Sections 325 and 326 of the Companies Act, 2013: Insolvency Rules and Overriding Preferential Payments
Sections 325 and 326 form part of the Companies Act, 2013 provisions dealing with winding up. Section 325 has been omitted, while Section 326 continues to define overriding preferential payments and important concepts relating to workmen's dues.
Section 325 - Application of insolvency rules in winding up of insolvent companies
Section 325, titled "Application of insolvency rules in winding up of insolvent companies", has been omitted. The omission was made by the Insolvency and Bankruptcy Code, 2016 through section 255 read with the Eleventh Schedule, with effect from 15 November 2016.
Accordingly, Section 325 should not be presented as an operative substantive rule for present-day corporate insolvency. Corporate insolvency and liquidation under the IBC are governed by the Insolvency and Bankruptcy Code, 2016 and the applicable regulations.
Section 326 - Overriding preferential payments
Section 326 deals with debts that receive overriding priority in a winding up under the Companies Act, 2013. Broadly, it gives priority to workmen's dues and, in the circumstances specified by the section, certain unrealised debts of a secured creditor, ranking pari passu with workmen's dues.
Priority under Section 326
Where Section 326 applies, workmen's dues receive the statutory priority prescribed by the provision. The section also addresses the position of a secured creditor who has realised a secured asset and the extent to which the qualifying balance may rank with workmen's dues.
The proviso to Section 326(1) gives special priority to specified components of workmen's dues for the prescribed preceding period. Section 326(2) further provides for payment in full in the statutory order, subject to proportionate abatement where the available assets are insufficient.
Important definitions under Section 326
| Term | Meaning in the statutory scheme |
|---|---|
| Workmen | Employees who fall within the statutory meaning of "workman" referred to by Section 326. |
| Workmen's dues | The aggregate statutory dues described in Section 326, including qualifying wages or salary, accrued holiday remuneration, compensation liabilities and sums due from specified welfare funds. |
| Workmen's portion | The proportion of the value of a secured creditor's security attributable to workmen's dues under the formula contained in Section 326. |
| Pari passu | Ranking on an equal footing for distribution in accordance with the applicable statutory priority. |
What is included in workmen's dues?
Section 326 describes workmen's dues as including specified sums such as wages or salary for services rendered, accrued holiday remuneration, qualifying compensation for death or disablement, and sums due from provident fund, pension fund, gratuity fund or another fund maintained for the welfare of workmen, subject to the wording and conditions of the Act.
How the workmen's portion is calculated
The "workmen's portion" of a secured creditor's security is determined proportionately. In substance, the value of the security is apportioned by comparing workmen's dues with the combined total of workmen's dues and debts due to secured creditors.
Interaction with the Insolvency and Bankruptcy Code, 2016
A critical distinction is necessary. Section 327(7) of the Companies Act provides that Sections 326 and 327 do not apply in the event of liquidation under the Insolvency and Bankruptcy Code, 2016. For an IBC liquidation, distribution is governed by the IBC framework, particularly section 53. The IBC nevertheless refers to the meaning assigned to "workmen's dues" in Section 326 of the Companies Act for its statutory purposes.
Therefore, the applicable priority regime depends on the legal route under which the company is being wound up or liquidated. Readers should identify whether the proceeding is under the Companies Act or the IBC before applying a priority rule.
Official legal resources
For the current statutory text and insolvency framework, refer to the official India Code, the Ministry of Corporate Affairs, and the Insolvency and Bankruptcy Board of India.
This article is intended as a statutory reference and general legal information. The priority applicable to a particular winding-up or liquidation depends on the governing proceeding, facts, amendments and orders in force.