Sections 327 and 328 of the Companies Act, 2013: Preferential Payments and Fraudulent Preference
Sections 327 and 328 form part of the winding-up provisions of the Companies Act, 2013. Section 327 identifies specified debts that receive priority in a winding up under the Act, while Section 328 empowers the National Company Law Tribunal to undo a fraudulent preference that improperly places a creditor, surety or guarantor in a better position before winding up.
Updated: 17 September 2026
What is Section 327 - Preferential Payments?
Section 327 deals with the priority of certain debts when a company is wound up under the Companies Act, 2013. It operates subject to Section 326, which deals with overriding preferential payments. In practical terms, Section 327 determines which specified claims are to be paid ahead of ordinary debts, subject to the conditions stated in the provision.
Debts given priority under Section 327(1)
(a) Government and local authority dues: revenues, taxes, cesses and rates due at the relevant date that became due and payable during the twelve months immediately preceding that date.
(b) Wages and salary: qualifying wages or salary of employees for services rendered, for a period not exceeding four months within the preceding twelve months, subject to the statutory limit applicable to a workman.
(c) Accrued holiday remuneration: qualifying holiday remuneration becoming payable on termination of employment before or by reason of winding up or dissolution.
(d) Social insurance and similar contributions: qualifying employer contributions payable during the preceding twelve months under the Employees' State Insurance Act, 1948 or other applicable law, subject to the statutory exception.
(e) Employee compensation: qualifying compensation or liability for compensation in respect of death or disablement of an employee, subject to the conditions in the section.
(f) Employee welfare funds: sums due to an employee from provident fund, pension fund, gratuity fund or another employee welfare fund maintained by the company.
(g) Investigation expenses: expenses of investigations under Sections 213 and 216, to the extent payable by the company.
Priority where another person advanced wages
Under Section 327(2), where money was advanced by another person to pay an employee's wages, salary or accrued holiday remuneration, the person making the advance can obtain the corresponding priority to the extent that the employee's preferential claim was reduced by that payment.
Ranking and payment of preferential debts
Section 327(3) provides that the debts listed in the section rank equally among themselves. They are to be paid in full where assets permit; if assets are insufficient, they abate in equal proportions. The provision also gives them the stated priority over claims secured by a floating charge where the assets otherwise available to general creditors are insufficient.
Section 327(4) requires preferential debts to be discharged promptly, subject to retention of sums needed for winding-up costs and expenses and the availability of sufficient assets. Section 327(5) deals with goods or effects distrained shortly before a winding-up order, while Section 327(6) treats qualifying holiday and sickness absence remuneration as wages for this purpose.
Meaning of relevant expressions
The Explanation to Section 327 defines expressions including accrued holiday remuneration, employee and relevant date. The statutory definition of employee for this section excludes a workman. The relevant date depends on the circumstances of the winding up, including the appointment of a provisional liquidator or the winding-up order.
Section 327 and liquidation under the Insolvency and Bankruptcy Code, 2016
Section 327(7), inserted through the Insolvency and Bankruptcy Code, 2016, states that Sections 326 and 327 do not apply in the event of liquidation under the IBC. This distinction is important: Section 327 remains a Companies Act winding-up provision, but it should not be used as the distribution rule for an IBC liquidation.
What is Section 328 - Fraudulent Preference?
A fraudulent preference under Section 328 concerns conduct that places a creditor, surety or guarantor in a better position in the event of liquidation than that person would otherwise have occupied. The section focuses on transactions or acts occurring within the statutory six-month period before the making of a winding-up application.
Power of the Tribunal under Section 328(1)
If the company gives a preference to a creditor, surety or guarantor and the effect is to improve that person's position on liquidation, the Tribunal may, if satisfied that the transaction amounts to a fraudulent preference, make an order it considers appropriate to restore the position that would have existed without the preference.
Property transfers, deliveries, payments and executions
Section 328(2) further addresses a preferential transfer of movable or immovable property, delivery of goods, payment or execution made, taken or done by or against the company within six months before the winding-up application. If the statutory conditions are satisfied, the Tribunal may declare the transaction invalid and order restoration of the position.
Difference between Sections 327 and 328
Section 327 establishes a statutory priority for specified legitimate debts in a Companies Act winding up. Section 328, by contrast, is an avoidance and restoration provision aimed at transactions that improperly prefer particular creditors, sureties or guarantors shortly before winding up.
Related provisions
These sections should be read with nearby winding-up provisions, including Section 326 on overriding preferential payments, Sections 329 and 330 on certain void transfers, and Sections 331 and 332 on persons fraudulently preferred and floating charges.