Sections 331 and 332 of the Companies Act, 2013: Fraudulent Preference and Effect of Floating Charge
Sections 331 and 332 form part of the winding-up provisions of the Companies Act, 2013. Section 331 deals with the liabilities and rights of certain persons who receive a fraudulent preference connected with mortgaged or charged property. Section 332 deals with the validity of certain floating charges created shortly before winding up.
Section 331 - Liabilities and rights of certain persons fraudulently preferred
What Section 331 covers: This provision supplements Section 328 on fraudulent preference. It addresses the position of a person interested in property mortgaged or charged to secure a company's debt where the relevant act is invalid as a fraudulent preference.
(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.
Meaning of Section 331
In simple terms, when a transaction is invalidated as a fraudulent preference under Section 328 and the preferred person has an interest in property securing the company's debt, Section 331 determines that person's corresponding liabilities and rights. The provision also empowers the Tribunal to resolve connected disputes involving a surety or guarantor.
The expression "mutatis mutandis" means that the rule is applied with the necessary changes required by the different circumstances. Therefore, the mechanism in sub-section (3) is adapted to relevant non-cash transactions under sub-section (4).
Section 332 - Effect of floating charge
What Section 332 covers: A floating charge generally operates over a changing class of company assets rather than attaching permanently to each individual asset from the outset. Section 332 sets a special rule for a floating charge created during the twelve months immediately before commencement of winding up.
Where a company is being wound up, a floating charge on the undertaking or property of the company created within the twelve months immediately preceding the commencement of the winding up, shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, except for the amount of any cash paid to the company at the time of, or subsequent to the creation of, and in consideration for, the charge, together with interest on that amount at the rate of five per cent. per annum or such other rate as may be notified by the Central Government in this behalf.
Meaning of Section 332
The section targets a floating charge created shortly before winding up. If the charge was created within the prescribed twelve-month period, its validity depends on proof that the company was solvent immediately after creation of the charge. Even where the charge is otherwise invalid under the section, the statutory exception protects qualifying cash actually paid to the company in consideration for the charge, together with the interest specified by the provision.
Relationship with Section 328 on fraudulent preference
Section 331 expressly refers to Section 328 of the Companies Act, 2013. Section 328 enables the Tribunal, where the statutory conditions for a fraudulent preference are met, to make orders intended to restore the position that would have existed if the preference had not been given. Section 331 then addresses specified liabilities and rights arising from such a preference.
Key distinction between Sections 331 and 332
Section 331 concerns the consequences for certain persons connected with a transaction treated as a fraudulent preference. Section 332 instead focuses on a floating charge created within twelve months immediately before winding up and provides a solvency-based rule governing its validity, subject to the statutory protection for qualifying cash and interest.
Official legal resources
For the latest statutory text, amendments, notifications and corporate-law updates, consult the official Ministry of Corporate Affairs and India Code resources. Users dealing with an actual winding-up, insolvency or liquidation matter should also verify whether the Insolvency and Bankruptcy Code, 2016 and related regulations apply to the proceeding.
Disclaimer: This page is intended for general legal information and statutory reference. It is not a substitute for advice on the facts of a particular case.