Companies Act Section 335

Companies Act, Section 335: Invalidity of Certain Attachments, Executions, and Sales in Winding Up by Tribunal

Section 335 of the Companies Act, 2013 provides a protective legal mechanism to safeguard the estate and assets of a company undergoing winding up by the Tribunal. It clearly establishes that any legal or enforcement actions such as attachment, distress, execution, or sale carried out without the leave (i.e., prior permission) of the Tribunal after the commencement of the winding-up process shall be rendered legally void.

This provision is vital in ensuring that the liquidation process remains fair, orderly, and within judicial control, thereby preventing individual creditors or other parties from gaining an unfair or preferential advantage over others in the distribution of the company’s assets.

1. Objective and Importance of Section 335

The core purpose of Section 335 is to:

Ensure that all claims against the company are handled uniformly through the structured process of liquidation.
Prevent unauthorized seizures or sales of company property during the pendency of the winding-up proceedings.
Maintain the integrity of the liquidation estate, ensuring that all assets remain available for equitable distribution among the company’s creditors, employees, and other claimants under the supervision of the Tribunal and the Company Liquidator.
Curtail individual legal actions that can disrupt or undermine the Tribunal-led winding-up process.
2. Scope and Applicability

Section 335 applies strictly to cases where a company is being wound up by an order of the National Company Law Tribunal (NCLT) under the relevant provisions of Chapter XX of the Companies Act, 2013.

The provision becomes effective from the "commencement of winding up", which is generally understood (as per Section 357 of the Act) to be the date on which the winding-up petition is presented before the Tribunal.

3. Acts Rendered Void Without Tribunal’s Leave

According to subsection (1) of Section 335, the following acts are considered void if undertaken after the commencement of winding up and without prior permission of the Tribunal:

(a) Attachment, Distress, or Execution

Attachment refers to the legal seizure of a company’s assets by order of a court or authority to enforce a judgment or debt.
Distress is a common law remedy for the recovery of rent or other dues by seizing the debtor’s goods.
Execution means the enforcement of a court’s judgment through seizure and sale of the judgment debtor’s property.
If any of these legal actions are carried out against the property or effects of the company without the Tribunal's leave after the commencement of winding up, they shall be considered null and void.

(b) Sale of Company Property

If any sale of the company’s assets whether movable or immovable is conducted without the Tribunal’s prior approval after the commencement of winding up, such a sale is also deemed void.
This includes court-ordered auctions or private sales through enforcement agencies or secured creditors.
4. Rationale Behind the Requirement of Tribunal’s Leave

The requirement to obtain leave of the Tribunal serves several important legal and procedural purposes:

Centralizes control of the company’s assets and liabilities under the jurisdiction of the Tribunal, Prevents preferential treatment of certain creditors over others, Preserves the estate for distribution under statutory priorities, especially for workmen, secured creditors, and government dues.
Allows the Tribunal to ensure that any actions taken against the company’s property are fair, necessary, and do not compromise the winding-up process.
5. Exception: Government Dues Not Affected

Subsection (2) of Section 335 provides a statutory exemption from the operation of this provision. It states that:

Government departments such as the Income Tax Department, Customs, or GST authorities can proceed to recover dues from the company without needing to obtain leave of the Tribunal, even after the winding-up process has commenced.
Such government dues include taxes, duties, levies, and other statutory charges.
This exception underscores the preferential status given to sovereign dues and balances the interest of the exchequer with the general process of liquidation.

6. Legal Consequences of Non-Compliance

Any party that proceeds to:

Attach or seize company property, Enforce a decree or judgment against company assets, Conduct a sale of company property, without prior Tribunal permission, after winding-up has commenced, will find that such acts are:

Legally ineffective, Subject to reversal by the Tribunal, Potentially exposed to liability for contempt or costs, Deprived of any rights or claims to the proceeds or property involved in the unauthorized action.
The Company Liquidator is also empowered to recover such property, and the Tribunal may issue directions to restore the position to what it was before such unauthorized act.