Companies Act Section 326 — Overriding preferential payments
CHAPTER XX WINDING UP
Commercial / Corporate
Summary
Sub-section (1) sets out which debts must be paid before all other debts when a company is being wound up. These priority debts are, first, the dues owed to workmen, and second, where a secured creditor has sold a secured asset, the lesser of either the amount of the secured debt that the creditor could not recover from the sale, or the workmen's portion of the security (if that portion is payable under the law). This second amount is to be paid on an equal footing with the workmen's dues.
The proviso to sub-section (1) adds that, in a winding up, the sums referred to in sub-clauses (i) and (ii) of clause (b) of the Explanation, which are payable for the two years before the winding up order or any other period that may be prescribed, must be paid before all other debts, including debts owed to secured creditors. These sums must be paid within thirty days of the sale of assets, and they are subject to a charge over the secured creditors' security as may be prescribed.
Sub-section (2) states that the debts payable under the proviso to sub-section (1) must be paid in full before any payment is made to secured creditors. After that, the debts payable under sub-section (1) must also be paid in full, unless the company's assets are not enough to cover them, in which case these debts are reduced proportionally.
The Explanation defines key terms for this section and section 327. Under clause (a), "workmen" means employees of the company who are workmen as defined in clause (s) of section 2 of the Industrial Disputes Act, 1947.
Under clause (b), "workmen's dues" means the total of several sums owed by the company to its workmen. Sub-clause (i) covers all wages or salary, including wages for time or piece work, salary earned wholly or partly by way of commission for services rendered, and any compensation payable under the Industrial Disputes Act, 1947. Sub-clause (ii) covers all accrued holiday remuneration payable to a workman, or to another person on the workman's behalf in case of death, when employment ends before or because of the winding up order or resolution. Sub-clause (iii) covers all amounts due for compensation or liability for compensation under the Workmen's Compensation Act, 1923, for death or disablement of a workman, unless the company is being wound up voluntarily only for reconstruction or amalgamation, or unless the company has rights under a contract with insurers that can be transferred to the workmen. Sub-clause (iv) covers all sums due to a workman from the provident fund, pension fund, gratuity fund, or any other welfare fund maintained by the company.
Under clause (c), "workmen's portion" in relation to the security of any secured creditor means the amount that bears the same proportion to the value of the security as the workmen's dues bear to the total of the workmen's dues plus the debts owed to secured creditors. The text gives an example: if the workmen's dues are one-fourth of the combined total, then the workmen's portion of the security is one-fourth of the security's value.
Official Text
(1) In the winding up of a company under this Act, the following debts shall be paid in priority to all other debts:—
(a) workmen’s dues; and
(b) where a secured creditor has realised a secured asset, so much of the debts due to such secured creditor as could not be realised by him or the amount of the workmen's portion in his security (if payable under the law), whichever is less, pari passu with the workmen's dues:
Provided that in case of the winding up of a company, the sums referred to in sub-clauses
(i) and
(ii) of clause (b) of the Explanation, which are payable for a period of two years preceding the winding up order or such other period as may be prescribed, shall be paid in priority to all other debts (including debts due to secured creditors), within a period of thirty days of sale of assets and shall be subject to such charge over the security of secured creditors as may be prescribed.
(2) The debts payable under the proviso to sub-section (1) shall be paid in full before any payment is made to secured creditors and thereafter debts payable under that sub-section shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. Explanation.—For the purposes of this section, and section 327—
(a) “workmen”, in relation to a company, means the employees of the company, being workmen within the meaning of clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947);
(b) “workmen's dues”, in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:—
(i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947 (14 of 1947);
(ii) all accrued holiday remuneration becoming payable to any workman or, in the case of his death, to any other person in his right on the termination of his employment before or by the effect of the winding up order or resolution;
(iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen's Compensation Act, 1923 (19 of 1923), rights capable of being transferred to and vested in the workmen, all amount due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company;
(iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the company;
(c) “workmen's portion”, in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of the amount of workmen's dues and the amount of the debts due to the secured creditors. workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000.]