Companies Act Section 326

Companies Act, Section 326: Overriding Preferential Payments in Winding Up Proceedings

In the context of a company's winding up under the Companies Act, 2013, Section 326 outlines a special priority structure for certain categories of debts. These debts must be settled before all others, including those owed to secured creditors. The provision reflects legislative intent to safeguard the rights and interests of workmen, recognizing their economic vulnerability in insolvency situations.

1. Scope and Application

This section applies when a company is undergoing winding up proceedings.
It overrides all other claims and establishes a hierarchy of payment, emphasizing the protection of "workmen's dues".
2. Debts to be Paid in Priority

The following debts are required to be paid in priority to all other debts, including those of secured creditors:

(a) Workmen’s Dues

All amounts legally owed to the company’s workmen as defined under this section and the Industrial Disputes Act, 1947.
(b) Secured Creditors- Unrealised Debt Portion

If a secured creditor realizes a part of their security (i.e., sells off secured assets), the unpaid portion of their debt is given priority, but only to the extent of the workmen’s portion in the security (if payable under law), and only to the lesser of:
The unrecovered debt amount, or the proportionate amount of the “workmen's portion” in the secured asset.
Pari Passu Clause: These dues are paid pari passu (equally and simultaneously) with the dues of the workmen.

3. Timeframe for Preferential Payments

Proviso to Sub-section (1): In case of winding up, certain dues listed below shall be paid within 30 days of sale of assets, with priority over all other debts, including those due to secured creditors:
Sub-clause (i): Salary, wages, or commissions payable to any workman.
Sub-clause (ii): Compensation or benefits payable to workmen, as explained later.
These payments also constitute a charge over the security held by secured creditors, as may be prescribed by law.
4. Priority Structure

First, payments under the proviso to sub-section (1) are made in full.
Then, payments under the rest of sub-section (1) are made in full, unless the company’s assets are insufficient.
If assets are insufficient, the available funds are distributed among the eligible creditors and workmen in proportionate shares.
5. Definitions and Explanation

For the purpose of Section 326 and Section 327, the following definitions apply:

(a) "Workmen"

Refers to employees categorized as workmen under clause (s) of Section 2 of the Industrial Disputes Act, 1947.
(b) "Workmen’s Dues"
Includes the following amounts legally owed by the company to its workmen:

1. All wages or salary (including piece-rate wages and commission-based salary) and compensation payable under the Industrial Disputes Act, 1947.
2. Accrued holiday remuneration due to any workman at the time of termination due to winding up, or, in case of death, to their legal successor.
3. Compensation under Workmen's Compensation Act, 1923, unless:
The winding up is for amalgamation or reconstruction, or The company has valid insurance that covers workmen’s compensation, and the rights under that insurance contract are transferable.
4. Amounts due from any welfare fund maintained by the company, such as:
Provident Fund, Pension Fund, Gratuity Fund, Any other fund for workmen’s welfare.
(c) "Workmen’s Portion" of Security

This term refers to the share in a secured asset that proportionally belongs to workmen based on their dues, calculated as: Workmen’s Portion = (Workmen’s Dues/Workmen’s Dues + Secured Debt) × Value of Secured Asset

Illustration:

Value of secured asset: ?1,00,000
Workmen’s dues: ?1,00,000
Total secured debt: ?3,00,000
Aggregate (workmen’s dues + secured debt) = ?4,00,000
Workmen’s portion = (1,00,000 / 4,00,000) × 1,00,000 = ?25,000. This ?25,000 is to be paid to workmen before any further distribution to secured creditors.