Section 326 Overriding preferential payments – Companies Act 2013

Amended and updated notes on section 326 of Companies Act 2013. Detail discussion on provisions and rules related to overriding preferential payments.

Amended and updated notes on section 326 of Companies Act 2013. Detail discussion on provisions and rules related to overriding preferential payments.

Chapter XX (Section 270365) of the Companies Act, 2013 (CA 2013) deals with the provisions related to winding up. Section 326 of CA 2013 provides for overriding preferential payments.

Recently, we have discussed in detail section 325 (Application of insolvency rules in winding up of insolvent companies) of CA 2013. Today, we learn the provisions of section 326 of the Companies Act 2013.

The provisions of section 326 are effective from 15th December, 2016. You may refer Notification No. S.O. 3677(E) issued dated 7-12-2016. In this article, you will learn detail of the provisions of section 326 the Companies Act 2013.

Name of ActThe Companies Act 2013
Enacted byParliament of India
Administered byMinistry of Corporate Affairs (MCA)
Number of Chapters29
Number of Sections484 (470-43+57)
Number of Schedules7
You are reading:
Chapter No.XX
Chapter NameWinding Up
Section No.326
Section NameOverriding preferential payments
Monthly Updated EditionCompany Law PDF

Section 326 of Companies Act 2013: Overriding preferential payments

Section 326 substituted pursuant to section 255 of the Insolvency and Bankruptcy Code, 2016 vide Notification No. S.O. 3453(E) issued dated 15.11.2016 and shall come into force on 15th December, 2016 vide Notification No. S.O. 3677(E) dated 07.12.2016.

(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 ₹1,00,000. The total amount of the workmen’s dues is ₹1,00,000. The amount of the debts due from the company to its secured creditors is ₹3,00,000. The aggregate of the amount of workmen’s dues and the amount of debts due to secured creditors is ₹4,00,000. The workmen’s portion of the security is, therefore, one-fourth of the value of the security, that is ₹25,000.


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