Overriding Preferential Payments
| Provision | Explanation |
|---|---|
| Priority Debts | In the winding up of a company under the Companies Act, certain debts are given priority. |
| Debts in Priority | These priority debts include workmen’s dues and a portion of debts due to secured creditors. |
| Workmen’s Dues | Workmen are defined as employees within the meaning of the Industrial Disputes Act, 1947. |
| Components of Workmen’s Dues | – Wages or salary – Compensation under the Industrial Disputes Act – Accrued holiday remuneration – Sums from provident, pension, or gratuity funds maintained by the company. |
| Priority for Workmen’s Dues | Workmen’s dues are to be paid in priority to all other debts. |
| Secured Creditors | If a secured creditor has realized a secured asset, their remaining dues are paid along with workmen’s dues, but subject to certain conditions. |
| Conditions for Secured Creditors | – The amount that couldn’t be realized from the secured asset, or the workmen’s portion in the security (if payable under the law), whichever is less. – Within a specified time frame after the sale of assets. – Subject to a charge over the security of secured creditors. |
| Sums Payable in Priority | Certain sums, including wages or salary for a specified period, are to be paid in priority within 30 days of the sale of assets. |
| Equal Abatement | If the assets are insufficient to pay all priority debts, they shall abate in equal proportions. |
Now, let’s look at three examples in the Indian context to explain these provisions:
Example 1: Suppose a company is being wound up, and the total workmen’s dues amount to Rs. 2,00,000. The value of the security held by a secured creditor is Rs. 1,50,000, and the total debts due to secured creditors are Rs. 5,00,000. In this case, the workmen’s dues will be paid in full, followed by the secured creditor’s dues, which will be paid in full since there are sufficient assets.
Example 2: In another scenario, if the company’s assets are only worth Rs. 3,00,000, and the total workmen’s dues and debts due to secured creditors amount to Rs. 4,00,000, the available assets are insufficient to meet these debts in full. In this case, both the workmen’s dues and secured creditor’s dues will abate equally.
Example 3: Suppose a company is winding up, and the sums payable in priority include two years of wages or salary, which amounts to Rs. 1,50,000. After the sale of assets, the company pays this amount in priority within 30 days, as required by the law. The remaining assets are then used to pay the secured creditors and other debts, as applicable.
Explanation
Section 326 of the Companies Act 2013 deals with the priority of payments when a company is being wound up. It specifies which debts must be paid first before others. Let me explain it in simple terms:
Priority of Payments: When a company is going through the process of winding up (closing down its operations), certain debts must be paid before any other debts.
Workmen’s Dues: The first priority goes to the dues of the company’s employees, who are often referred to as “workmen.” These dues include wages, salaries, compensation, and other payments owed to the employees for their work.
Secured Creditors: If a creditor has a security interest (like a mortgage or lien) on a specific asset of the company and has already sold that asset, the amount they couldn’t recover from the sale, or the portion of the security related to workmen’s dues (if applicable), must be paid alongside the workmen’s dues.
Time Limit: In cases of winding up, the wages and salaries due to employees for the two years before the winding up order (or as specified by law) must be paid within 30 days of selling the company’s assets. This is given the highest priority, even over debts owed to secured creditors.
Equal Abatement: If there isn’t enough money to pay all the debts in full, they will be reduced proportionally. This means that all creditors, including workmen and secured creditors, will receive a reduced payment if there’s insufficient money to pay them in full.
In simple terms, this section ensures that when a company is closing down, the employees’ dues, especially their recent wages and salaries, are paid first. If there’s any money left after that, it goes to the creditors who had security on the company’s assets. If there’s not enough to pay everyone in full, they share what’s available equally. This prioritizes the financial well-being of the employees during the winding-up process.
Complete text of Section 326 of Companies Act 2013
(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 subsection 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.
Illustration
The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs.3,00,000. The aggregate of the amount of workmen’s dues and the amount of debts due to secured creditors is Rs. 4,00,000. The workmen’s portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000.”.]
Amendment
1 (a) Substituted by Insolvency and Bankruptcy Code, 2016 Dated 15th November, 2016. – Orignal Content
original Omitted Content:- 326. (1) Notwithstanding anything contained in this Act or any other law for the time being in force, in the winding up of a company,–
(a) workmen’s dues; and
(b) debts due to secured creditors to the extent such debts rank under clause (iii) of the proviso to sub-section (1) of section 325 pari passu with such dues, shall be paid in priority to all other debts:
Provided that in case of the winding up of a company, the sums towards wages or salary referred to in sub-clause (i) of clause (b) of sub-section (3) of section 325, 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.
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