Companies Act Section 327

Companies Act, Section 327: Preferential Payments in the Event of Company Winding Up

In the event of a company's winding up under the Companies Act, 2013, Section 327 specifies a distinct class of debts and obligations that must be given preferential treatment. These payments are made before all other unsecured debts and subject to the provisions of Section 326, which prioritizes overriding payments such as workmen’s dues.

The objective of this provision is to protect employees and government authorities by ensuring that their dues are addressed promptly and fairly, even in the event of financial distress or insolvency.

1. Priority Debts in Winding Up

Subject to the overriding provisions of Section 326, the following categories of payments are granted priority over other debts and shall be paid out first during the winding up process:

a) Dues to Government and Local Authorities

All revenues, taxes, cesses, and rates payable to:
The Central Government, or A State Government, or Any local authority These dues must have become due and payable within the 12 months immediately before the “relevant date” (defined later in this section).
b) Employee Wages and Salary

All wages or salaries, including:
Time-based or piece-rate wages Salary earned fully or partly through commission. This applies to all employees (but not to “workmen” as defined separately), and:
Only for a maximum period of four months. These four months must fall within the 12 months immediately before the relevant date
The amount payable is capped for each employee, as notified by the government.
c) Accrued Holiday Remuneration

All holiday pay that becomes payable to an employee:
Due to termination of employment as a result of winding up or company dissolution. In case of the employee’s death, the dues become payable to their legal heir or successor.
d) Employees’ State Insurance Contributions

Any amount payable by the company as the employer under:
The Employees’ State Insurance Act, 1948, or Any other applicable welfare legislation. This applies to contributions that became due within the 12 months before the relevant date
Exclusion: This clause does not apply if the company is voluntarily wound up only for the purpose of amalgamation or reconstruction.
e) Compensation under the Workmen’s Compensation Act, 1923

All amounts due for compensation or liability for compensation under the Workmen’s Compensation Act, 1923, in respect of:
Death or Disablement of any employee. Exception:
If the company holds an insurance contract as mentioned in Section 14 of that Act, and The rights under the contract can be transferred to the employee, then the payment from company assets is not required.
Weekly compensation: If compensation is in the form of weekly payments, the redeemable lump sum value shall be considered for prioritization.
f) Dues from Employee Welfare Funds

All amounts due to any employee from: Provident Fund, Pension Fund, Gratuity Fund, Any other employee welfare fund maintained by the company.
g) Investigation Expenses

All costs and expenses associated with:
Investigations conducted under Sections 213 or 216 of the Companies Act, 2013. These expenses must be payable by the company, not other parties.
2. Reimbursement for Advance Payment of Wages

If any employee has received payment of wages, salary, or holiday remuneration from funds advanced by another person, then:
That person (who advanced the funds) shall receive the same priority in the winding up process. The priority applies to the extent that the employee’s claim is reduced due to such an advance payment.
3. Equal Ranking and Priority over Floating Charge

All debts listed under this section:
a) Rank equally among themselves and must be paid in full, unless the company’s available assets are insufficient.
b) If assets are inadequate, payments shall be proportionately reduced (abate) among the creditors.
Additionally, these preferential debts shall have priority over claims of debenture holders under any floating charge, and Must be paid from the charged property, before payments to such debenture holders.
4. Immediate Discharge of Preferential Debts

After retaining amounts needed to cover winding-up costs and expenses, the preferential debts:
Shall be paid off immediately, to the extent assets permit. For dues under clause (d) (Employees’ State Insurance), formal proof of debt is not required, unless specifically prescribed by rules.
5. Priority over Distress or Attachment of Property

If a landlord or other person has distained or seized goods of the company within 3 months before the winding up order:
The debts listed under this section shall have a first charge on those goods or proceeds from their sale. If any preferential debt is paid using these seized goods:
The landlord or person who seized the goods shall enjoy the same priority status as the original creditor.
6. Holiday and Sick Leave Treated as Wages

Any remuneration for holidays or medically justified leave (e.g., due to sickness) shall be treated as wages for services rendered. This ensures they are also eligible for preferential treatment under this section.
7. Non-Applicability Under Insolvency and Bankruptcy Code (IBC), 2016 Both Section 326 and Section 327 shall not apply in cases where liquidation proceedings are carried out under the Insolvency and Bankruptcy Code, 2016.