Companies Act Section 333

Companies Act, Section 333: Disclaimer of Onerous Property by the Company Liquidator in the Course of Winding Up

Section 333 of the Companies Act, 2013 empowers the Company Liquidator to disclaim certain types of property or contracts that are burdensome, unprofitable, or otherwise disadvantageous to the company during the course of winding up. This provision allows the Liquidator, with the permission of the Tribunal, to relieve the company of liabilities attached to such properties or agreements, thereby protecting the interests of creditors and ensuring an efficient liquidation process.

This section mirrors similar provisions in insolvency legislation globally, recognizing that it may not be beneficial to administer or attempt to realize certain property where the cost or burden outweighs the benefit.

1. Meaning and Scope of Onerous Property

Under Section 333(1), the term “onerous property” refers to any part of a company’s property that falls within the following categories:

(a) Land with Burdensome Covenants:
Land of any type or tenure, which is burdened with obligations (like maintaining structures or complying with usage restrictions) that impose a financial or legal burden on the company.
(b) Shares or Stocks in Other Companies:
Particularly where these may carry liability (e.g., partly paid shares), or where holding them imposes obligations or expenses without corresponding benefit.
(c) Other Unsaleable Property with Attached Obligations:
Any property which is either not saleable at all, or not readily saleable, because it binds the owner (the company) to perform an onerous act, or It involves the payment of a monetary sum or other burdensome obligation.
(d) Unprofitable Contracts:
Any contract entered into by the company that is no longer beneficial, and performance would result in a loss to the company’s estate.
2. Power of the Company Liquidator to Disclaim Property

The Company Liquidator, with the prior approval of the Tribunal, may disclaim any of the above types of property. The disclaimer must be made in writing and signed by the Liquidator. It may be exercised:

Within 12 months from the commencement of the winding up, or
Within 12 months from the date the Liquidator became aware of such property, if it was not known within the first month, or
Within an extended period as may be permitted by the Tribunal.
This power can be exercised even if the Liquidator has attempted to sell the property, taken possession of it, or acted in accordance with any contract relating to it.

3. Legal Effect of Disclaimer

As per Section 333(2), once the disclaimer is made:

It operates to terminate the company’s rights, interests, and liabilities in relation to the disclaimed property.
However, it does not affect the rights or liabilities of third parties, except to the extent necessary to relieve the company from liability.
Thus, third parties with a valid interest in the disclaimed property are not automatically deprived of their rights.

4. Tribunal’s Discretion in Granting Leave to Disclaim

Before allowing the disclaimer, the Tribunal may:
Require that notice be served to persons interested in the property or contract, Impose reasonable terms and conditions for granting leave, Make any additional orders it considers just and proper. This ensures that the rights of third parties and creditors are duly considered.

5. Request by Interested Parties to Decide on Disclaimer

If any interested person makes a written request to the Liquidator to decide whether he will disclaim or not:
The Liquidator must notify his intention to apply to the Tribunal within 28 days (or any extended period granted). If he fails to do so, or does not disclaim within the period, he is deemed to have adopted the property or contract.
In the case of a contract, failure to disclaim is treated as adoption of the contract by the Liquidator.

6. Rescission of Contract by Tribunal

If a party is entitled to the benefit or burden of a contract made with the company, they may apply to the Tribunal to rescind the contract. The Tribunal can:
Cancel the contract. Order payment of damages for non-performance by either party, Allow such relief as it deems just and proper.
Any damages payable to the applicant can be claimed as a debt in the winding up.
7. Vesting of Disclaimed Property

Claims interest in the disclaimed property, or Bears liability in respect of it. They may apply to the Tribunal to:

Vest the property in themselves or a trustee, or deliver the property to a rightful claimant, on such just and proper terms as the Tribunal may determine.

The Tribunal shall not vest it in a person claiming under the company (like a mortgagee or sub-lessee), unless that person agrees to:
Take on the same lease obligations as the company was subject to, or accept the lease as if it had been assigned on the winding-up commencement date.
Any such person who refuses these terms will lose all interest and security in the property.

If no person under the company accepts the lease on these terms, the Tribunal may vest the interest in any person liable to perform the covenants discharged of all company-created encumbrances.

8. Compensation for Affected Persons

Any person who suffers loss or damage due to a disclaimer can:
Claim compensation, prove the amount as a debt in the company’s winding up. This ensures affected persons are recognized as creditors in the liquidation process.