Section 333: Disclaimer of Onerous Property

Introduction

Section 333 of Company Act, 2013, is part of chapter XX- Part III and lays down the provision for disclaimer of onerous property during the winding up proceeding by the company. This section was enforced via notification on 15th December 2016. This section provides to save an insolvent company’s assets from further losses and enables the company liquidator to get rid of onerous property by disclaiming it. A time schedule is provided within which the company liquidator and Tribunal are required to complete such actions as necessary. The Tribunal before or on granting leave to disclaim may require such notices to be given to persons interested and impose such terms and conditions of granting leave and make such other order in the matter as the Tribunal considers just.

Any person affected by the operation of a disclaimer shall be deemed to be a creditor of the company to the amount of the compensation or damages payable in respect of such effect and may accordingly prove the amount as a debt in the winding up. This analysis will give a comprehensive understanding of this section.

Purpose of Section 333

This section comes into play during the winding up procedure of a company and briefly lay down the following:

• Where any part of the property of a company which is being wound up consists of (a) land of any tenure, burdened with onerous covenants (b) shares or stocks in companies (c) any other property which is not saleable or is not readily saleable by reason of the possessor thereof being bound either to the performance of any onerous act or to the payment of any sum of money (d) unprofitable contracts, the company liquidator can notwithstanding that he has endeavored to sell or has taken possession of the property or exercised any act of ownership in relation thereto or done anything in pursuance of the contract, with the leave of the tribunal, by writing signed by him, at any time within twelve months after the commencement of the winding up or such extended period as may be allowed by the tribunal, disclaim the property.
• Where the company liquidator had not become aware of the existence of any such property within one month from the commencement of the winding up, the power of disclaiming the property may be exercised at any time within twelve months after he has become aware thereof or such extended period as may be allowed by the tribunal.
• The disclaimer shall operate to determine, as from the date of disclaimer, the rights, interest, and liabilities of the company in or in respect of the property disclaimed, but shall not, except so far as is necessary for the purpose of releasing the company and the property of the company from liability, affect the rights, interest or liabilities of any other person.
• The tribunal, before or during granting leave to disclaim, may require such notices to be given to persons interested, and impose such terms as a condition of granting leave, and make such other order in the matter as the tribunal considers just and proper.
• The company liquidator shall not be entitled to disclaim any property in any case where an application in writing has been made to him by any person interested in the property requiring him to decide whether he will or will not disclaim and the company liquidator has not, within a period of twenty-eight days after the receipt of the application or such extended period as may be allowed by the tribunal, give notice to the applicant that he intends to apply to the tribunal for leave to disclaim, and in case the property is under a contract, if the company liquidator after such an application as aforesaid does not within the said period or extended period disclaim the contract, he shall be deemed to have adopted it.
• The tribunal may, on the application of any person who is, as against the company liquidator, entitled to the benefit or subject to the burden of a contract made with the company, make an order rescinding the contract on such terms as to payment by or to either party of damages for the non-performance of the contract, or otherwise as the tribunal considers just and proper, and any damages payable under the order to any such person may be proved by him as a debt in the winding up.
• The tribunal may, on an application by any person who either claims any interest in any disclaimed property or is under any liability not discharged under this act in respect of any disclaimed property, and after hearing any such person as it thinks fit, make an order for the vesting of the property in, or the delivery of the property to, any person entitled thereto or to whom it may seem just that the property should be delivered by way of compensation for such liability as aforesaid, or a trustee for him, and on such terms as the tribunal considers just and proper, and on any such vesting order being made, the property comprised therein shall vest accordingly in the person named therein in that behalf without any conveyance or assignment for the purpose.
• Where the property disclaimed is of a leasehold nature, the Tribunal shall not make a vesting order in favor of any person claiming under the company, whether as under-lessee or as mortgagee or holder of a charge by way of demise, except upon the terms of making that person (a) subject to the same liabilities and obligations as those to which the company was subject under the lease in respect of the property at the commencement of the winding up (b) if the Tribunal thinks fit, subject only to the same liabilities and obligations as if the lease had been assigned to that person at that date, and in either event as if the lease had comprised only the property comprised in the vesting order, and any mortgagee or under-lessee declining to accept a vesting order upon such terms shall be excluded from all interest in, and security upon the property, and, if there is no person claiming under the company who is willing to accept an order upon such terms, the tribunal shall have power to vest the estate and interest of the company in the property in any person liable, either personally or in a representative character, and either alone or jointly with the company, to perform the covenants of the lessee in the lease, free and discharged from all estates, encumbrances and interests created therein by the company.
• Any person affected by the operation of a disclaimer under this section shall be deemed to be a creditor of the company to the amount of the compensation or damages payable in respect of such effect, and may accordingly prove the amount as a debt in the winding up.

To conclude, this section provides a thorough procedure for disclaiming an onerous property by a liquidator to do away with bad assets of a company.

Situation Before Enactment of Section 333

The section 535 of the old Act of 1956 is similar to the section 333 of the act, 2013. Section 535 also laid down the disclaiming of onerous property that is a property which is a heavy liability and on which returns aren’t good, during winding up process of the company, to get rid of bad assets by disclaiming them so as to get rid of a companies’ bad assets. Both the sections are similar, there are no standout differences between the two.

Application of Section 333

This section comes into application when a company is being wound up. It lays down the requirements to get rid of onerous property by the liquidator by disclaiming them.

Cases at a Glance

Following cases are important for this section. There are no cases on provision of 2013 but the following cases on provision of 1956 are important and relevant as both the provisions are similar.

• United Bank of India v. Official Liquidator [1]: In this case a company was wound up under the orders of the high court and the official liquidator was appointed as its liquidator. The company had taken on a lease from a cotton mill’s 7 bighas of land under a deed in 1931. The lease was for 99 years and permitted renewal on the same terms for another 99 years. The rent was 1200 rupees per annum. In 1935 the lessor’s interest in such land was purchased by a trust. The trust applied to court to order liquidator to sell the land, as it was its onerous property and to give necessary payments to the trust. Here the court allowed the same and dismissed the bank who was willing to pay arrears on the land. The court here on appeal said that the lower court should not have dismissed the banks request to pay arrears as well as the court should have more properly investigated the onerous nature of the property before ordering to disclaim it. The court here held that the high court’s power to grant leave must be exercised with due care and circumspection on being satisfied about the existence of a covenant imposing heavy burden on the company. In the end, the court held that the high court or the lower court in this case wrongfully concluded at the behest of the lessor that the lease had become onerous. It should have accepted the appellant’s banks offer to pay arrears of rent, keeping in mind the interest of companies’ creditors.
• Bangur Brothers Ltd. (in liquidation), in re [2]: In this case the applicant had filed a disclaimer application, praying for a direction upon the official liquidator to take over the possession of tenanted premises to them, as they were the owners. The tenanted company was in liquidation and the property in question was of no use to the tenanted company. The property was also not utilized in winding up proceedings. Here the court held that as the official liquidator did not take over the possession, the applicant was entitled to get back the property.
• W.B. Small Industries Development Corporation Ltd. v. Official Liquidator[3]: In this case the court held that the leasehold interest of the company in liquidation is an asset of the company and can only be disclaimed if the conditions mentioned therein are complied with and its appears to the company court that the terms of the lease are onerous. When lease is not onerous, section 534 has no application but the lessor is entitled to approach the court for releasing the land in his favor on satisfying the court that the lease had been determined for alleged violation and steps have been taken for getting possession according to law.

Concluding Summary

This section sets forth a provision to disclaim an onerous property by company liquidator during winding up of a company. This is very important to do away with bad assets of the company and to make sure that the interest of the creditors is safeguarded during the winding up process.

References:

[1] United Bank of India v. Official Liquidator (1994) 79 CompCas 262.

[2] Bangur Brothers Ltd. (in liquidation), in re (2013) 3 CHN 306 (Cal.).

[3] W.B. Small Industries Development Corporation Ltd. v. Official Liquidator (2006) 2 CHN 569.