Section 328 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 328 stops a failing company from favouring one creditor over the others shortly before a winding-up application. If the Tribunal is satisfied that a transaction is a fraudulent preference, it can order the position to be restored as if the preference had not been given, and can declare a preferential transfer, payment, delivery or execution invalid.
Where a company puts a creditor, surety or guarantor in a better position than he would have been in had the thing not been done, in the event of liquidation, prior to six months of making the winding-up application, the Tribunal, if satisfied that the transaction is a fraudulent preference, may order restoration of the position (sub-section 1). It may also declare invalid a preferential transfer of property, delivery of goods, payment or execution within six months before making the winding-up application and restore the position (sub-section 2).
Why the section exists, and its place after the IBC
A company close to winding up has limited assets and several creditors who must share them. If it pays one creditor in full just before the winding-up application, the others are left with less. Section 328 lets the Tribunal reverse such a transaction.
Since the Insolvency and Bankruptcy Code, 2016 (IBC), inability to pay debts and voluntary winding up are dealt with under the Code, which has its own provisions for avoidance of preferential and other suspect transactions (see avoidance transactions under the IBC). Section 328 of the Companies Act stays relevant for winding up by the Tribunal on the grounds left in section 271, such as fraudulent conduct of affairs or default in filings for five consecutive financial years (see grounds for winding up by the Tribunal).
If you are a creditor who received a payment shortly before a winding-up petition, or a liquidator or creditor who suspects favoured treatment, our legal dispute resolution team can help you assess your position.
Sub-section (1): preference to creditors, sureties and guarantors
The elements in the text are:
- The company has "given preference" to a person who is one of its creditors, or a surety or guarantor for any of its debts or other liabilities.
- The company did something, or suffered something to be done, which has the effect of putting that person in a position which, in the event of the company going into liquidation, will be better than the position he would have been in if the thing had not been done.
- The thing was done "prior to six months of making winding up application".
- The Tribunal is satisfied that the transaction is a fraudulent preference.
If those are met, the Tribunal "may order as it may think fit for restoring the position to what it would have been if the company had not given that preference". The order is discretionary: "may" and "as it may think fit".
The phrase "suffers anything done" is wide. The company need not itself act; allowing something to be done can be enough. A surety or guarantor is included because paying off a debt that a director has guaranteed, for instance, benefits the guarantor by releasing the guarantee.
The text does not define "fraudulent preference" beyond this. It does not say what state of mind is required, so the reading of that phrase is for the Tribunal and the courts. Do not assume that every payment to a creditor in the six months is a preference: the test is that the company gave preference and the creditor is put in a better position, and the Tribunal must be satisfied it is fraudulent.
Sub-section (2): preference transfers, deliveries, payments and executions
If the Tribunal is satisfied that there is a "preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within six months before making winding up application", it may order as it thinks fit and "may declare such transaction invalid and restore the position".
| Feature | Sub-section (1) | Sub-section (2) |
|---|---|---|
| Who benefits | A creditor, surety or guarantor | Not limited in the text; covers transfers, deliveries, payments and executions by or against the company |
| Time | Thing done "prior to six months of making winding up application" (as worded) | "Within six months before making winding up application" |
| Tribunal's order | Restore the position as if the preference had not been given | Order as it thinks fit, declare the transaction invalid and restore the position |
| Key test | Satisfied that the transaction is a fraudulent preference | Satisfied that there is a preference transfer, delivery, payment or execution |
A drafting point. Sub-section (1) says the thing done "prior to six months of making winding up application". Read literally, "prior to" could be taken as before the six-month window, which would be the reverse of what the section seems to intend. Sub-section (2) says "within six months before". The safer reading is that both sub-sections look back six months from the winding-up application, but the wording of sub-section (1) is loose. If a transaction falls near the edge of the period, take advice on how the Tribunal is likely to read it.
The reference point is the application. The six months are counted back from "making winding up application", that is, the petition, not from the winding-up order. A petition under section 272 must be presented first (see section 273). So the period starts from the date the application is made, and the order may come much later.
What follows: rights of persons fraudulently preferred
Section 331 builds on section 328. Where a transaction is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company's debt, that person is subject to the same liabilities, and has the same rights, as if he had undertaken to be personally liable as a surety for the debt, to the extent of the mortgage or charge or the value of his interest, whichever is less. The Tribunal can also decide questions between the person paid and a surety or guarantor. See sections 330 and 331.
Related points in the same Chapter: section 329, as substituted by the IBC, makes certain transfers made within one year before presentation of a winding-up petition void against the Company Liquidator unless in the ordinary course of business or in favour of a purchaser or encumbrancer in good faith for valuable consideration. Section 332 deals with floating charges created within twelve months before winding up. For a wider view, see our article on avoidance of fraudulent preference in winding up.
Practical examples
Example 1: paying the director's friend. Three months before a winding-up petition, a struggling company repays a loan to a creditor who is a director's relative, leaving other creditors unpaid. The Tribunal is satisfied this is a fraudulent preference and orders the position restored, so the amount returns to the company for the benefit of all creditors.
Example 2: releasing a guarantor. A company pays off a bank loan that the managing director guaranteed personally, two months before the petition. The effect is to put the guarantor in a better position. Section 328(1) covers a surety or guarantor, so the Tribunal can examine it.
Example 3: a transfer of assets. Four months before a winding-up petition, the company transfers a property to one creditor in settlement of his debt. Under sub-section (2) the Tribunal may declare the transfer invalid and restore the position.
Proposed change
No clause of the Corporate Laws (Amendment) Bill, 2026 amends section 328. The Bill is pending and is not law as on 30 September 2026.
Need help with a suspect pre-winding-up payment?
Whether you are a creditor who received a payment, or someone trying to recover value for the company, the timing and the parties involved decide the outcome. We can go through the transactions and explain what the Tribunal can do. Contact us for legal dispute resolution.
Key takeaways
- Section 328(1) lets the Tribunal restore the position where a creditor, surety or guarantor was put in a better position by a fraudulent preference.
- Section 328(2) lets it declare a preferential transfer, delivery, payment or execution within six months before the winding-up application invalid.
- The reference point is the winding-up application, not the order.
- The Tribunal must be satisfied; its orders are discretionary.
- Sub-section (1) is loosely worded on the six-month period; sub-section (2) says "within six months before".
- Section 331 sets the consequences for persons interested in mortgaged or charged property.
- The Bill, 2026 does not amend section 328 and is not law.
Read next
- Section 327: Preferential payments in winding up
- Sections 330–331: Void transfers and persons preferred
- Section 332: Effect of a floating charge
- Avoidance of fraudulent preference in winding up
Disclaimer: Based on the Companies Act, 2013 as amended up to 1 April 2021 (official consolidated text), read with later developments noted in the article; proposals in the Corporate Laws (Amendment) Bill, 2026 are pending and not law as on 30 September 2026. Verify current notifications and rules before acting.