Freezing of Assets of a Company: Section 221
Freezing of assets of a company under section 221 of the Companies Act, 2013 is a preservation order, not a penalty. The Tribunal can stop funds, assets or properties from moving out of a company for up to three years while an inquiry or investigation runs, and three different routes can put the question in front of it. Breaching the order is what carries the punishment.
Definition
Freezing of assets of a company
is an order of the Tribunal under section 221 barring the removal, transfer or disposal of a company's funds, assets or properties for up to three years, or allowing it only on conditions, where such a movement is likely to be prejudicial to the company, its shareholders, its creditors or the public interest. Source: Companies Act, 2013, section 221(1).
When can there be freezing of assets of a company?
Freezing of assets of a company needs two things: a route into the Tribunal, and a likelihood. Section 221(1) lists the routes in a single sentence, and there are three of them. It applies where it appears to the Tribunal:
- on a reference made to it by the Central Government;
- in connection with any inquiry or investigation into the affairs of a company under this Chapter; or
- on any complaint made by one of three named classes of complainant.
The complaint route is the one that carries the classes, and the sub-section names them in order: such number of members as specified under sub-section (1) of section 244, a creditor having one lakh amount outstanding against the company, and any other person having a reasonable ground to believe.
Two of those classes deserve attention. The members' class borrows the eligibility test from section 244(1), the same threshold that gates an oppression and mismanagement petition, so the numbers are not restated here. The creditor class is printed as a creditor having one lakh amount outstanding against the company, without the word "rupees" after the figure. Quote it as printed if you are citing the threshold.
The last class, any other person having a reasonable ground to believe, is the widest. It does not require membership, a debt or a government reference.
What has to be likely before the Tribunal acts?
The subject matter is movement. The Tribunal must be satisfied that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of the company or its shareholders or creditors or in public interest.
Four interests are named, and any one of them is enough: the company's own, the shareholders', the creditors', and the public interest. The trigger is a likely future movement, so section 221 is forward-looking. Nothing in section 221(1) requires a completed transfer, a finding of wrongdoing or a concluded investigation.
What can the order say, and for how long?
Up to 3 years
The maximum period for which the Tribunal may direct under section 221(1) of the Companies Act, 2013 that the transfer, removal or disposal of a company's funds, assets or properties shall not take place
Source: Companies Act, 2013, section 221(1)
The Tribunal may by order direct that such transfer, removal or disposal shall not take place during such period not exceeding three years as may be specified in the order or may take place subject to such conditions and restrictions as the Tribunal may deem fit.
That is two forms of relief in one clause, and the second is the softer one. A complete bar for a specified period of up to three years, or a conditional permission on terms the Tribunal sets. The three-year cap attaches to the bar, and the order has to specify the period rather than run open-ended.
What is the penalty for breaching a freezing order?
Section 221(2) applies in case of any removal, transfer or disposal of funds, assets, or properties of the company in contravention of the order of the Tribunal under sub-section (1). It punishes two persons on two different scales.
| Who | Punishment under section 221(2) |
|---|---|
| The company | Fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees |
| Every officer of the company who is in default | Imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both |
The company's exposure is money only. The officer's includes imprisonment of up to three years, and the court can impose both limbs. Both fines carry a floor, so there is no discretion below one lakh rupees for the company or fifty thousand rupees for the officer.
How does section 221 differ from section 222?
Chapter XIV carries two Tribunal-ordered restriction powers, sitting next to each other, and they restrain different things. Section 221 restrains the company's assets. Section 222 restrains the company's securities.
| Section 221, freezing of assets | Section 222, restrictions upon securities | |
|---|---|---|
| What is restrained | Removal, transfer or disposal of funds, assets, properties of the company | Securities issued or to be issued by the company |
| The trigger | A likely prejudicial movement of assets | Relevant facts about securities that cannot be found out without restrictions |
| Route in | Central Government reference, any Chapter XIV inquiry or investigation, or a complaint by section 244(1) members, a creditor owed one lakh, or any other person with reasonable ground | In connection with any investigation under section 216 or a complaint by any person |
| Maximum period | Three years | Three years |
| Company's fine on contravention | One lakh to twenty-five lakh rupees | One lakh to twenty-five lakh rupees |
| Officer's imprisonment on contravention | Up to three years | Up to six months |
| Officer's fine floor on contravention | Fifty thousand rupees | Twenty-five thousand rupees |
The two sections share a three-year cap and an identical company fine, and they part on both limbs of the officer's punishment: the imprisonment ceiling and the fine floor. Section 222 also has a narrower entry: it names investigation of ownership under section 216 as its investigation route, while section 221 opens on any inquiry or investigation into the affairs of a company under this Chapter, which takes in a section 206 inquiry, an investigation under section 210 or 213, and a case assigned to the Serious Fraud Investigation Office.
Reading a freezing of assets of a company order therefore means checking which of the three routes brought the matter to the Tribunal, which of the four interests the prejudice was found against, whether the order bars movement outright or permits it on conditions, and what period it specifies inside the three-year cap.
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Frequently asked questions
What is freezing of assets of a company under section 221?
An order of the Tribunal directing that the removal, transfer or disposal of a company's funds, assets or properties shall not take place, or may take place only on conditions. It is available where such a movement is likely in a manner prejudicial to the company, its shareholders, its creditors or the public interest. Source: Companies Act, 2013, section 221(1).
How long can a section 221 freezing order last?
The Tribunal may by order direct that such transfer, removal or disposal shall not take place during such period not exceeding three years as may be specified in the order. Alternatively it may allow the movement subject to such conditions and restrictions as the Tribunal may deem fit. Source: Companies Act, 2013, section 221(1).
Who can ask the Tribunal to freeze a company's assets?
Section 221(1) has three routes. A reference made to the Tribunal by the Central Government, the question arising in connection with any inquiry or investigation under Chapter XIV, or a complaint. The complaint route names three classes: the number of members specified under section 244(1), a creditor having one lakh amount outstanding against the company, and any other person having a reasonable ground to believe. Source: Companies Act, 2013, section 221(1).
What is the penalty for breaching a freezing order?
Under section 221(2) the company is punishable with a fine of not less than one lakh rupees and up to twenty-five lakh rupees. Every officer in default is punishable with imprisonment which may extend to three years, or with a fine of not less than fifty thousand rupees and up to five lakh rupees, or with both. Source: Companies Act, 2013, section 221(2).
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