The liability of past members and preferential payments in the context of company law involves understanding the responsibilities of former members of a company and the order in which certain creditors are paid during the winding-up or insolvency of a company.
Liability of Past Members
In a company, members (shareholders) generally enjoy limited liability, which means that their liability is limited to the amount unpaid, if any, on their shares. This limited liability protects the personal assets of members from the company’s debts and liabilities.
- Liability for Unpaid Shares: Past members may be held liable for unpaid shares if they were members at the time the shares were issued but did not fully pay for those shares. In such cases, they remain liable for the unpaid amount even after they cease to be members.
- Liability for Wrongful Trading: In cases of wrongful trading or fraudulent conduct, former members who were directors or officers of the company during the period of wrongdoing may be held personally liable for the company’s debts.
- Liability for Voidable Transactions: If the company engaged in transactions that are later deemed voidable, such as transactions to defraud creditors, past members who benefited from these transactions may be required to return those benefits.
- Liability for Fraudulent Trading: In cases of fraudulent trading, where a company carries on business with the intent to defraud creditors, past members who were knowingly involved in such activities may be held personally liable for the company’s debts.
Preferential Payments
Preferential payments refer to the order in which certain creditors are paid during the winding-up or insolvency of a company. The priority of payment is established by law and aims to ensure that specific creditors are paid before others. In India, the order of preferential payments is primarily governed by the Insolvency and Bankruptcy Code, 2016.
- Costs of Winding Up: The costs associated with the winding-up process, including legal and administrative expenses, are typically paid first from the company’s assets.
- Secured Creditors: Secured creditors, who have a valid security interest (such as a mortgage or charge) over the company’s assets, are usually entitled to be paid from the proceeds of the sale of the secured assets.
- Workmen’s Dues: The dues of employees, such as salaries, wages, and provident fund contributions, are given priority and paid before other unsecured creditors.
- Taxes and Duties: Unpaid taxes, duties, and statutory obligations owed to government authorities also receive priority in payment.
- Unsecured Creditors: After the above categories have been satisfied, the remaining assets are distributed among unsecured creditors, including trade creditors and suppliers.
- Preference Shareholders: If there are any remaining assets after paying all other debts, preference shareholders may receive payment according to the terms of their shareholding.
- Equity Shareholders: Equity shareholders receive payment only after all other debts and obligations have been satisfied. In many cases, equity shareholders may not receive any distribution if there are insufficient assets remaining.
