Section 331 of the Companies Act, 2013
Section 331 of the Companies Act, 2013 relates to the effect of floating charge in case of liquidation of a company.
🔹 Section 331 – Floating Charge Invalid in Certain Cases
✅ Key Provisions:
Applicability:
This section applies when a company is being wound up (i.e., undergoing liquidation).
Floating Charge Created Within 12 Months:
If the company has created a floating charge on its assets within 12 months before the commencement of winding up, the charge shall be invalid, unless it is proven that the company was solvent immediately after the charge was created.
Meaning of Floating Charge:
A floating charge is a security interest over a fund of changing assets (like stock-in-trade), which allows the company to use those assets in the ordinary course of business until a default occurs.
Exception – Solvent Company:
The floating charge will be valid if it is proved that the company was not insolvent at the time of creation of the charge.
Purpose:
To protect creditors by preventing companies from creating last-minute charges over assets to favor certain lenders when insolvency is imminent.
🔸 Why It Matters:
Prevents fraudulent preference by companies just before winding up.
Ensures fair treatment of all creditors in liquidation proceedings.
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