Companies Act Section 351

Companies Act, Section 351: Prohibition on Deposit of Liquidation Monies into Private Bank Accounts 

Section 351 of the Companies Act, 2013 lays down a clear and unequivocal prohibition on the deposit of any monies received during the course of company liquidation into private banking accounts. This provision applies uniformly to both Official Liquidators and Company Liquidators, ensuring that all funds handled during the winding-up process are safeguarded, transparent, and managed through regulated financial channels.

The objective of this provision is to uphold the integrity of the liquidation process, prevent misuse or misappropriation of funds, and ensure that the liquidator acts purely in a fiduciary capacity with no personal control over the liquidation proceeds.

1. Applicability of the Provision

Section 351 applies to two categories of liquidators:

a) Official Liquidator

An Official Liquidator is a government officer appointed by the Central Government and attached to the National Company Law Tribunal (NCLT). The Official Liquidator is responsible for:

Conducting the winding-up of companies as directed by the Tribunal, Realizing and safeguarding the company’s assets, Settling liabilities, and Disbursing any surplus as per law.
b) Company Liquidator: A Company Liquidator is appointed either:

By the Tribunal from a panel of professionals (such as chartered accountants, advocates, or company secretaries), or in a voluntary winding-up, by the company or its creditors.
Both types of liquidators perform similar core functions in the winding-up process but differ in their mode of appointment and supervision.

2. Core Provision of Section 351

The central tenet of Section 351 is as follows:

Key Components:

Absolute Prohibition: The language of the section is categorical no funds received in the capacity of a liquidator may be deposited into a private banking account under any circumstances.
Scope of Funds: This applies to all types of monies received during liquidation, including:
Sale proceeds from company assets, Recoveries from debtors or investments, Receipts from settlements or litigation, Unclaimed dividends or undistributed surplus.
Capacity-based Prohibition: The restriction is triggered when the funds are received by the individual in their capacity as a liquidator, i.e., in their official fiduciary role.
3. Rationale Behind the Prohibition

This statutory prohibition is grounded in fundamental principles of financial propriety, fiduciary responsibility, and institutional accountability. The following objectives are served by this section:

a) Safeguarding Liquidation Monies: Ensures that all monies realized during liquidation are securely held in approved bank accounts and not exposed to unauthorized use or personal control.
b) Preventing Misappropriation and Fraud: Prohibits scenarios where liquidation funds may be diverted, concealed, or commingled with personal or unrelated accounts, which could lead to fraud, insolvency malpractice, or criminal breach of trust.
c) Enhancing Transparency and Auditability: Depositing funds only in designated official accounts (as mandated under Sections 349 and 350) ensures that all monetary transactions are traceable, auditable, and compliant with financial regulations.
d) Reinforcing Public Trust: The liquidation process involves handling creditors’ and shareholders’ rights, including distribution of dues. This prohibition reinforces stakeholder confidence in the neutrality and credibility of the Liquidator.
4. Supporting Framework Under the Companies Act

Section 351 must be read in conjunction with related provisions:

Section 349: Requires the Official Liquidator to deposit all monies into the Public Account of India with the Reserve Bank of India.
Section 350: Requires a Company Liquidator to deposit all received monies into a special bank account in a scheduled bank, with limits on retention and penalties for delay.
Section 347: Requires unclaimed dividends and undistributed assets to be transferred to the Companies Liquidation Account in the RBI.
These provisions, taken together, create a comprehensive financial compliance regime during liquidation, aimed at eliminating any possibility of personal handling or concealment of funds.

5. Consequences of Non-Compliance

While Section 351 does not explicitly state penalties within its text, any contravention would amount to:

a) Misconduct and Breach of Fiduciary Duty: The liquidator may be held personally liable for loss or damage caused due to deposit of funds into an unauthorized private account.
b) Grounds for Removal: The Tribunal may direct the removal or replacement of the Liquidator under applicable rules or based on stakeholder complaints.
c) Penal Action Under Other Sections: The Companies Act contains penalty provisions under general sections (like Section 447 for fraud and Section 448 for false statements) that may apply depending on the facts and nature of the violation.
d) Disqualification from Future Appointments: A liquidator found violating Section 351 may be barred from acting in future insolvency or liquidation matters, affecting their professional standing and credibility.