Section 320: Distribution of Property of a Company

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Section 320 of Companies Act, 2013, which was part of chapter XX par II, is now omitted from the companies act by the Insolvency and Bankruptcy code, 2016 (IBC) vide its section 255 and schedule XI, laid down the provision for distribution of property of company, when voluntary liquidation of company takes place. The code, 2016 consolidates all the laws on insolvency under one heading, thus increasing the efficiency of the procedure and at the same time empowers the creditors by creating a time bound resolution. This analysis will briefly explain the section as stood before its omission and its history and its status under IBC if any.

Purpose of Section 320

This section was a very small section, which read briefly as follows:

  • This section basically laid down what will happen to property of a company after winding, more importantly indicating how the asset will be distributed.
  • According to this section, the company which was being wound up, subject to overriding preferential payments, the assets of that company had to be applied for satisfaction of its liabilities pari passu and have to unless the articles of the company being wound up provide otherwise, be distributed among the members according to their rights and interests in the company.

This section basically tried to make sure that after the voluntary winding up of the company, the assets of the company are properly distributed to the right stakeholders of the company and the debts are repaid.

Now after the enforcement of IBC, 2016 section 59 of the code lays down the procedure for voluntary liquidation of a company. The procedure in brief is as follows:

  • The process of voluntary winding up can be initiated under this code by a company, which has not committed any default.
  • Voluntary liquidation under this section will be subjected to the conditions and procedural required as the board of the winding up company lay down.
  • Following conditions must be meet by the company for voluntary liquidation under this section without prejudice to requirements specified by the board:
  • An affidavit by majority of directors, which provides that (1) An inquiry is made into affairs of the company and they are of the opinion that either company has no debt or that it will be able to pay its debt (2) company through this liquidation is not defrauding anyone.
  • This Declaration of directors must be supplemented by following documents (1) audited financial statements and record of business operation from previous two years (2) a report of valuation of assets of the liquidating company if prepared by registered valuer.
  • Within four weeks of this declaration, the following should be ensured: (1) In the general meeting of the company a special resolution needs to be  passed requiring the company to be liquidated voluntarily and appointing an insolvency profession to act as the liquidator (2) resolution in a general meeting requiring company to be liquidated voluntarily as a result of expiry of the period of its duration and appointing an insolvency professional to act as the liquidator. Provided that if the company liquidating owes any debt to any person, creditors representing two-thirds in value of the debt of the company will have to approve the resolution passed above within seven days of such resolution, only then the liquidation procedure will move forward.
  • Within seven days of resolution being passed, the same must be informed to the board and the registrar by the company.
  • Subject to the approval of the creditor from the date of passing of such a resolution, the liquidation process of the company would be deemed to be commenced. 
  • Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the adjudicating authority for dissolution of such company.
  • On application filed by the liquidator, the adjudicating authority will pass an order, from which the company will be dissolved.
  • The authority with the company is registered; the company must send the copy of the above-mentioned order to such authority within seven days.

In the above procedure it is evident that the requirements of section 320 are not a part of voluntary liquidation as provided under IBC, 2016 which has replaced the procedure as laid down under companies act 2013.

Situation Before Enactment of Section 320

Section 320 of the act, 2013 is like section 511 of the act of 1956- the old act enforceable in India. The section in the old act was verbatim the same as the section in the new act. There have been no changes in this section from previous to new act.

Application of Section 320

This section laid down provisions for distribution of assets after voluntary winding up of the company and the way forward once the voluntary winding up process is approved. Now this section has no application as now the whole procedure for voluntary winding up is followed as given under Insolvency and Bankruptcy Code, 2016.

Cases at a Glance

There are no cases on section 320 of the act, 2013 but the following cases on the similar provision, that is section 511 of the act of 1956 will be valuable to understand the present section in question better as both sections are verbatim same.

  • CIT v. Ram Kumar Agarwal & Bros. [1]: In this case the court interpreted the phrase “according to their interest in the company” under section 511 as meaning according to their shareholding in the company. The liquidator distributes the assets of the company among the shareholders, when a company goes into liquidation and what each shareholder gets is this distribution is in lieu of his/her shareholding, that is the value and price of his shareholding, which he receives in this distribution. The court in this case also held that “once the distribution takes place the shares and shareholding come to an end and the fact that shares may technically continue until the name of the company is struck off is of little significance” [2].
  • M/s Globe United Engineering v. Industrial Financial Corporation of India [3]: This case is important because here the court held that preference shareholders are entitled to priority to the repayment of capital and arrears of dividend etc. if the articles provide for the same.

Concluding Summary

This section of the act, 2013 does not exist anymore and thus there isn’t a lot of material and discussion on it as just after three years of its inclusion by 2013 act it was omitted by IBC, 2016. Now a company who has not committed any default but intends to liquidate itself voluntarily follows the procedure as laid down by IBC, 2016 under section 59 along with relevant regulation issued under IBC. Winding is a very important process and is done for many reasons. By switching to IBC not only the efficiency increased but the procedure is also streamlined.

[1] CIT v. Ram Kumar Agarwal & Bros (1994) 1 SCC 201.

[2] Ibid

[3] M/s Globe United Engineering v. Industrial Financial Corporation of India (1973) SCC OnLine Del 230.

Also read, Power of Limited Company to alter Share Capital: Concept, Role of NCLT, Application.