Companies Act Section 298

Companies Act, Section 298: Tribunal’s Authority to Determine Priority of Costs in Winding Up Proceedings

Section 298 of the Companies Act, 2013, provides the National Company Law Tribunal (NCLT) with the discretionary authority to decide how the costs, charges, and expenses incurred during the process of winding up a company are to be paid out of the company’s assets especially in situations where those assets are insufficient to meet all liabilities.

This provision is an important component of insolvency law as it ensures that the costs incurred for managing and concluding the winding up process are fairly allocated and prioritized, even when the company does not have enough funds to pay off all its debts and obligations.

1. Context and Applicability

When a company enters into liquidation either through an order of the Tribunal or voluntarily under Tribunal supervision the company’s assets are gathered and applied to settle all its outstanding debts and obligations. However, there are circumstances in which the total realizable value of the company’s assets is insufficient to satisfy all liabilities in full. In such cases, determining which costs should be paid first becomes a matter of legal and practical importance.

Section 298 is specifically designed to address such situations. It provides the Tribunal with statutory power to resolve issues related to the prioritization and payment of various costs and expenses associated with the winding up.

2. Tribunal’s Power to Order Payment of Costs

Under Section 298, the Tribunal is authorized to make an order directing that specific costs, charges, and expenses incurred during the course of winding up be paid out of the company’s remaining assets. These costs could include, but are not limited to:

Professional fees of liquidators, lawyers, accountants, and valuers,
Court fees and filing charges associated with the proceedings,
Administrative expenses, including costs related to asset realization, public auctions, asset protection, and correspondence with creditors,
Expenses related to calling and conducting meetings of creditors or contributories,
Costs of any legal actions required to recover debts or assets on behalf of the company.
3. Determining Priority Among Various Expenses

A key feature of Section 298 is that the Tribunal has the discretion to determine the order of priority in which these costs are to be paid from the available assets. The phrase “inter se” used in the section refers to priority among different classes or types of expenses. This enables the Tribunal to assess the nature of each expense and decide how they should be ranked relative to each other for the purpose of payment.

For instance, the Tribunal may determine that:

Liquidator’s costs and statutory filing fees should be paid before other professional fees,
Costs incurred to preserve the company’s assets may take precedence over general administrative charges,
Legal expenses essential to the recovery of significant claims may be prioritized over routine compliance-related costs.
This judicial discretion ensures that fairness is maintained and the most critical and urgent liabilities are satisfied first, especially when the asset pool is limited.

4. Principle of Justice and Equity

The exercise of power under Section 298 is not arbitrary. The Tribunal is expected to act in accordance with the principles of justice, equity, and good conscience. It must ensure that no creditor or stakeholder is unfairly disadvantaged, and that the parties who have contributed significantly to the liquidation process especially those whose services directly enabled asset recovery or legal compliance are compensated appropriately from the available funds.

This also acts as a deterrent against excessive or unnecessary expenditures during liquidation and incentivizes prudent financial conduct by the Company Liquidator and other parties involved.

5. Relevance in Cases of Asset Shortfall

Section 298 becomes especially critical when there is an asset shortfall that is, when the company’s assets fall short of the total liabilities and obligations. In such situations:

The Tribunal's order under this section ensures that the limited funds are utilized in the most effective and legally sound manner,
It prevents disputes among parties by providing a binding order of payment,
It ensures that the process of winding up does not come to a standstill due to lack of clarity on how the costs should be paid.
6. Supplementary Role in the Overall Winding Up Framework

While Section 298 does not independently deal with the company’s overall debts and distribution of assets to creditors and shareholders, it plays a supporting and facilitative role in the broader scheme of liquidation. It helps bridge the gap between the procedural conduct of the winding up and the equitable resolution of financial obligations arising from it.