Companies Act Section 331 — Liabilities and rights of certain persons fraudulently preferred
CHAPTER XX WINDING UP
Commercial / Corporate
Summary
Sub-section (1) explains what happens when a company is being wound up and something done after the Act came into force is treated as invalid under section 328 because it fraudulently preferred a person who had an interest in property that was mortgaged or charged to secure the company's debt. In that situation, without affecting any other rights or liabilities that may exist, the person who was preferred takes on the same liabilities and rights as if they had personally agreed to act as a surety for the company's debt. This applies only up to the lesser of the value of the mortgage or charge on the property, or the value of that person's interest in the property.
Sub-section (2) sets out how to calculate the value of the preferred person's interest for the purpose of sub-section (1). This value is determined as of the date of the transaction that constituted the fraudulent preference, and it is calculated as if the interest were free of all encumbrances except for the mortgage or charge that secured the company's debt at that time.
Sub-section (3) deals with applications made to the Tribunal regarding a payment that is claimed to be a fraudulent preference of a surety or guarantor. In such cases, the Tribunal has the authority to decide any questions about the payment that arise between the person who received the payment and the surety or guarantor, and to grant relief on those questions, even if deciding them is not necessary for the winding up itself. To do this, the Tribunal may allow the surety or guarantor to be brought in as a third party, just as in a lawsuit for recovering the amount paid.
Sub-section (4) states that the provisions of sub-section (3) apply in the same way, with necessary modifications, to transactions that do not involve the payment of money.
Official Text
(1) 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 mortgage or charge on the property or the value of his interest, whichever is less.
(2) The value of the interest of the person preferred under sub-section (1) shall be determined as at the date of the transaction constituting the fraudulent preference, as if the interest were free of all encumbrances other than those to which the mortgage or charge for the debt of the company was then subject.
(3) On an application made to the Tribunal with respect to any payment on the ground that the payment was a fraudulent preference of a surety or guarantor, the Tribunal shall have jurisdiction to determine any questions with respect to the payment arising between the person to whom the payment was made and the surety or guarantor and to grant relief in respect thereof, notwithstanding that it is not necessary so to do for the purposes of the winding up, and for that purpose, may give leave to bring in the surety or guarantor as a third party as in the case of a suit for the recovery of the sum paid.
(4) The provisions of sub-section (3) shall apply mutatis mutandis in relation to transactions other than payment of money.