Disclaimer of Onerous Property: Section 333

Disclaimer of onerous property is how a liquidator drops an asset that costs more to hold than it is worth. Section 333 of the Companies Act, 2013 names four kinds of property that qualify, requires the Tribunal's leave, sets a twelve month window, and turns anyone left worse off into a creditor. This page reads the section as printed.

What is disclaimer of onerous property, and what qualifies?

Four categories, listed in section 333(1) as clauses (a) to (d): land of any tenure, burdened with onerous covenants; shares or stocks in companies; 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; and unprofitable contracts.

Clause (b) is the one that surprises. Shares or stocks in companies are disclaimable as a category in their own right, with no separate test of burden attached in the clause.

The power survives the liquidator having already dealt with the property. Section 333(1) applies notwithstanding that he has endeavoured 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. Having tried to sell, or having taken possession, does not spend the power.

What has to happen before a liquidator can disclaim?

Leave, writing and a signature. The disclaimer is made with the leave of the Tribunal and subject to the provisions of this section, by writing signed by him. All three are in the same sentence of the sub-section, so an oral abandonment is not a disclaimer, and neither is an unauthorised one. The liquidator exercising the power is the one appointed under section 275.

The timing is twelve months. The liquidator may act at any time within twelve months after the commencement of the winding up or such extended period as may be allowed by the Tribunal. The proviso moves the start for property the liquidator did not know about: where he 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 the Tribunal allows.

Section 333(3) lets the Tribunal shape the leave itself: before or on granting leave to disclaim it 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.

What does a disclaimer actually do?

It cuts the company out, and only the company. Section 333(2) states that 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.

Two limits are printed there. The effect runs from the date of disclaimer, not from the winding up order. And third party rights are preserved except to the extent needed to release the company.

Can an interested person force the issue?

Yes, and doing nothing has a consequence for the liquidator. Section 333(4) states that the liquidator shall not be entitled to disclaim any property where a person interested in the property has applied to him in writing requiring him to decide whether he will or will not disclaim and the 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, given notice to the applicant that he intends to apply to the Tribunal for leave to disclaim.

For contracts the sub-section goes further. If the liquidator, after such an application, does not within the said period or extended period disclaim the contract, he shall be deemed to have adopted it. Silence is not neutral: the contract becomes one the estate has taken on.

Where does the disclaimed property go?

To whoever the Tribunal decides, on application. Section 333(6) lets a 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 apply for an order vesting or delivering the property, and on such a 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:

Leaseholds get their own proviso. The Tribunal shall not make a vesting order in favour of any person claiming under the company, whether as under-lessee or as mortgagee or holder of a charge by way of demise, except on terms making that person subject to the same liabilities and obligations as the company was under the lease at the commencement of the winding up, or, 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. A 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.

Section 333(5) is the separate rescission route. The Tribunal may, on the application of a 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, and any damages payable under the order to such a person maybe proved by him as a debt in the winding up. That is the word as printed. The India Code consolidation of the Act sets "maybe" as one word in sub-section (5), where sub-section (7) prints the same idea as may accordingly prove the amount as a debt in the winding up.

What is the person left holding the loss entitled to?

A claim in the queue, and nothing better. Section 333(7) deems Any person affected by the operation of a disclaimer under this section to be a creditor of the company to the amount of the compensation or damages payable in respect of such effect, who may accordingly prove the amount as a debt in the winding up.

That is the whole of the remedy the section gives. Where the claim then ranks is decided elsewhere, by the preferential payments in winding up, and by the avoidance rules in fraudulent preference. A disclaimer of onerous property therefore converts a burden into a provable claim, which is why the twenty-eight day mechanism in sub-section (4) exists for the person on the other side of it.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.