Winding up - Part 3
Section 324. Debts of all descriptions to be admitted to proof
324(1).
When a company is being wound up, all types of debts and claims against the company can be admitted.
This applies regardless of whether the company is solvent or insolvent.
In the case of an insolvent company, admission of debts and claims is subject to:
The provisions of the Companies Act.
The rules of the applicable insolvency law. (Insolvency and Bankruptcy Code)
324(2).
Types of debts or claims that are admissible in winding up:
Contingent debts - Claims that depend on a future event which may or may not happen.
Present debts - Amounts already due and payable at the time of winding up.
Future debts - Amounts that will become payable at a later date.
Certain debts - Fixed and clearly determined amounts.
Uncertain debts - Amounts not yet determined but capable of being estimated.
Unascertained claims measurable by damages - Claims where the exact amount is not fixed but can be calculated based on evidence.
324(3).
If a company is being wound up and a debt or claim is:
Contingent (depends on a future event).
Uncertain.
Not capable of exact/precise valuation, then the law requires that a fair and reasonable estimate of its value must be made.
This means:
The Liquidator or Tribunal must assess the probable value of the claim.
The claim is admitted based on this estimated amount, even if the exact figure is not known.
It prevents contingent or unliquidated claims from being ignored simply because they cannot be exactly calculated.
The estimation must be objective, justified, and reasonable based on available facts and circumstances.
Section 325. [Omitted]
Section 326. Overriding preferential payments
326(1).
When a company enters winding up, some debts must be paid before all others.
These debts have statutory priority and override general creditor claims.
Two categories of debts get overriding priority
1. Workmen’s dues
These include all amounts legally payable to workmen under labour laws, such as:
Wages, Salaries , PF, Gratuity, Bonus , Compensation and statutory payments.
Any other dues defined under the Companies Act
These must be settled before all other debts.
2. Certain unpaid debts of secured creditors
If a secured creditor sells the secured asset, but the sale proceeds are insufficient to repay the whole debt the:
The unrecovered amount OR the workmen’s portion in the security (whichever is smaller) ranks pari passu (equally) with workmen’s dues.
So , secured creditors must share their recoveries proportionately with workmen, instead of getting paid in full ahead of them.
Workmen’s dues for the prescribed period (normally 2 years before the winding-up order) must be paid:
In priority to all other debts.
Including debts of secured creditors.
Must be paid within 30 days of the sale of assets.
These workmen-related sums enjoy a legal charge over the security held by secured creditors.
Workmen’s dues attach to the secured asset itself.
The secured creditor cannot be paid from that security unless workmen’s dues are first satisfied to the required extent.
326(2).
The debts mentioned in 326(1) with respect to the recent workmen dues , they must be paid in full before any payments are made to secured creditors.
After that, the remaining debts under 326(1) are to be paid in full as far as possible.
If the assets are insufficient to cover all such debts, they will be reduced proportionally.
If assets are insufficient then, each creditor or workman receiving an equal share in proportion to their entitlement.
Explanation:
(a). Workmen
Workmen has the same meaning as under Section 2(s) of the Industrial Disputes Act, 1947.
It includes persons employed in:
Manual work
Skilled or unskilled work
Technical or operational work
Clerical work
Supervisory work (subject to wage and duty limits under the ID Act)
It does not include managerial or administrative staff.
(b). Workmen’s Dues
Workmen’s dues include all amounts legally payable to workmen by the company, such as:
(i). Wages & Compensation
Wages, salaries, commissions, and compensation payable for services rendered.
Any amount payable under the Industrial Disputes Act, 1947.
(ii). Accrued Holiday Pay
Any holiday pay or remuneration due to a workman.
Payable to his heirs if the workman has died, because employment ended due to winding up.
(iii). Compensation under Workmen’s Compensation Act
Compensation payable for death or disablement under the Workmen’s Compensation Act, 1923.
Exception: If winding up is voluntary only for reconstruction or amalgamation, or the company has an insurance policy covering this liability.
(iv). Amounts Due from Workmen’s Welfare Funds
All sums due from:
Provident fund.
Pension fund.
Gratuity fund.
Any other fund maintained for workmen’s welfare.
These dues have super-priority in winding up.
(c). Workmen’s Portion of a Secured Creditor’s Security
It refers to the proportionate share of workmen in the value of a secured creditor’s security.
Workmen’s Portion = Value of Security * [Workmen Dues / (Workmen’s Dues + Secure Creditors Debts)]
Section 327. Preferential payments
327(1).
In the winding up of a company, and subject to Section 326, the following debts must be paid in priority to all other debts:
(a).
All amounts owed by the company to the Central Government, State Government, or any local authority must be treated as preferential debts if they became due and payable within twelve (12) months before the relevant date.
These include:
Taxes
Duties
Cesses
Rates
Any similar statutory dues
Such government dues are paid in priority during the winding-up process, subject to the provisions of Sections 326 and 327.
(b).
The following debts must be paid in priority during winding up:
All wages or salaries payable to any employee of the company are treated as preferential debts, subject to the following conditions:
Types of remuneration covered
Time-based wages.
Piece-rate wages.
Commission payable as salary.
Any other form of salary for services rendered.
The wages or salary must relate to services rendered during a period not exceeding four months within the twelve months immediately preceding the relevant date.
Any amount payable to a workman under this clause is subject to the statutory monetary ceiling notified by the Central Government.
(c).
All accrued holiday remuneration that is payable to an employee shall rank as a preferential debt in the winding up of a company.
This includes any payment the employee is entitled to for earned but unused leave.
If the employee has died, the accrued holiday remuneration must be paid to the person legally claiming under him.
This priority applies specifically where the employee’s service is terminated because of:
The winding up of the company.
The dissolution of the company.
The entire holiday remuneration falling under this clause must be paid in priority to all other unsecured debts of the company.
(d).
All amounts due as employer’s contributions that the company is required to pay under:
The Employees’ State Insurance Act, 1948.
Any other law that requires the employer to make similar contributions.
These dues must relate to the twelve months immediately before the relevant date.
These amounts enjoy priority status, meaning they must be paid before unsecured debts and other non-preferential liabilities.
Exception:
These dues do NOT get priority where the winding-up is:
For Reconstruction, or
For amalgamation of the company.
In such exceptional cases, the company’s continuity ensures that employee rights are not harmed, so special priority is unnecessary.
(e).
The following amounts must be paid in priority during winding up:
All compensation payable by the company under the Workmen’s Compensation Act, 1923 for:
Death of an employee.
Disablement of an employee.
Exceptions: No priority applies if:
The winding up is only for reconstruction or amalgamation.
The company has already made insurance arrangements under Section 14 of the Workmen’s Compensation Act.
Weekly payments treated as lump sum:
If the compensation is payable in weekly instalments, the amount is treated as the commuted lump sum that could be redeemed under the Workmen’s Compensation Act.
(f).
All sums due to any employee from company-maintained funds, such as provident fund, pension fund, gratuity fund, or similar welfare funds.
(g).
Expenses of investigations held under sections 213 and 216 to the extent payable by the company.
327(2).
If a person (such as a director, lender, or third party) advances money to a company so that the company can pay:
Wages
Salary
Holiday remuneration to an employee, then:
Priority Status is Granted
The person who made the advance gets the same priority in repayment as the employee would have received in the winding-up process.
This means the lender steps into the shoes of the employee for that amount.
Priority Only to the Extent of Reduction of Employee’s Claim
The priority applies only for the amount by which the employee’s own priority claim is reduced because the advance was made.
This protection applies only when the employee’s dues were actually paid using the advance.
The provision applies only when money is advanced for wages, salary, or holiday remuneration, not for any other company liabilities.
327(3).
The debts listed above:
(a) Rank equally among themselves and must be paid in full. If assets are insufficient, they abate proportionately.
(b) Have priority over claims of debenture-holders under any floating charge, to the extent that general assets are insufficient.
Payment under this head may be made from assets subject to that floating charge.
327(4).
The liquidator must keep aside (retain) enough funds to cover the costs and expenses of the winding-up process.
After retaining those necessary funds, the remaining assets must be used to immediately pay the debts covered under this section, as far as the available assets permit.
For the dues mentioned in clause (d) of 327(1), formal proof of debt is not required, except to the extent that the rules specifically prescribe otherwise.
327(5).
If a landlord (or anyone else) seizes the company’s goods within 3 months before the court orders winding up, special rules kick in.
The preferential debts (like wages, taxes, etc.) get first claim on those seized goods or on the money made by selling them.
The landlord or person who seized the goods then gets priority for repayment, similar to someone who has already been paid from those goods.
327(6).
If an employee is paid for holiday time or for being absent due to sickness or other valid reasons, that payment is considered part of their wages.
Because it is treated as wages, this amount also counts as a preferential debt under 327(1).
This means the employee’s claim for such payments gets priority when the company’s assets are distributed during winding up.
327(7).
Sections 326 and 327 do not apply in cases of liquidation under the Insolvency and Bankruptcy Code, 2016.
Explanation
(a) Accrued holiday remuneration
This includes holiday pay that the employee would have earned in the future if the employment had continued.
So, even if the employee had not yet reached the date when they could take the holiday, the amount they would have been entitled to is still counted as “accrued” holiday pay.
(b) Meaning of “Employee”
The term “employee” does not include “workman.”
Workmen and their payments are handled separately under Section 326, which gives them different (often higher) priority rights.
(c) “Relevant date”
For cases where the Tribunal orders winding up, the relevant date is:
The date when a provisional liquidator is first appointed, or
If no provisional liquidator is appointed, then the date of the winding-up order.
However, if the company had already started voluntary winding up under the IBC before either of those dates, then:
That earlier voluntary commencement date becomes the relevant date.
Section 328. Fraudulent preference
328(1).
If a company, within 6 months before someone files a winding-up application, gives any special benefit or preference to:
A creditor.
A surety/guarantor for the company’s debts, then this raises concern.
A “preference” means the company’s action puts that person in a better position during liquidation than other creditors.
If the Tribunal finds that the company intended to fraudulently favour that creditor or guarantor, it can intervene.
The Tribunal may then order steps to undo the preference and return things to the position they would have been in if the company had not given that unfair advantage
328(2).
If, within 6 months before a winding-up application is filed, the company has:
Transferred property (movable or immovable).
Delivered goods.
Made payments.
Allowed someone to enforce or take its assets, in a way that gives them an unfair preference, the Tribunal can act.
The Tribunal can declare such transactions invalid if they amount to preferential treatment.
After declaring them invalid, the Tribunal can take steps to restore things to how they were before the preference was given.
Section 329. Transfers not in good faith to be void
329(1).
If a company transfers property (movable or immovable) or delivers goods within 1 year before a winding-up petition is filed, that transfer is treated as void (invalid) against the Company Liquidator.
However, the transfer will be valid if it was:
Done in the ordinary course of business.
Made to a buyer or lender who acted in good faith and paid fair value (valuable consideration).
This rule prevents companies from making unusual, suspicious, or fraudulent transfers shortly before liquidation.
If a transfer was not a genuine business transaction or not made for fair value, the Liquidator can cancel it and recover the property for the benefit of all creditors.
Section 330. Certain transfers to be void
330(1).
If a company transfers or assigns all its assets to trustees for the benefit of all its creditors, that transfer is automatically void (invalid).
The company cannot hand over all its property to trustees to manage or distribute among creditors on its own.
Such a transfer is not allowed because it would let the company avoid the formal winding-up process and the legally prescribed order of priority for paying creditors.
Section 331. Liabilities and rights of certain persons fraudulently preferred
331(1).
If, during winding up, a transaction is declared invalid under Section 328 because it was a fraudulent preference benefiting someone who has an interest in property that is mortgaged or charged for the company’s debt, special rules apply to that person.
That person will then be treated as if he had personally agreed to act as a surety (guarantor) for the company’s debt.
This does not affect any other legal rights or liabilities he may have and it only adds this limited surety-like responsibility.
His liability as this “deemed surety” is capped at the lower of:
The value of his interest in the mortgaged/charged property.
The amount secured by the mortgage or charge.
331(2).
To decide how much the preferred person must be liable for, the law needs to value that person’s interest in the property involved.
This value is calculated as of the date on which the fraudulent transaction took place.
While valuing the interest, it is assumed that the property was free of all other encumbrances, except the mortgage or charge that was securing the company’s debt.
331(3).
When someone applies to the Tribunal saying that a payment was a fraudulent preference made in favour of a surety or guarantor, certain disputes may arise.
The Tribunal is allowed to decide any issues between:
The person who received the payment.
The surety/guarantor.
The Tribunal can give whatever relief or orders are appropriate, even if resolving these issues is not strictly required for completing the winding-up of the company.
To handle these matters properly, the Tribunal may allow the surety or guarantor to be added as a third party, similar to how parties are added in a normal civil recovery suit.
331(4).
Section 331(3) lays down a procedure for handling disputes about fraudulent preference, especially involving payments.
This same procedure will also apply to other types of transactions, not just payments.
So, the Tribunal has wide authority to investigate and resolve disputes involving any form of fraudulent preference, regardless of the nature of the transaction.
Section 332. Effect of floating charge
Floating Charge
A floating charge is a security interest that a lender takes over a changing pool of assets (like inventory, receivables, or cash).
These assets are not fixed and keep changing as part of normal business operations.
The company is allowed to use, sell, or dispose of these assets freely in the ordinary course of business.
The floating charge remains “floating” until a trigger event occurs such as:
Default on a loan.
Insolvency.
Liquidation.
When such an event happens, the floating charge crystallizes and turns into a fixed charge.
After crystallization, the assets covered by the charge become frozen, and the company cannot deal with them without the lender’s consent.
332(1).
If a company is being wound up and it had created a floating charge over its assets within the 12 months before winding up began, then:
That floating charge is generally treated as invalid.
The only way the floating charge can be considered valid is if it is proven that the company was solvent (able to pay its debts) at the time the charge was created.
This rule exists because a company that is already in financial trouble might create a floating charge to unfairly secure one creditor over others just before winding up.
332(2).
Even if a floating charge is declared invalid, the law still protects the creditor to a limited extent.
The charge will remain valid only up to the amount of actual cash the creditor:
Paid to the company when the charge was created.
Paid after the charge was created, but only if that payment was genuinely made in exchange for (i.e., as consideration for) the charge.
The creditor is also entitled to interest at 5% per year, or any other rate the Central Government may notify.
Section 333. Disclaimer of onerous property
333(1).
If a company in winding up owns property that is burdensome, unprofitable, or difficult to sell, then:
The Company Liquidator can ask the Tribunal for permission to disclaim (legally give up) that property.
This includes:
(a) Land with burdensome conditions (e.g., heavy obligations, high payments).
(b) Shares or stock in other companies.
(c) Property that cannot be sold easily because it involves continuing liabilities or obligations.
(d) Unprofitable contracts that would drain the company’s assets.
The Liquidator can disclaim such property in writing within 12 months from the commencement of winding up.
The Tribunal may grant an extension beyond 12 months.
If the Liquidator becomes aware of such burdensome property after winding up starts, the 12-month period begins from the date of awareness.
Again, the Tribunal can extend this period if needed.
333(2).
When the Liquidator disclaims (renounces) a burdensome property, the company’s rights, interests, and liabilities in that property end immediately from the date of the disclaimer.
This means the company is no longer responsible for any obligations, payments, or duties related to that property.
However, the disclaimer does not cancel or change the rights or liabilities of other people connected to the property.
The only exception is where modifying those rights is necessary to fully release the company from its obligations.
333(3).
Before granting permission to disclaim, the Tribunal may:
Require notice to be given to interested persons.
Impose conditions for granting permission.
Make any other order considered fair and proper.
333(4).
An interested person can write to the Liquidator asking whether he intends to disclaim a certain property.
After receiving such a request, the Liquidator must give a reply within 28 days, unless the Tribunal gives extra time.
In his reply, the Liquidator must state whether he plans to apply for Tribunal permission to disclaim the property.
If the Liquidator does not respond within the allowed time, and the property is part of a contract, the law assumes that he has adopted the contract.
333(5).
If someone is a beneficiary of or bound by a contract with the company (now in winding up), they may apply to the Tribunal to have the contract cancelled (rescinded).
The Tribunal has the power to cancel the contract if it thinks it is appropriate.
The Tribunal can set any terms it considers fair, which may include ordering either party to pay damages.
If damages are awarded against the company, the person can claim those damages as a debt in the winding-up process.
333(6).
If someone claims an interest in, or is subject to liability because of, property that the Liquidator has disclaimed, they may apply to the Tribunal.
They can ask the Tribunal to transfer (vest) the disclaimed property to:
Themselves, or
Another suitable person.
The Tribunal may grant the vesting order on terms it considers appropriate.
Once the Tribunal makes the order, the property automatically vests in the named person and no separate deed or paperwork is required.
If the disclaimed property is a lease:
The Tribunal cannot vest the lease in someone claiming under the company unless that person agrees to one of the following:
(a) Take on all liabilities the company had under the lease.
(b) Take on those liabilities as if the lease had been assigned to them on the date winding up began.
If such a person refuses to accept these liabilities, they lose all interest in the disclaimed lease.
If no person willing to take the lease with its obligations:
The Tribunal may vest the lease in any person who is legally liable (personally or as a representative) to perform the lessee’s obligations.
This vesting will be free of any interests created by the company.
333(7).
Anyone who suffers loss because of the disclaimer is considered a creditor of the company for the amount of compensation or damages resulting from the disclaimer. They may prove this amount as a debt in the winding up.
Section 334. Transfers after commencement of winding up to be void
334(1).
Once winding up by the Tribunal has started, certain actions done afterward become automatically void unless the Tribunal specifically allows them.
These include:
Any transfer or disposal of the company’s property (including actionable claims).
Any transfer of the company’s shares.
Any change in the status of the company’s members.
Section 335. Certain attachments, executions in winding up by Tribunal to be void
335(1).
When a company is being wound up by the Tribunal, certain actions taken after the winding up begins are automatically void unless the Tribunal gives permission.
First, no creditor or person can attach, seize, or enforce execution against the company’s assets without the Tribunal’s prior approval.
Second, any sale of the company’s property made after the commencement of winding up is invalid unless the Tribunal has permitted it.
335(2).
This section does not apply to proceedings for recovery of any tax, impost, or dues payable to the Government.
Therefore, government authorities pursuing statutory dues are exempt from this restriction.
Section 336. Offences by officers of companies in liquidation
336(1).
If a person who is or has been an officer of a company that is being wound up by the Tribunal commits any of the acts listed below, he is liable for punishment.
These acts relate to concealment, destruction, falsification, or mishandling of the company’s property and records, or fraudulent behavior.
The prohibited acts include:
(a).
Failing to fully and truthfully disclose to the Company Liquidator all property (movable and immovable) of the company.
The details of how, to whom, for what consideration, and when any part of the property was disposed of should have also been disclosed.
The rules does not apply if property has been disposed of in the ordinary course of business.
(b).
Failing to deliver to the Company Liquidator, or as directed, all company property under his custody or control that he is legally required to deliver.
(c)
Failing to deliver to the Company Liquidator, or as directed, all books and papers of the company under his custody or control that he is legally required to deliver.
(d).
Doing any of the following within twelve months before winding up or at any time after winding up begins:
(i). Concealing company property worth at least Rs. 1,000, or concealing any debt owed to or by the company.
(ii). Fraudulently removing company property worth at least Rs. 1,000.
(iii). Concealing, destroying, mutilating, falsifying, or being involved in any such act regarding company books or papers.
(iv). Making or being involved in making false entries in company books or papers.
(v). Fraudulently altering, omitting, or being involved in altering or omitting entries in company books or papers.
(vi). Fraudulently obtaining property on credit for the company which the company subsequently does not pay for.
(vii). Obtaining property on credit by falsely pretending that the company is carrying on business, when it is not, and the company does not pay.
(viii). Pawning, pledging, or disposing of property obtained on credit and not paid for, unless done in the ordinary course of business.
(e).
Making material omissions in any statement relating to the company’s affairs.
(f).
Knowing or believing that a false debt has been proved under winding up, but failing to inform the Company Liquidator within one month.
(g).
After winding up begins, preventing the production of any book or paper related to company property or affairs.
(h).
Within the twelve months before winding up or after its commencement, attempting to account for company property by creating fictitious losses or expenses.
(i).
Making false representations or committing fraud to obtain creditors’ consent to an agreement related to the company’s affairs or the winding up.
Any person committing the above acts is punishable with:
Imprisonment of not less than three years, but which may extend to five years.
Fine of not less than one lakh rupees, but which may extend to three lakh rupees.
The provision also states that it is a valid defence if the accused proves that he had no intention to defraud, conceal the true state of the company, or defeat the law.
336(2).
If property is pawned, pledged, or disposed of in violation of sub-clause (viii) of clause (d) then:
Any person who receives such property knowing the circumstances is also punishable.
The punishment is:
Imprisonment of not less than three years, but which may extend to five years &
Fine of not less than three lakh rupees, but which may extend to five lakh rupees.
Explanation
For this section, the term “officer” includes any person whose directions or instructions the company’s directors customarily follow.
This means even persons not formally designated as officers can be held liable.
Section 337. Penalty for frauds by officers
An officer will be punished if he commits any of the following acts:
(a).
If a person fraudulently convinces someone to give credit to the company, he becomes liable.
This includes making false statements or representations to induce the other person.
It also covers any other dishonest or deceptive method used to make someone lend money or supply goods/services to the company.
(b).
If an officer acts with the intention to defraud the company’s creditors or any other person, he becomes liable.
This includes situations where he makes or causes to be made any gift, transfer, or charge over the company’s property.
It also includes situations where he enables or helps someone to enforce execution against the company’s property.
(c).
If an officer intends to defraud the company’s creditors and hides or removes any part of the company’s property, he becomes liable.
This applies in two situations:
When a court has already passed a judgment or payment order against the company that remains unpaid.
When the act of hiding or removing property occurs within two months before such a judgment or order is passed.
For any of these acts, the officer faces strict punishment:
Imprisonment for at least one year, which can go up to three years.
Fine of at least one lakh rupees, which can go up to three lakh rupees.
Section 338. Liability where proper accounts not kept
338(1).
If a company is being wound up and it is shown that the company did not maintain proper books of account during:
The two years immediately before the commencement of winding up.
The period from incorporation to commencement of winding up (if shorter) then:
Every officer in default is punishable unless he can prove both of the following:
He acted honestly.
Given the circumstances in which the company operated, the failure was excusable.
If he fails to prove this, he is punishable with:
Imprisonment for at least one year (may extend to three years).
Fine of at least one lakh rupees (may extend to three lakh rupees).
338(2).
For the purpose of 338(1), a company is treated as not having kept proper books of account in the following situations:
(a).
When it failed to maintain the books needed to record and explain all transactions and show the company’s true financial position.
This includes maintaining day-to-day cash books that properly record all money received and paid, with adequate detail.
(b).
When the company’s business involved dealing in goods, and it failed to maintain:
Annual stock-taking statements.
Detailed records of goods bought and sold (other than in ordinary retail trade), with proper identification of the goods and of the buyers and sellers.
Section 339. Liability for fraudulent conduct of business
339(1).
If, during winding up, it appears that the company’s business was carried on with the intention to defraud the company’s creditors or any other persons, or for any fraudulent purpose, the Tribunal may, on an application made by:
The Official Liquidator.
The Company Liquidator.
Any creditor or contributory.
declare that any person who is or has been a director, manager, officer, or any person who knowingly participated in such fraudulent business, shall be personally liable without any limit for all or any debts or liabilities of the company, to the extent the Tribunal directs.
The Official Liquidator or Company Liquidator may give evidence or call witnesses during such proceedings.
339(2).
When the Tribunal makes such a declaration, it may issue further directions to give effect to the declaration.
In particular, it may:
(a). Make the declared liability a charge on:
Any debt or obligation owed by the company to the person concerned.
Any mortgage, charge, or interest held by that person (or on his behalf) on company assets.
Any interest held by someone claiming under him (such as an assignee).
(b). Issue any additional orders needed to enforce such charge.
339(3).
If the company’s business was conducted with fraudulent intent, as described earlier, liability does not fall only on the main offender.
Any person who knowingly took part in carrying on the business in this fraudulent manner is also responsible.
Such persons can be prosecuted under Section 447, which provides punishment for fraud.
339(4).
This section applies even if the person’s actions are already punishable under another law.
That means the liability under this provision is not a substitute for other penalties.
Instead, it is in addition to any other legal consequences the person may face.
Explanation
(a).
The term “assignee” includes anyone in whose favour a debt, obligation, mortgage, charge, or other interest has been created, issued, or transferred at the direction of the person who is liable.
However, it excludes an assignee who:
Gave valuable consideration.
Acted in good faith.
Had no knowledge of any fraudulent circumstances.
(b).
“Officer” includes any person whose directions or instructions the directors of the company are accustomed to follow.
Thus, even persons not formally designated as officers may be held liable.
