Provisions Applicable to Every Mode of Winding Up

Everything may be proved: section 324

In every winding up, subject in the case of insolvent companies to 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, are admissible to proof, a just estimate being made, so far as possible, of the value of those which are contingent, sound only in damages, or for some other reason do not bear a certain value.

The section is wider than it looks. A claim that has not yet accrued, or whose amount nobody knows, is not shut out; it is valued.

Overriding preferential payments: section 326

In the winding up of a company under this Act, the following debts shall be paid in priority to all other debts:

• (a) workmen's dues; and
• (b) where a secured creditor has realised a secured asset, so much of his debt as could not be realised by him, or the amount of the workmen's portion in his security, whichever is less, pari passu with the workmen's dues.

The proviso is the sharpest rule in the Chapter. The sums in sub-clauses (i) and (ii) of clause (b) of the Explanation, that is wages or salary and accrued holiday remuneration, payable for a period of two years preceding the winding up order or such other period as may be prescribed, shall be paid in priority to all other debts including debts due to secured creditors, within thirty days of the sale of assets, and shall be subject to such charge over the security of secured creditors as may be prescribed.

Section 326(2). Those debts shall be paid in full before any payment is made to secured creditors; and thereafter the debts payable under sub-section (1) shall be paid in full unless the assets are insufficient, in which case they abate in equal proportions.

So two years of wages and holiday pay outrank even a secured creditor, and that is the point to make first in any answer on priorities.

The Explanation defines the three key expressions.

"Workmen" means employees who are workmen within the meaning of section 2(s) of the Industrial Disputes Act, 1947.

"Workmen's dues" means the aggregate of: (i) all wages or salary, including wages for time or piece work and salary earned wholly or partly by commission, and any compensation under the Industrial Disputes Act, 1947; (ii) all accrued holiday remuneration payable to a workman or, on his death, to another in his right, on the termination of his employment before or by the winding up; (iii) unless the company had insurance rights transferable to the workmen under section 14 of the Workmen's Compensation Act, 1923, all amounts due for compensation for death or disablement under that Act; and (iv) all sums due to a workman from the provident fund, pension fund, gratuity fund or any other welfare fund maintained by the company.

"Workmen's portion", in relation to a secured creditor's security, means the amount bearing to the value of the security the same proportion as the workmen's dues bear to the aggregate of the workmen's dues and the debts due to secured creditors.

The Act's own illustration should be reproduced in an answer. The security is worth one lakh rupees; the workmen's dues are one lakh; the secured creditors are owed three lakh. The aggregate is four lakh. The workmen's portion is therefore one-fourth of the security, that is twenty-five thousand rupees.

Preferential payments: section 327

Subject to section 326, the following are paid in priority to all other debts:

• (a) all revenues, taxes, cesses and rates due to the Central Government, a State Government or a local authority at the relevant date, having become due and payable within the twelve months immediately before that date;
• (b) all wages or salary of any employee for services rendered, due for a period not exceeding four months within the twelve months immediately before the relevant date, subject to a notified ceiling per workman;
• (c) all accrued holiday remuneration becoming payable to an employee, or on his death to a person claiming under him, on the termination of his employment before or by the winding up order or the dissolution;
• (d) unless the company is being wound up voluntarily merely for reconstruction or amalgamation, all contributions payable during the twelve months immediately before the relevant date by the company as employer under the Employees' State Insurance Act, 1948 or any other law in force;
• (e) unless the company had, at the commencement, insurance rights transferable to the workmen under section 14 of the Workmen's Compensation Act, 1923, all amounts due for compensation for death or disablement of an employee under that Act, a weekly payment being taken at the lump sum for which it could be redeemed if the employer has applied under that Act;
• (f) all sums due to an employee from the provident fund, pension fund, gratuity fund or any other welfare fund; and
• (g) the expenses of any investigation under sections 213 and 216, so far as payable by the company.

Section 327(2): the person who advanced the money. Where wages, salary or accrued holiday remuneration have been paid to an employee out of money advanced by some person for that purpose, that person has the same priority to the extent that the employee's own priority has been reduced by the payment.

Section 327(3): how they rank. They rank equally among themselves and are paid in full, unless the assets are insufficient, in which case they abate in equal proportions; and so far as the assets available for general creditors are insufficient, they have priority over the claims of debenture holders under a floating charge and are paid out of the property comprised in or subject to that charge.

That second limb is important. Preferential creditors beat a floating charge holder, though not a fixed one.

Section 327(4). Subject to retaining what is necessary for the costs and expenses of the winding up, these debts are discharged forthwith so far as the assets suffice; and for clause (d) debts, formal proof is not required except as prescribed.

Section 327(5): distress by a landlord. Where a landlord or other person has distrained on the company's goods within three months immediately before the winding up order, the preferential debts are a first charge on the goods distrained on or the proceeds of their sale; and the landlord, in respect of money so paid, has the same rights of priority as the person to whom the payment is made.

Section 327(6). Remuneration for a period of holiday or of absence from work on medical grounds through sickness or other good cause is deemed to be wages for services rendered during that period.

Section 327(7): the great exclusion. Sections 326 and 327 shall not be applicable in the event of liquidation under the Insolvency and Bankruptcy Code, 2016.

That sub-section must be stated in any answer on priorities, because most liquidations in India today are under the Code, where section 53 of the Code supplies a different order.

The Explanation defines three expressions. "Accrued holiday remuneration" covers sums payable, under the contract of employment or any enactment, for a holiday period that would have become payable had the employment continued until he became entitled to the holiday. "Employee" does not include a workman, which is why sections 326 and 327 do not overlap. And "relevant date" means, for a winding up by the Tribunal, the date of appointment or first appointment of a provisional liquidator, or if none was made, the date of the winding up order, unless the company had already commenced to be wound up voluntarily under the Code.

Undoing what was done: sections 328 to 332

Fraudulent preference: section 328

Section 328(1). Where a company has given preference to a creditor, surety or guarantor, and does or suffers anything which has the effect of putting that person into a position better than he would have been in if the thing had not been done prior to six months of making the winding up application, the Tribunal, if satisfied that the transaction is a fraudulent preference, may order as it thinks fit to restore the position to what it would have been.

Section 328(2). If satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment or execution made, taken or done by or against a company within six months before the winding up application, the Tribunal may declare the transaction invalid and restore the position.

Transfers not in good faith: section 329

Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being 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 one year before the presentation of the winding up petition, shall be void against the Company Liquidator.

Three ways out of the section: the ordinary course of business, a purchaser or encumbrancer in good faith, and valuable consideration.

Assignments to trustees: section 330

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. No qualification and no period; such an assignment is void outright, because it substitutes a private arrangement for the statutory scheme.

The preferred person's position: section 331

Where a thing is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company's debt, that person is subject to the same liabilities and has the same rights as if he had undertaken to be personally liable as a surety for the debt, to the extent of the mortgage or charge, or the value of his interest, whichever is less. That value is taken as at the date of the transaction, as if the interest were free of all encumbrances other than those to which the mortgage or charge was then subject. And on an application about a payment said to be a fraudulent preference of a surety or guarantor, the Tribunal may determine questions between the payee and the surety and grant relief.

Floating charges: section 332

A floating charge on the undertaking or property created within the twelve months immediately preceding the commencement of the winding up is invalid, unless it is proved that the company was solvent immediately after the creation of the charge, except for the amount of any cash paid to the company at the time of, or after, and in consideration for, the charge, with interest at five per cent per annum or such other rate as the Central Government may notify.

The exception is the sensible part. A charge given for fresh money is good to the extent of that money; a charge given to secure an old debt is the mischief.

Disclaimer of onerous property: section 333

Section 333(1): what may be disclaimed. Where part of the company's property consists of (a) land burdened with onerous covenants, (b) shares or stocks in companies, (c) any other property not saleable or not readily saleable because the possessor is bound to perform an onerous act or pay money, or (d) unprofitable contracts, the Company Liquidator may, with the leave of the Tribunal, by writing signed by him, within twelve months after the commencement of the winding up or such extended period as the Tribunal allows, disclaim the property, notwithstanding that he has tried to sell it, taken possession, exercised ownership or acted under the contract.

The proviso: where he did not become aware of the property within one month of the commencement, the power may be exercised within twelve months after he becomes aware of it, or such extended period as the Tribunal allows.

Section 333(2): the effect. The disclaimer determines, from its date, the rights, interest and liabilities of the company in the property, but does not affect the rights, interest or liabilities of any other person except so far as necessary to release the company and its property from liability.

Section 333(3). Before or on granting leave, the Tribunal may require notices to persons interested, impose terms, and make such other order as is just and proper.

Section 333(4): being forced to decide. He may not disclaim where a person interested has applied to him in writing requiring him to decide, and he has not, within twenty-eight days of receipt or such extended period as the Tribunal allows, given notice that he intends to apply for leave to disclaim; and where the property is under a contract, failing to disclaim within that period means he is deemed to have adopted it.

Section 333(5). On the application of a person entitled to the benefit or subject to the burden of a contract with the company, the Tribunal may rescind the contract on such terms as to damages as it thinks just, and damages so payable may be proved as a debt in the winding up.

Section 333(6): vesting orders. On the application of a person claiming an interest in disclaimed property or under an undischarged liability in respect of it, the Tribunal may order the property to be vested in or delivered to the person entitled or to whom it seems just it should go by way of compensation, and the property then vests without any conveyance or assignment.

The proviso for leasehold property. Where the disclaimed property is leasehold, the Tribunal shall not make a vesting order in favour of a person claiming under the company, whether as under-lessee or mortgagee, except on terms making him (a) subject to the same liabilities and obligations as the company was under the lease at the commencement of the winding up, or (b) if the Tribunal thinks fit, subject only to the same liabilities as if the lease had been assigned to him at that date, in either case as if the lease comprised only the property in the vesting order. A mortgagee or under-lessee declining such an order is excluded from all interest in and security upon the property; and if nobody claiming under the company will accept, the Tribunal may vest the company's estate in any person liable to perform the lessee's covenants, free of all estates, encumbrances and interests created by the company.

Section 333(7). Any person affected by a disclaimer is deemed a creditor to the amount of the compensation or damages payable, and may prove it as a debt.

After commencement, nothing moves: sections 334 and 335

Section 334. In a winding up by the Tribunal, any disposition of the property including actionable claims, and any transfer of shares or alteration in the status of members, made after the commencement of the winding up, shall be void unless the Tribunal otherwise orders.

Section 335(1). Where a 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, and any sale held without leave of the Tribunal of any of its properties or effects after that commencement, shall be void.

Section 335(2). Nothing in the section applies to proceedings for the recovery of any tax or impost or any dues payable to the Government.

Offences and personal liability: sections 336 to 341

Offences by officers in liquidation: section 336

A person who is or has been an officer of a company being wound up by the Tribunal, or subsequently ordered to be wound up by the Tribunal, commits an offence if he:

• (a) does not fully and truly disclose to the Company Liquidator all the property of the company and how, to whom, for what consideration and when any part was disposed of, except in the ordinary course of business;
• (b) does not deliver up the property in his custody or control which he is required by law to deliver up;
• (c) does not deliver up the books and papers he is required by law to deliver up;
• (d) within the twelve months immediately before the commencement of the winding up or at any time thereafter: (i) conceals property worth one thousand rupees or more, or any debt due to or from the company; (ii) fraudulently removes property worth one thousand rupees or more; (iii) conceals, destroys, mutilates or falsifies any book or paper relating to the property or affairs, or is privy to it; (iv) makes or is privy to a false entry; (v) fraudulently parts with, alters or omits anything in such a book or paper; (vi) by false representation or other fraud obtains property on credit which the company does not pay for; (vii) under the false pretence that the company is carrying on business, obtains property on credit which it does not pay for; or (viii) pawns, pledges or disposes of property obtained on credit and not paid for, otherwise than in the ordinary course of business;
• (e) makes any material omission in any statement relating to the affairs of the company;
• (f) knowing or believing that a false debt has been proved, fails for one month to inform the Company Liquidator;
• (g) after the commencement, prevents the production of any book or paper;
• (h) after the commencement, or at a creditors' meeting within the twelve months before it, attempts to account for property by fictitious losses or expenses; or
• (i) is guilty of false representation or fraud to obtain the creditors' consent to an agreement about the affairs or the winding up.

Punishment: imprisonment of not less than three years extending to five years, and fine of not less than one lakh rupees extending to three lakh rupees.

The proviso is the defence: it is a good defence if the accused proves that he had no intent to defraud or to conceal the true state of affairs of the company or to defeat the law.

Section 336(2): the receiver of pledged goods. A person who takes in pawn or pledge or otherwise receives property knowing it to be pawned, pledged or disposed of in circumstances amounting to an offence under clause (d)(viii) is punishable with imprisonment of not less than three years extending to five years and fine of not less than three lakh rupees extending to five lakh rupees.

The Explanation: "officer" includes any person in accordance with whose directions or instructions the directors have been accustomed to act.

Frauds by officers: section 337

An officer of a company subsequently ordered to be wound up by the Tribunal who has (a) by false pretences or other fraud induced any person to give credit to the company; (b) with intent to defraud creditors, made or caused any gift, transfer or charge, or connived at an execution against the company's property; or (c) with intent to defraud creditors, concealed or removed property since the date of an unsatisfied judgment or order for payment of money, or within two months before that date, is punishable with imprisonment of not less than one year extending to three years and fine of not less than one lakh rupees extending to three lakh rupees.

Proper accounts not kept: section 338

Where proper books of account were not kept throughout the two years immediately preceding the commencement of the winding up, or the period between incorporation and commencement if shorter, every officer in default is punishable with imprisonment of not less than one year extending to three years and fine of not less than one lakh rupees extending to three lakh rupees, unless he shows that he acted honestly and that in the circumstances in which the business was carried on the default was excusable.

Section 338(2) deems proper books not to have been kept where (a) books necessary to exhibit and explain the transactions and financial position, including day-to-day entries of all cash received and paid, were not kept; and (b) where the business involved dealings in goods, statements of annual stock takings and, except for ordinary retail sales, of all goods sold and purchased showing the goods and the buyers and sellers in sufficient detail to identify them, were not kept.

Fraudulent conduct of business: section 339

Section 339(1). If in the course of the winding up it appears that any business of the company has been carried on with intent to defraud creditors or any other persons, or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, the Company Liquidator, or any creditor or contributory, may declare that any person who is or has been a director, manager or officer, or any persons who were knowingly parties to carrying on the business in that manner, 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. On the hearing the liquidator may himself give evidence or call witnesses.

Section 339(2). The Tribunal may give further directions, and in particular make the liability a charge on any debt or obligation due from the company to that person, or on any mortgage or charge or interest in one held by or vested in him or a person on his behalf or an assignee, and make orders to enforce that charge.

Section 339(3). Every person knowingly a party to such conduct is liable for action under section 447, the fraud section.

Section 339(4). The section applies notwithstanding that the person may be punishable under any other law.

The Explanation excludes from "assignee" a person taking for valuable consideration, not being marriage, in good faith and without notice; and defines "officer" to include a person on whose directions the directors are accustomed to act.

Misfeasance: section 340

Section 340(1). If in the course of winding up it appears that a person who took part in the promotion or formation, or who is or has been a director, manager, Company Liquidator or officer, has (a) misapplied or retained or become liable or accountable for any money or property, or (b) been guilty of any misfeasance or breach of trust in relation to the company, the Tribunal may, on the application of the Official Liquidator, the Company Liquidator, or any creditor or contributory, inquire into his conduct and order him to repay or restore the money or property with interest at such rate as it considers just, or to contribute such sum to the assets by way of compensation as it considers just and proper.

Section 340(2): limitation. The application shall be made within five years from the date of the winding up order, or of the first appointment of the Company Liquidator, or of the misapplication, retainer, misfeasance or breach of trust, whichever is longer.

Section 340(3). The section applies notwithstanding that the matter is one for which the person may be criminally liable.

Partners and directors: section 341

Where a declaration under section 339 or an order under section 340 is made in respect of a firm or body corporate, the Tribunal may also make such a declaration or order in respect of any person who was at the relevant time a partner in that firm or a director of that body corporate.

And remember section 246: sections 337 to 341 apply mutatis mutandis to applications under section 241 or section 245, so this machinery is available in an oppression petition too.

A worked example

Ulwe Steel Limited is wound up by the Tribunal. A provisional liquidator was appointed on 1 June; the winding up order followed on 1 September.

The relevant date is therefore 1 June, the date of appointment of the provisional liquidator, not the date of the order: Explanation (c) to section 327.

The realisations. The factory, mortgaged to a bank, sells for one crore; the unencumbered assets realise fifty lakh.

Who is paid first. Two years' wages and accrued holiday remuneration preceding the winding up order are paid in priority to all other debts including the bank's, within thirty days of the sale of the assets, subject to the prescribed charge over the bank's security: proviso to section 326(1). Only then do the other workmen's dues and the bank's shortfall or the workmen's portion of its security, whichever is less, rank pari passu under section 326(1).

Working out the workmen's portion. Say the bank's security is worth one crore, the workmen's dues are one crore, and the secured debts are three crore. The aggregate is four crore, so the workmen's portion is one-fourth of the security, twenty-five lakh rupees, exactly as the Act's illustration shows.

Next in the queue. Under section 327, and subject to section 326: taxes due and payable within the twelve months before 1 June; wages of employees for not more than four months within those twelve months, subject to the notified ceiling; accrued holiday remuneration; Employees' State Insurance contributions for those twelve months; workmen's compensation; provident, pension, gratuity and welfare fund dues; and the expenses of any investigation under sections 213 and 216. They rank equally, are paid in full or abate equally, and are paid out of property subject to a floating charge in priority to the debenture holders if the general assets fall short.

A landlord who distrained. The landlord of the godown distrained on goods two months before the winding up order. The preferential debts are a first charge on those goods or the proceeds, and in respect of money so paid the landlord has the same rights of priority as the person paid: section 327(5).

A payment before the winding up. Two months before the petition the company paid a supplier in full who was also a director's brother, while paying nobody else. That put him in a better position than he would have been in, and it was within six months of the winding up application, so the Tribunal may hold it a fraudulent preference and order restoration: section 328.

A transfer at an undervalue. Ten months before the petition the company transferred a plot of land to a promoter's firm for a nominal sum. It was not in the ordinary course of business and the transferee was not a purchaser in good faith for valuable consideration, and it was within one year of the petition, so it is void against the Company Liquidator: section 329.

A charge for an old debt. Eight months before the commencement the company created a floating charge over its stock to secure a debt already owed to a finance company. Being created within twelve months and the company not being solvent immediately after, the charge is invalid except for cash paid at or after its creation in consideration for it, with interest at five per cent per annum or the notified rate: section 332.

An assignment to trustees. The Board also purported to assign all the company's assets to trustees for the benefit of all its creditors. That is void outright under section 330.

After commencement. A shareholder transfers his shares in October, and a creditor levies execution against the company's plant without leave. The transfer of shares is void unless the Tribunal orders otherwise (section 334), and the execution is void (section 335), though recovery of tax or dues payable to the Government is outside section 335.

Onerous property. The company holds a lease with heavy repairing covenants and an unprofitable long-term supply contract. The liquidator may, with the Tribunal's leave and by writing signed by him, within twelve months of the commencement, disclaim both. The lessor, affected by the disclaimer, is deemed a creditor for the damages and may prove them. If the lessor writes requiring the liquidator to decide, and the liquidator does not within twenty-eight days give notice of his intention to apply for leave, he loses the right to disclaim, and as to the contract he is deemed to have adopted it. An under-lessee may ask for a vesting order, but only on terms making him subject to the company's liabilities under the lease, or, if the Tribunal thinks fit, as if the lease had been assigned to him at the commencement.

The officers. The former managing director did not disclose two godowns to the liquidator and removed stock worth four lakh rupees five months before the commencement. Both are offences under section 336(1)(a) and (d)(ii), punishable with imprisonment of three to five years and fine of one to three lakh rupees, unless he proves he had no intent to defraud, to conceal the true state of affairs or to defeat the law. The pawnbroker who took the stock knowing how it was obtained is punishable with three to five years and fine of three to five lakh rupees: section 336(2).

The books. The company kept no day-to-day cash records and no stock statements for the two years before the commencement. Every officer in default is punishable with imprisonment of one to three years and fine of one to three lakh rupees, unless he shows he acted honestly and that the default was excusable in the circumstances: section 338.

The business itself. It appears that for a year the company took deposits knowing it could not repay them. On the application of the liquidator or any creditor or contributory, the Tribunal may declare the directors and everyone knowingly a party personally responsible, without any limitation of liability, for the company's debts, and may make that liability a charge on any debt the company owes them or on any security they hold; and each is liable for action under section 447: section 339.

Misfeasance. A former director retained sale proceeds of scrap. On an application made within five years of the winding up order, the first appointment of the Company Liquidator, or the misapplication, whichever is longer, the Tribunal may inquire into his conduct and order him to repay with interest or to contribute compensation, and it may do so although he is also criminally liable: section 340.

A firm. Where the declaration or order is made against a firm of promoters, the Tribunal may make it also against any person who was then a partner in that firm: section 341.

Distinctions that carry marks

What this does NOT mean

It does not mean secured creditors are always paid first. Two years' wages and accrued holiday remuneration are paid in priority to all other debts including debts due to secured creditors.

It does not mean sections 326 and 327 apply to every liquidation. Section 327(7) disapplies them in a liquidation under the Insolvency and Bankruptcy Code, 2016.

It does not mean every transfer within a year is void. A transfer in the ordinary course of business, or to a purchaser or encumbrancer in good faith for valuable consideration, is outside section 329.

It does not mean every floating charge within twelve months is invalid. It is valid if the company is proved to have been solvent immediately after its creation, and in any event to the extent of cash paid at or after its creation in consideration for it, with interest.

It does not mean the liquidator may disclaim at leisure. He has twelve months, and only twenty-eight days to respond to a written demand that he decide, failing which a contract is deemed adopted.

It does not mean an officer charged under section 336 has no defence. It is a good defence to prove no intent to defraud, to conceal the true state of affairs, or to defeat the law.

It does not mean criminal liability excludes the civil remedy. Sections 339(4) and 340(3) both say the section applies notwithstanding liability under other law or criminal liability.

Quick revision

• 324: all debts payable on a contingency and all claims present or future, certain or contingent, ascertained or sounding only in damages are admissible to proof, a just estimate being made of uncertain values.
• 326: workmen's dues, and a secured creditor's unrealised debt or the workmen's portion of his security, whichever is less, pari passu, are paid in priority to all other debts; and wages and accrued holiday remuneration for two years preceding the winding up order are paid before all debts including secured creditors, within thirty days of the sale of assets. Workmen are those under section 2(s) of the Industrial Disputes Act, 1947; workmen's dues are wages and salary with Industrial Disputes Act compensation, accrued holiday remuneration, workmen's compensation, and provident, pension, gratuity and welfare fund sums; the workmen's portion is the security's value multiplied by the workmen's dues over the aggregate of workmen's dues and secured debts.
• 327: subject to section 326, taxes due within twelve months before the relevant date; four months' wages within those twelve months, up to a notified ceiling; accrued holiday remuneration; ESI and like contributions for twelve months; workmen's compensation; welfare fund dues; and investigation expenses under sections 213 and 216. They rank equally, abate equally, and beat floating charge holders; one who advanced money to pay wages takes the employee's priority; a landlord distraining within three months takes subject to a first charge; holiday and sick pay count as wages; and none of this applies in a liquidation under the Code. The relevant date is the appointment of the provisional liquidator, or the winding up order if none.
• 328 to 332: a fraudulent preference within six months of the winding up application may be restored or declared invalid; a transfer not in the ordinary course, or not to a good faith purchaser for value, within one year of the petition is void against the liquidator; an assignment of all assets to trustees for creditors is void; a person preferred who is interested in mortgaged property is treated as a surety to the extent of the charge or his interest, whichever is less; and a floating charge within twelve months is invalid unless the company was solvent immediately after, save for cash paid for it with interest at five per cent or the notified rate.
• 333: the liquidator may, with the Tribunal's leave and in writing, disclaim land with onerous covenants, shares or stocks, property not readily saleable because of an onerous obligation, and unprofitable contracts, within twelve months of commencement or of becoming aware; the disclaimer ends the company's rights and liabilities without affecting others; a written demand forces a decision in twenty-eight days, failing which a contract is deemed adopted; the Tribunal may rescind contracts with damages, and make vesting orders, leasehold vesting being on terms of assuming the company's liabilities; and a person affected is deemed a creditor for the damages.
• 334 and 335: after commencement, dispositions of property, transfers of shares and alterations in the status of members are void unless the Tribunal orders otherwise; and attachment, distress, execution or sale without the Tribunal's leave is void, except recovery of tax or dues payable to the Government.
• 336: nine kinds of default by an officer, from non-disclosure and non-delivery to concealment or fraudulent removal of property worth a thousand rupees or more, falsifying books, obtaining property on credit by fraud or false pretence of carrying on business, pledging unpaid-for goods, material omissions, failing for a month to report a false debt, preventing production of books, fictitious losses, and fraud to obtain creditors' consent, punishable with three to five years and one to three lakh rupees; a knowing receiver of pledged goods with three to five years and three to five lakh rupees; good defence of no intent to defraud, conceal or defeat the law; and "officer" includes a person on whose directions the directors act.
• 337: an officer who induced credit by fraud, made a gift, transfer or charge or connived at execution with intent to defraud creditors, or concealed or removed property since an unsatisfied judgment or within two months before it, is punishable with one to three years and one to three lakh rupees.
• 338: failure to keep proper books for two years before commencement, or since incorporation if shorter, punishes every officer in default with one to three years and one to three lakh rupees, unless he shows he acted honestly and the default was excusable; books are deemed improper without day-to-day cash entries or, in a goods business, annual stock takings and records of goods sold and purchased identifying buyers and sellers.
• 339 to 341: business carried on with intent to defraud or for a fraudulent purpose exposes directors, managers, officers and anyone knowingly a party to personal responsibility without limitation, chargeable on debts and securities owed to them, and to action under section 447; misapplication, retention, misfeasance or breach of trust by a promoter, director, manager, Company Liquidator or officer may be met by an order to repay or restore with interest or contribute compensation, on an application within five years of the winding up order, the liquidator's first appointment or the act, whichever is longer, and although he is criminally liable; and both may be extended to a partner of a firm or a director of a body corporate against which the declaration or order is made.

Test yourself

1. What is paid first in a winding up under the Companies Act? Wages or salary and accrued holiday remuneration payable for the two years preceding the winding up order, which are paid in priority to all other debts including debts due to secured creditors, within thirty days of the sale of assets: proviso to section 326(1). Then the remaining workmen's dues, and so much of a secured creditor's debt as he could not realise or the workmen's portion of his security, whichever is less, rank pari passu.

2. How is the workmen's portion calculated? It is the amount bearing to the value of the security the same proportion as the workmen's dues bear to the aggregate of the workmen's dues and the debts due to the secured creditors. On the Act's own illustration, a security worth one lakh, workmen's dues of one lakh and secured debts of three lakh give an aggregate of four lakh, so the workmen's portion is one-fourth of the security, twenty-five thousand rupees.

3. Do sections 326 and 327 apply to a liquidation under the Insolvency and Bankruptcy Code? No. Section 327(7) provides that sections 326 and 327 shall not be applicable in the event of liquidation under the Insolvency and Bankruptcy Code, 2016.

4. State the periods within which a transaction may be undone. A fraudulent preference within six months of the making of the winding up application: section 328. A transfer not in the ordinary course of business and not to a purchaser or encumbrancer in good faith for valuable consideration within one year before the presentation of the petition: section 329. A floating charge created within the twelve months immediately preceding the commencement: section 332.

5. What property may the liquidator disclaim, and within what time? Land burdened with onerous covenants, shares or stocks in companies, property not saleable or not readily saleable because the possessor is bound to an onerous act or payment, and unprofitable contracts; with the leave of the Tribunal, by writing signed by him, within twelve months of the commencement or of becoming aware of the property, or such extended period as the Tribunal allows: section 333(1).

6. When may a director be made personally liable without limit? Where it appears in the course of the winding up that any business of the company has been carried on with intent to defraud creditors or any other persons, or for any fraudulent purpose, the Tribunal may, on the application of the Official Liquidator, the Company Liquidator or any creditor or contributory, declare any person who is or has been a director, manager or officer, or anyone knowingly a party to it, personally responsible without any limitation of liability for all or any of the company's debts: section 339(1).