Companies Act Section 350

Companies Act, Section 350: Duty of Company Liquidator to Deposit Liquidation Monies in Scheduled Bank 

Section 350 of the Companies Act, 2013 lays down a critical fiduciary duty of every Company Liquidator to ensure that all monies received during the course of liquidation are promptly deposited into a designated bank account. This section is essential for financial integrity, accountability, and safeguarding of liquidation proceeds.

It also sets out the permissible exceptions, consequences of non-compliance, and the penalties for mismanagement or delay in handling liquidation funds. The provision promotes transparency and aims to protect the interests of creditors, contributories, and other stakeholders during the winding-up process.

1. Requirement to Deposit Monies into Scheduled Bank Account 

Every Company Liquidator, upon receiving funds in their capacity as liquidator, is legally required to deposit those monies into a special bank account opened specifically for that purpose.

Key Provisions:

Bank Account Requirement: The Liquidator must open a special bank account in a scheduled bank, which is a bank listed under the Second Schedule of the Reserve Bank of India Act, 1934. 

This ensures that the funds are deposited in reliable, regulated financial institutions and are securely held until disbursed.
Timing and Manner: The manner and time within which these deposits must be made are to be prescribed by the rules framed under the Companies Act, 2013. This could include requirements such as:
Immediate deposit within a specified number of working days, Accompanying documentation (e.g., cash book entries, vouchers), Periodic reconciliation and reporting.
Flexibility by Tribunal: The National Company Law Tribunal (NCLT) may, at its discretion, allow the Liquidator to open the special account in another bank (not necessarily a scheduled bank), provided:
It is deemed beneficial to the creditors, contributories, or the company, and proper justification is provided by the Liquidator.
This provision enables flexibility to accommodate specific circumstances, such as the convenience of stakeholders or proximity to local branches.
Objective: The primary goal is to prevent misuse, delay, or misplacement of liquidation funds and to ensure that the liquidator acts as a responsible trustee of the company’s assets during the winding-up process.

2. Prohibition on Retaining Excess Liquidation Funds

To enforce financial discipline, Section 350 imposes a strict prohibition on the personal retention of funds by the Company Liquidator beyond a specified limit and timeframe.

Threshold Limit and Timeframe: The Company Liquidator must not retain in their personal possession or custody:
Any sum exceeding ?5,000 (or such higher amount as may be permitted by the Tribunal), For a period exceeding ten days.
If the Liquidator requires a higher retention limit for operational reasons, they must apply to the Tribunal for authorization, and such authorization must be granted in writing.
Consequences of Unjustified Retention: If the Company Liquidator fails to deposit the money within the prescribed period and cannot justify the delay to the satisfaction of the Tribunal, they shall face serious consequences, which may include:

(a) Interest and Penalty:

Interest Liability: The Liquidator must pay interest at the rate of 12% per annum on the amount retained in excess beyond the permissible period.
Penalty: In addition to interest, the Tribunal may impose monetary penalties, the quantum of which is to be determined based on the facts of the case.
(b) Liability for Additional Expenses: The Liquidator will be personally liable for any expenses, losses, or complications arising due to their default in timely depositing the funds.
These may include increased legal costs, delays in distribution to creditors, or administrative inefficiencies.
(c) Impact on Remuneration and Office: The Tribunal may order partial or complete disallowance of the Liquidator’s remuneration.
In extreme cases, the Tribunal may direct the removal of the Company Liquidator from their position, especially if the delay or retention is intentional or negligent.
Rationale: This provision reinforces the high fiduciary standard expected of a Company Liquidator and discourages casual or self-serving handling of funds. 

Since the Liquidator acts in a quasi-public capacity during winding up, any lapse in prompt deposit may be viewed as a breach of trust and professional misconduct.

3. Applicability and Distinction from Section 349

While Section 349 applies specifically to the Official Liquidator (a public officer appointed by the Central Government) who must deposit money into the Public Account of India with RBI, Section 350 applies to Company Liquidators, which may include Insolvency Professionals or private individuals appointed by the Tribunal.

Section 349 is public-fund centric, requiring centralization of all monies in the RBI.
Section 350 permits special account management in scheduled banks, often used in non-governmental or Tribunal-supervised liquidations.
4. Procedural Compliance

Company Liquidators must follow detailed procedural and record-keeping practices to ensure compliance with Section 350:

Maintain daily cash books and ledgers, Prepare deposit challans and bank receipts for all funds, Ensure timely filings and bank reconciliations, Preserve documentation for Tribunal inspections or stakeholder queries.
Failing to meet these procedural standards may result in reputational damage, disciplinary proceedings, and disqualification from future appointments.