THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XX — Part III

Provisions Applicable to Every Mode of Winding Up

Sections 324–358

For Judicial Service Aspirants & Law Students

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Preferential Payments • Fraudulent Preference • Misfeasance

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Chapter XX Part III — Provisions Applicable to Every Mode of Winding Up

Part III of Chapter XX — Sections 324 to 358 — is a general code that applies to every mode of winding up, whether compulsory by the Tribunal under Part I or (historically) voluntary under Part II. It deals with: the avoidance of fraudulent preference and transfers; directors' and officers' liability for misfeasance; offences in connection with winding up; the order of preferential payments; the liquidator's handling of monies, books, and final distribution; and the Tribunal's power to declare dissolution void. Though the provisions are procedural in tone, they are the operational backbone of the liquidation process and are frequently examined.

Because Part II (voluntary winding up) has been omitted with effect from 15 November 2016, Part III primarily applies to Part I (winding up by Tribunal) — but voluntary liquidation under Section 59 of the IBC also borrows heavily from these principles.

Section 324 — Debts of All Descriptions to be Admitted to Proof

In every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of insolvency), all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency, or sound only in damages, or for some other reason do not bear a certain value.

Section 325 — Application of Insolvency Rules in Winding Up of Insolvent Companies

In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to —

• Debts provable;
• The valuation of annuities and future and contingent liabilities; and
• The respective rights of secured and unsecured creditors,

As are in force for the time being under the Insolvency and Bankruptcy Code, 2016, in relation to the estates of persons adjudged insolvent. All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section.

Section 326 — Overriding Preferential Payments

Notwithstanding anything contained in this Act or any other law for the time being in force, in the winding up of a company —

1. Workmen's dues; andDebts due to secured creditors to the extent such debts rank under clause (iii) of the proviso to sub-section (1) of section 325 pari passu with such dues,

Shall be paid in priority to all other debts. In case of the winding up of a company, the sums referred to in sub-clauses (i) and (ii) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions and be paid accordingly.

Definitions under Section 326

• 'Workmen's dues' means the aggregate of the following sums due from the company to its workmen: (a) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947; (b) all accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution; (c) unless the company is being wound up voluntarily merely for the purpose of reconstruction or of amalgamation with another company, all amount due in respect of contributions payable during the period of twelve months immediately before the relevant date by the company as the employer of any person, under the Employees' State Insurance Act, 1948, or any other law for the time being in force; (d) unless the company has, at the commencement of the winding up, under such a contract with an insurer as is mentioned in section 14 of the Workmen's Compensation Act, 1923, rights capable of being transferred to and vested in the workman, all amount due in respect of any compensation or liability for compensation under that Act; and (e) all sums due to any workman from the provident fund, the pension fund, the gratuity fund, or any other fund for the welfare of the workmen, maintained by the company.
• 'Workman' shall have the meaning assigned to it in clause (s) of section 2 of the Industrial Disputes Act, 1947.

Section 327 — Preferential Payments

(1) Categories of Preferential Payments

In a winding up, subject to the provisions of section 326, there shall be paid in priority to all other debts —

1. All revenues, taxes, cesses and rates due from the company to the Central Government or a State Government or to a local authority at the relevant date, and having become due and payable within the twelve months immediately before that date;All wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any employee in respect of services rendered to the company and due for a period not exceeding four months within the twelve months immediately before the relevant date, subject to the condition that the amount payable under this clause to any workman shall not exceed such amount as may be notified;All accrued holiday remuneration becoming payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution;Unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amount due in respect of contributions payable during the period of twelve months immediately before the relevant date by the company as the employer of persons under the Employees' State Insurance Act, 1948 or any other law for the time being in force;Unless the company has, at the commencement of winding up, under such a contract with any insurer as is mentioned in section 14 of the Workmen's Compensation Act, 1923, rights capable of being transferred to and vested in the workman, all amount due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company;All sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the employees, maintained by the company; andThe expenses of any investigation held in pursuance of sections 213 and 216 in so far as they are payable by the company.

(2) & (3) Order — Rank Equally Between Themselves

The debts enumerated in sub-section (1) shall rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. So far as the assets of the company available for payment of general creditors are insufficient to meet them, the debts enumerated in sub-section (1) shall have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.

(7) Non-application to Insolvent Companies under IBC

Sub-sections (1) to (6) of Section 327 shall not apply in the event of liquidation under the Insolvency and Bankruptcy Code, 2016. This was inserted by the IBC to preserve the IBC's own liquidation waterfall under Section 53 of the IBC, which differs materially in ranking (in particular, workmen's dues for 24 months + unpaid dues of secured creditors who have relinquished their security rank highest, ahead of Central Government dues).

Section 328 — Fraudulent Preference

Where a company has given preference to a person who is one of the creditors of the company or a surety or guarantor for any of the debts or other liabilities of the company, and the company does anything or suffers anything done which has the effect of putting that person into a position which, in the event of the company going into liquidation, will be better than the position he would have been in if that thing had not been done prior to six months of making winding up application, the Tribunal, if satisfied that such transaction is a fraudulent preference may order as it may think fit for restoring the position to what it would have been if the company had not given that preference.

If the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within six months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.

Section 329 — Transfers Not in Good Faith to be Void

Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the Tribunal under this Act shall be void against the Company Liquidator.

Section 330 — Certain Transfers to be Void

Any transfer or assignment by a company of all its properties or assets to trustees for the benefit of all its creditors shall be void.

Section 331 — Liabilities and Rights of Certain Persons Fraudulently Preferred

Where a company is being wound up and anything made, taken or done after the commencement of this Act is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company's debt, then, without prejudice to any rights or liabilities arising, apart from this provision, the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as a surety for the debt, to the extent of the charge on the property or the value of his interest, whichever is less.

Section 332 — Effect of Floating Charge

Where a company is being wound up, a floating charge on the undertaking or property of the company created within the twelve months immediately preceding the commencement of the winding up, shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, except for the amount of any cash paid to the company at the time of, or subsequent to the creation of, and in consideration for, the charge, together with interest on that amount at the rate of five per cent per annum or such other rate as may be notified by the Central Government in this behalf.

Section 333 — Disclaimer of Onerous Property

Where any part of the property of a company which is being wound up consists of —

• Land of any tenure, burdened with onerous covenants;
• Shares or stock in companies;
• Any other property which is not saleable or is not readily saleable, by reason of the possessor thereof being bound either to the performance of any onerous act or to the payment of any sum of money; or
• Unprofitable contracts,

The Company Liquidator may, notwithstanding that he has endeavoured to sell or has taken possession of the property or exercised any act of ownership in relation thereto or done anything in pursuance of the contract, with the leave of the Tribunal and subject to the provisions of this section, by writing signed by him, at any time within twelve months after the commencement of the winding up or such extended period as may be allowed by the Tribunal, disclaim the property.

Section 334 — Transfers, etc., After Commencement of Winding Up to be Void

In the case of a winding up by the Tribunal, any disposition of the property, including actionable claims, of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up shall, unless the Tribunal otherwise orders, be void.

Section 335 — Certain Attachments, Executions, etc., in Winding Up by Tribunal to be Void

Where any company is being wound up by the Tribunal, any attachment, distress or execution put in force, without leave of the Tribunal against the estate or effects of the company, after the commencement of the winding up, or any sale held, without leave of the Tribunal of any of the properties or effects of the company, after such commencement, shall be void.

Section 336 — Offences by Officers of Companies in Liquidation

If any person, being a past or present officer of a company which, at the time of the commission of the alleged offence, is being wound up, whether by the Tribunal or voluntarily, or is subsequently ordered to be wound up by the Tribunal or which subsequently passes a resolution for voluntary winding up —

1. Does not, to the best of his knowledge and belief, fully and truly disclose to the Company Liquidator all the property, movable and immovable, of the company, and how and to whom and for what consideration and when the company disposed of any part thereof, except such part as has been disposed of in the ordinary course of the business of the company;Does not deliver up to the Company Liquidator, or as he directs, all such part of the movable and immovable property of the company as is in his custody or under his control and which he is required by law to deliver up;Does not deliver up to the Company Liquidator, or as he directs, all such books and papers of the company as are in his custody or under his control and which he is required by law to deliver up;Within the twelve months immediately before the commencement of the winding up or at any time thereafter, conceals any part of the property of the company to the value of ₹1,000 or upwards, or conceals any debt due to or from the company;Within the twelve months immediately before the commencement of the winding up or at any time thereafter, fraudulently removes any part of the property of the company to the value of ₹1,000 or upwards;Makes any material omission in any statement relating to the affairs of the company;Knowing or believing that a false debt has been proved by any person under the winding up, fails for a period of one month to inform the Company Liquidator thereof;After the commencement of the winding up, prevents the production of any book or paper affecting or relating to the property or affairs of the company;After the commencement of the winding up or at any meeting of the creditors of the company within the twelve months next before the commencement of the winding up, attempts to account for any part of the property of the company by fictitious losses or expenses; orIs guilty of any false representation or other fraud for the purpose of obtaining the consent of the creditors of the company or any of them to an agreement with reference to the affairs of the company or to the winding up,

He shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years and with fine which shall not be less than ₹1 lakh but which may extend to ₹3 lakh.

Section 337 — Penalty for Frauds by Officers

If any person, being at the time of the commission of the alleged offence an officer of a company which is subsequently ordered to be wound up by the Tribunal or which subsequently passes a resolution for voluntary winding up —

• Has, by false pretences or by means of any other fraud, induced any person to give credit to the company;
• With intent to defraud creditors of the company or any other person, has made or caused to be made any gift or transfer of or charge on, or has caused or connived at the levying of any execution against, the property of the company; or
• With intent to defraud creditors of the company, has concealed or removed any part of the property of the company since, or within two months before, the date of any unsatisfied judgment or order for payment of money obtained against the company,

He shall be punishable with 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 ₹1 lakh but which may extend to ₹3 lakh.

Section 338 — Liability Where Proper Accounts Not Kept

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, every officer of the company who is in default shall, 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, be punishable with 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 ₹1 lakh but which may extend to ₹3 lakh.

Section 339 — Liability for Fraudulent Conduct of Business

If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.

Section 340 — Power of Tribunal to Assess Damages Against Delinquent Directors, etc.

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 —

• Has misapplied, or retained, or become liable or accountable for, any money or property of the company; or
• 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), examine 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 thinks just, 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 thinks just.

Section 341 — Liability Under Sections 339 and 340 to Extend to Partners or Directors in Firms or Companies

Where a declaration under section 339 or an order under section 340 is or may be made in respect of a firm or body corporate, the Tribunal shall also have power to make a declaration under section 339 or pass an order under section 340, as the case may be, in respect of any person who was at the relevant time a partner in that firm or a director of that body corporate.

Section 342 — Prosecution of Delinquent Officers and Members of Company

If it appears to the Tribunal in the course of a winding up by the Tribunal, that any past or present officer, or any member, of the company has been guilty of any offence in relation to the company, the Tribunal may, either on the application of any person interested in the winding up or of its own motion, direct the Company Liquidator to prosecute the offender.

In case of a winding up by the Tribunal, it shall be the duty of the Company Liquidator, where it appears to him in the course of a voluntary winding up that any past or present officer, or any member, of the company has been guilty of any offence in relation to the company for which he is criminally liable, forthwith to report the matter to the Registrar and to furnish to him such information and give to him such access to and facilities for inspecting and taking copies of any documents, being information or documents in the possession or under the control of the Company Liquidator, relating to the matter in question, as the Registrar may require.

Sections 343-358 — Further Procedural Provisions

• Section 343 — Company Liquidator to exercise certain powers subject to sanction (sanction of the Tribunal or committee of inspection);
• Section 344 — Statement that company is in liquidation (on every invoice, order for goods, business letter);
• Section 345 — Books and papers of company to be evidence;
• Section 346 — Inspection of books and papers by creditors and contributories;
• Section 347 — Disposal of books and papers of company;
• Section 348 — Information as to pending liquidations (half-yearly);
• Section 349 — Official Liquidator to make payments into public account of India;
• Section 350 — Company Liquidator to deposit monies into scheduled bank;
• Section 351 — Liquidator not to deposit monies into private banking account;
• Section 352 — Company Liquidation Dividend and Undistributed Assets Account;
• Section 353 — Liquidator to make returns, etc.;
• Section 354 — Meetings to ascertain wishes of creditors or contributories;
• Section 355 — Court, Tribunal or person, etc., before whom affidavit may be sworn;
• Section 356 — Powers of Tribunal to declare dissolution of company void;
• Section 357 — Commencement of winding up by Tribunal;
• Section 358 — Exclusion of certain time in computing period of limitation.

Section 352 — Company Liquidation Dividend and Undistributed Assets Account

Where any company is being wound up and the liquidator has in his hands or under his control any money representing unclaimed or undistributed assets of the company which have remained unclaimed or undistributed for six months after the date on which they became payable, or any money held by the company in trust in respect of dividends or other sums due to any person as a member of the company, the liquidator shall forthwith pay the said money into the Public Account of India in such bank as the Central Government may direct, and he shall, on the dissolution of the company, similarly pay into the said account any money representing unclaimed or undistributed assets of the company which may remain in his hands or under his control at the date of the dissolution of the company.

Any person claiming to be entitled to any money paid into the Public Account of India in pursuance of this section may apply to the Central Government for a payment thereof and the Central Government may, on a certificate by the liquidator that the person claiming is entitled, make the payment to that person of the sum due.

Section 356 — Powers of Tribunal to Declare Dissolution of Company Void

Where a company has been dissolved, whether in pursuance of this Chapter or of section 232 or otherwise, the Tribunal may at any time within two years of the date of the dissolution, on application by the Company Liquidator of the company or by any other person who appears to the Tribunal to be interested, make an order, upon such terms as the Tribunal thinks fit, declaring the dissolution to have been void, and thereupon such proceedings may be taken as if the company had not been dissolved.

It shall be the duty of the Company Liquidator or the person on whose application the order was made, within thirty days after the making of the order or such further time as the Tribunal may allow, to file a certified copy of the order with the Registrar who shall register the same, and if the Company Liquidator or the person fails to do so, the Company Liquidator or such person shall be punishable with fine which may extend to ₹10,000 for every day during which the default continues.

Section 357 — Commencement of Winding Up by Tribunal

The winding up of a company by the Tribunal under this Act shall be deemed to commence at the time of the presentation of the petition for the winding up. The doctrine of relation back — crucial for determining which transactions are caught by the fraudulent-preference rules — attaches here.