, up to three lakh rupees |
| Defence | Officer shows he acted honestly and that, in the circumstances in which the business was carried on, the default was excusable |
When are books "not proper"? Sub-section (2)
Sub-section (2) deems that proper books of account have not been kept where clause (a) applies, "and" (as the text reads) clause (b) applies in a business dealing in goods.
- Clause (a): the books necessary to exhibit and explain the transactions and financial position of the business have not been kept. This includes books containing day-to-day entries, in sufficient detail, of all cash received and all cash paid.
- Clause (b): where the business involved dealings in goods, statements of annual stock takings have not been kept and, except for goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to identify them.
Clause (a) ends with "and" before clause (b), so the two clauses are worded as cumulative requirements, with clause (b) relevant only to a business that dealt in goods. How a court reads the two together in a given case is a point to check against the Act's text and the facts.
Connection with the books-of-account rule
The general duty to keep books of account is in section 128 of the Act (see Section 128: Books of account). Section 338 is the winding-up counterpart: it does not create the duty but makes a failure to meet it a punishable matter once the company is being wound up. Accounting records matter for another reason too. A liquidator depends on them to trace assets and transactions, and missing records can lead to further provisions being invoked, such as section 336 on falsifying or destroying books (see sections 336–337).
Since the Insolvency and Bankruptcy Code, 2016, insolvency liquidations are handled under the Code. Section 338 applies where a company is being wound up under the Act, which continues on the grounds left in section 271.
The defence in practice
The burden is on the officer. He must show two things: that he acted honestly, and that in the circumstances in which the business was carried on, the default was excusable. Typical points an officer may rely on include records lost through a documented event, a small business where the person responsible for books acted honestly but fell short, or evidence that the officer had arranged for accounts and was misled. The Act does not list these, so the question is one of facts for the court.
Practical examples
Example 1: no cash book. A trading company, incorporated four years ago, never maintained a cash book. It is wound up by the Tribunal. The two years before commencement are the look-back period. The absence of day-to-day cash records falls within clause (a), and the officers in default face the penalty unless they show honesty and excusable default.
Example 2: young company. A company is incorporated and wound up within eleven months. The period is from incorporation to commencement, as it is shorter than two years. Books are tested for that period only.
Example 3: goods without stock records. A company dealing in goods made no annual stock taking and kept no records of goods bought and sold with buyer and seller details. Clause (b) is engaged. If the business was ordinary retail trade, the requirement for statements of all goods sold and purchased does not apply, but the stock taking requirement as written still does.
Example 4: excusable default. An honest officer of a small company proves that accounting records were destroyed in a flood and that he took steps to reconstruct them. He may rely on the defence, subject to what the Tribunal accepts.
Proposed change (Corporate Laws (Amendment) Bill, 2026)
No clause of the Bill amends section 338. The Bill is pending and not law as on 30 September 2026.
Need help with missing or incomplete books?
If a liquidator is asking about records, or your company's books have gaps, the facts and dates will decide how section 338 applies. We can review what exists, what is missing and what explanation is available. Get in touch through legal dispute resolution.
Key takeaways
- Section 338 applies when a company is being wound up and proper books were not kept throughout the look-back period.
- The period is two years before commencement, or incorporation to commencement if that is shorter.
- Every officer in default faces one to three years' imprisonment and a fine of one to three lakh rupees.
- The officer must show he acted honestly and that the default was excusable in the circumstances.
- Sub-section (2) sets what counts as improper books, including day-to-day cash records and stock statements for trading businesses.
- The Bill, 2026 does not amend section 338.
Read next
- Section 339: Fraudulent conduct of business
- Sections 336–337: Offences and frauds by officers in liquidation
- Section 128: Books of account
- Books of accounts every company must maintain
Disclaimer: Based on the Companies Act, 2013 as amended up to 1 April 2021 (official consolidated text), read with later developments noted in the article; proposals in the Corporate Laws (Amendment) Bill, 2026 are pending and not law as on 30 September 2026. Verify current notifications and rules before acting.