Companies Act Section 329

Companies Act, Section 329: Void Transfers Not Made in Good Faith Prior to Winding Up

Section 329 of the Companies Act, 2013 addresses the treatment of certain transactions made by a company prior to the commencement of winding-up proceedings. Specifically, it deals with the invalidity of transfers or deliveries of property or goods that are not made in good faith or in the ordinary course of business, when such acts occur shortly before a winding up petition is filed. The intention behind this provision is to prevent companies from disposing of their assets in an unfair or non-transparent manner just before they are liquidated, thereby protecting the rights of creditors and ensuring that the company’s assets are preserved for equitable distribution.

1. Scope of the Provision:
This section applies to all movable and immovable property transfers and deliveries of goods made by a company.
It specifically covers such transactions if they are carried out within one year prior to the presentation of a winding-up petition before the National Company Law Tribunal (NCLT).
2. Key Conditions for a Transfer to be Declared Void:
The transaction must not be made in the ordinary course of the company’s business.
This means the transaction should not be a regular or routine business activity (e.g., sales to customers, procurement of raw materials, etc.).
Transactions outside the usual commercial activity, such as the sale of core assets, bulk transfers of goods, or gratuitous transfers may raise suspicion.
The transaction must not be made in favour of a purchaser or encumbrancer who acted in good faith and provided valuable consideration. A purchaser or encumbrancer in good faith is one who:
Was not aware of the company’s impending insolvency. Acted honestly and without any intention to defraud creditors or other stakeholders. Valuable consideration refers to a fair payment or compensation given in exchange for the transfer.
3. Consequences of a Void Transfer:
If the transaction meets the conditions for voidability (i.e., not in good faith, not in the ordinary course of business, or without valuable consideration), it shall be deemed void against the Company Liquidator. This means:
The liquidator has the power to reverse or disregard the transaction. The transferred property or goods can be recovered by the liquidator as part of the company’s assets. The transaction will have no legal effect in reducing the assets available to satisfy creditors’ claims.
4. Purpose and Legal Rationale:
The provision is designed to prevent fraudulent dissipation of assets prior to insolvency.
It safeguards the interests of creditors by ensuring that the company cannot favour specific parties or dispose of property in a manner that harms the collective interest of stakeholders.
It helps to maintain transparency and accountability in the winding-up process.
5. Burden of Proof:
It may rest upon the Company Liquidator or the creditors to demonstrate that the transfer:
Was not in the ordinary course of business, was not made to a good faith purchaser, or lacked valuable consideration.
Conversely, the recipient of the property or goods may seek to prove that the transaction was legitimate and executed in good faith to defend the validity of the transfer.
6. Illustrative Examples:
If a company donates machinery to an associate entity without consideration three months before a winding-up petition is filed, such a transaction would likely be declared void.
If a company sells its only office property to a director at a price well below market value within a year of filing for winding up, this too would be deemed a transfer not made in good faith.
On the other hand, if a company sells inventory to a third-party customer at market rate as part of routine operations, this would generally be considered valid, even if it occurred shortly before the winding-up petition.