Companies Act Section 327 — Preferential payments

CHAPTER XX WINDING UP

Commercial / Corporate

Summary

Sub-section (1) sets out the list of debts that must be paid before all other debts when a company is being wound up, subject to the rules in section 326. Under clause (a), this includes all revenues, taxes, cesses and rates owed by the company to the Central Government, a State Government, or a local authority, provided they became due and payable within the twelve months immediately before the relevant date. Under clause (b), it includes wages or salary of any employee, including wages for time or piece work and salary earned wholly or partly by way of commission, for services rendered to the company, if the amount is due for a period not exceeding four months within the twelve months immediately before the relevant date, with the condition that the amount payable to any workman under this clause cannot exceed such amount as may be notified.

Under clause (c) of sub-section (1), all accrued holiday remuneration that becomes payable to any employee, or to any other person claiming under the employee in case of the employee's death, on termination of employment before the winding up order or by the winding up order, or as the case may be, the dissolution of the company, is also a preferential debt. Under clause (d), unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amounts due in respect of contributions payable during the twelve months immediately before the relevant date by the company as an employer under the Employees' State Insurance Act, 1948, or any other law in force, are included.

Under clause (e) of sub-section (1), unless the company has, at the commencement of winding up, rights under a contract with an insurer as mentioned in section 14 of the Workmen's Compensation Act, 1923, that can be transferred to and vested in the workmen, all amounts due in respect of any compensation or liability for compensation under that Act for the death or disablement of any employee are included. The proviso states that where such compensation is a weekly payment, the amount payable under this clause is taken to be the lump sum for which that weekly payment could be redeemed, if the employer has made an application under that Act. Under clause (f), all sums due to any employee from the provident fund, pension fund, gratuity fund, or any other fund for the welfare of employees maintained by the company are included. Under clause (g), the expenses of any investigation held under sections 213 and 216, in so far as they are payable by the company, are also included.

Sub-section (2) deals with a situation where a payment has been made to an employee, or to a person claiming through a deceased employee, on account of wages, salary, or accrued holiday remuneration, out of money advanced by some person for that purpose. In such a case, the person who advanced the money has a right of priority in the winding up for the amount so advanced and paid, up to the amount by which the sum that the employee or other person would have been entitled to priority for has been reduced by reason of that payment having been made.

Sub-section (3) explains how the debts listed in this section are to be treated. Under clause (a), these debts rank equally among themselves and must be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions. Under clause (b), so far as the assets available for payment to general creditors are insufficient to meet these debts, they have priority over the claims of holders of debentures under any floating charge created by the company, and are paid accordingly out of any property comprised in or subject to that charge.

Sub-section (4) states that, subject to retaining such sums as may be necessary for the costs and expenses of the winding up, the debts under this section must be discharged forthwith so far as the assets are sufficient to meet them. In the case of debts given priority under clause (d) of sub-section (1), formal proof of those debts is not required except in so far as may be otherwise prescribed.

Sub-section (5) provides that if a landlord or other person has distrained on any goods or effects of the company within three months immediately before the date of a winding up order, the debts given priority under this section become a first charge on the goods or effects so distrained on, or on the proceeds of the sale thereof. The proviso states that, in respect of any money paid under such a charge, the landlord or other person has the same rights of priority as the person to whom the payment is made.

Sub-section (6) states that any remuneration in respect of a period of holiday or of absence from work on medical grounds through sickness or other good cause is deemed to be wages in respect of services rendered to the company during that period.

Sub-section (7) states that sections 326 and 327 do not apply in the event of liquidation under the Insolvency and Bankruptcy Code, 2016.

The Explanation defines certain terms used in this section. Under clause (a), the expression "accrued holiday remuneration" includes, in relation to any person, all sums which, by virtue of either the person's contract of employment or of any enactment including any order made or direction given thereunder, are payable on account of the remuneration that would, in the ordinary course, have become payable to the person in respect of a period of holiday, had the person's employment with the company continued until the person became entitled to be allowed the holiday. Under clause (b), the expression "employee" does not include a workman. Under clause (c), the expression "relevant date" means, in the case of a company being wound up by the Tribunal, the date of appointment or first appointment of a provisional liquidator, or if no such appointment was made, the date of the winding up

Official Text

(1) In a winding up, subject to the provisions of section 326, there shall be paid in priority to all other debts,—

(a) all revenues, taxes, cesses and rates due from the company to the Central Government or a State Government or to a local authority at the relevant date, and having become due and payable within the twelve months immediately before that date;

(b) 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 employee in respect of services rendered to the company and due for a period not exceeding four months within the twelve months immediately before the relevant date, subject to the condition that the amount payable under this clause to any workman shall not exceed such amount as may be notified;

(c) all accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any other person claiming under him, on the termination of his employment before, or by the winding up order, or, as the case may be, the dissolution of the company;

(d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amount due in respect of contributions payable during the period of twelve months immediately before the relevant date by the company as the employer of persons under the Employees’ State Insurance Act, 1948 (34 of 1948) or any other law for the time being in force;

(e) unless the company has, at the commencement of winding up, under such a contract with any insurer as is mentioned in section 14 of the Workmen’s Compensation Act, 1923 (8 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 employee of the company:

Provided that where any compensation under the said Act is a weekly payment, the amount payable under this clause shall be taken to be the amount of the lump sum for which such weekly payment could, if redeemable, be redeemed, if the employer has made an application under that Act;

(f) all sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the employees, maintained by the company; and

(g) the expenses of any investigation held in pursuance of sections 213 and 216, in so far as they are payable by the company.

(2) Where any payment has been made to any employee of a company on account of wages or salary or accrued holiday remuneration, himself or, in the case of his death, to any other person claiming through him, out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid-up to the amount by which the sum in respect of which the employee or other person in his right would have been entitled to priority in the winding up has been reduced by reason of the payment having been made.

(3) The debts enumerated in this section shall—

(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and

(b) so far as the assets of the company available for payment to general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.

(4) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the debts under this section shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given under clause (d) of sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise prescribed.

(5) In the event of a landlord or other person distaining or having distained on any goods or effects of the company within three months immediately before the date of a winding up order, the debts to which priority is given under this section shall be a first charge on the goods or effects so distrained on or the proceeds of the sale thereof:

Provided that, in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made.

(6) Any remuneration in respect of a period of holiday or of absence from work on medical grounds through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period. 1[

(7) Sections 326 and 327 shall not be applicable in the event of liquidation under the Insolvency and Bankruptcy Code, 2016 (31 of 2016).] Explanation.—For the purposes of this section,—

(a) the expression “accrued holiday remuneration” includes, in relation to any person, all sums which, by virtue either of his contract of employment or of any enactment including any order made or direction given thereunder, are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday, had his employment with the company continued until he became entitled to be allowed the holiday;

(b) the expression “employee” does not include a workman; and 2[

(c) the expression “relevant date” means in the case of a company being wound up by the Tribunal, the date of appointment or first appointment of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless, in either case, the company had commenced to be wound up voluntarily before that date under the Insolvency and Bankruptcy Code, 2016 (31 of 2016).]