Sec 331 of Companies Act, 2013: Liabilities and Rights of Certain Persons Fraudulently Preferred

Section 331 of the Companies Act of 2013 is part of Chapter 20 of the Act, which deals with the issue of company winding up. A company’s dissolution is known as winding up. Section 331 explains the responsibilities and rights of those who have been fraudulently preferred. Section 328, which deals with the problem of false preference, refers to a fraudulently favored individual.

According to Section 331:

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. The person preferred shall be subject to the same liabilities and have the same rights as if he had undertaken to be personally liable for the debt.

In simpler terms, where a company has paid a creditor to relieve or reduce the liability of the person who stood as surety to creditors on behalf of the company under section 328 (fraudulent preference), the creditor is subject to the same liabilities and has the same rights as if he had agreed to be personally liable as a surety for the debt. This implies he’ll have to pay the liquidator the difference between the amount of the mortgage or charge on the property and the value of his stake, whichever is less. After then, he may be able to reclaim the funds from the surety or guarantee.

Suppose Aman provided an Rs.10 crore loan to ABCL, a corporation. ABCL imposed a floating charge on the company’s equity and debtors in return for the loan. In addition, Aman mortgaged a dwelling property as security, using X as a guarantee. ABCL also took out loans from several banks. Then, one day, ABCL gave Aman a [fraudulent preference] to save the house property in X’s interest. After that, ABCL went bankrupt in less than six months. Sections 328 and 331 apply in this case, and Aman must return the money to the liquidator before pursuing the surety X.

If an application is made to the Tribunal concerning payment because the payment was a fraudulent preference of a surety or guarantor, the Tribunal shall have jurisdiction to determine any questions arising between the person to whom the payment was made and the surety or guarantor; and to grant relief in respect thereof, and may give leave to bring the surety or guarantor in as a third party as in the case of a suit for the rescission.