Sec 328 of Companies Act, 2013: Fraudulent Preference given to creditors

When a corporation does anything or suffers something as a result of fraudulent conduct that may assist a person in standing out in a stronger position throughout the winding up, this is referred to as a “fraudulent preference” granted by the company. Let us understand it in an elaborative manner:

If a company does anything or suffers anything, which has the effect of putting that person (who can be one of the creditors of the company or surety or guarantor for any liability) into a position which, in the event of the company going into liquidation, will be better, than the position he would have been in it that thing had not been done.

An example: A company director gave a guarantee for specific overdrafts granted to the company in exchange for giving him security over the assets whenever he was called upon to do so. The arrangement was not legally enforceable. The director subsequently issued a debenture, charging the company’s assets. The company’s winding up commenced a month later. The charge placed on the company’s assets was found to be a fraudulent preference that was void.

Such a fraudulent transaction must be done six months from the date of the winding-up application. Any transaction before that would not be covered under the winding-up process under this act.

Suppose the Tribunal is satisfied that such a transaction has been fraudulent and that the given preference is with dishonest intention. In that case, it may order restoring the position to what it would have been if the company had not shown that preference. For converting such a position company has many orders for transfer of property (movable or immovable), delivery of goods, payment or execution made, taken or done by them or against the company.

Highlights:

• There must be a dishonest intention while making a transaction with a person.
• A favorable treatment or preference for some creditors is referred to as a fraudulent preference.
• Legal evidence must be shown to substantiate the fraudulent purpose. Suspicion and accusation alone are insufficient.
• Any involuntary conduct performed under coercion does not qualify as fraudulent preference.