Overriding preferential payments
Section 326 of the Companies Act, 2013 deals with overriding preferential payments. 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; The Act came into force on 01 Apr 2014.
1[326. Overriding preferential payments.-- (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 sub-section 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 Rs. 1,00,000. The total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs.3,00,000. The aggregate of the amount of workmen's dues and the amount of debts due to secured creditors is Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000.]
Section 326, The Companies Act, 2013 (Act 18 of 2013).
Cross-references
Extracted from the operative text of the enactments themselves. Every destination below exists in our corpus.
This section refers to
Related judgements & precedents
These are some judgments that construed this section, and hold precedence value. They hold authority on how to read, interpret and use this section.
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Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India
Court's Decision & Legal Precedent
The Insolvency and Bankruptcy Code 2016 represents an organic evolution of insolvency law through a consultative process involving multiple committees and expert bodies. The waterfall mechanism under Section 53 of IBC, which ranks workmen's dues for 24 months preceding liquidation commencement date pari passu with secured creditors who relinquish security, is a carefully balanced framework that adequately protects workmen's interests while promoting revival of insolvent companies and maximizing asset value for all stakeholders. This framework is not arbitrary or violative of Articles 14 and 21 of the Constitution. The two regimes - liquidation under Companies Act 2013 and liquidation under IBC - deal with different situations and cannot be compared for constitutional purposes. In economic legislation, courts should defer to legislative judgment unless the exercise of legislative judgment appears to be palpably arbitrary. The sacrifices required from workmen under IBC are not manifestly unjust or arbitrary, and the exclusion of Provident Fund, Pension Fund and Gratuity Fund from liquidation estate, combined with the 24-month protection and Regulation 21A safeguards, adequately protect workmen's dues.
On this section: Overriding preferential payments to workmen; definition of workmen's dues incorporated into IBC by reference
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Raman Prakash Mangla vs Anuj Jain
Court's Decision & Legal Precedent
The Adjudicating Authority has limited jurisdiction in approving a resolution plan, circumscribed by Sections 30(2) and 31 of the Insolvency and Bankruptcy Code, 2016. The Authority cannot interfere with the commercial aspects of the decision taken by the Committee of Creditors. If the Adjudicating Authority finds shortcomings in the resolution plan vis-à-vis the specified parameters of keeping the corporate debtor as a going concern, maximizing the value of its assets, and taking care of interests of all stakeholders, it must send the plan back to the Committee of Creditors for reconsideration, not modify the plan itself. Payment to dissenting financial creditors must be in monetary terms, not in kind or through transfer of equity or land. Once homebuyers as a class vote in favor of a resolution plan through their authorized representative, individual homebuyers cannot challenge the plan as dissenting creditors or aggrieved persons. The INR 750 crores deposited by the holding company pursuant to Supreme Court orders in Chitra Sharma is the property of the holding company, not the corporate debtor, and cannot be appropriated by the corporate debtor or the resolution applicant.
On this section: Definition of workmen's dues
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Axis Bank Limited vs The Official Liquidator Attached to the Hon'ble Bombay High Court
Court's Decision & Legal Precedent
A secured creditor which, with the leave of the Company Court, sells the secured asset of a company in liquidation while standing outside the winding up does not thereby relinquish its security or become obliged to prove its debt with the Official Liquidator; it may appropriate the sale proceeds. That appropriation is, however, subject to the pari passu charge of the workmen, and the Court permitted it only on the bank's undertaking to deposit with the Official Liquidator, with interest at the prevailing rate, that portion of the proceeds equal to the workmen's portion once the workmen's claims are adjudicated under Section 529A of the Companies Act, 1956 or Section 326 of the Companies Act, 2013.
On this section: It shows Section 326 operating on the proceeds of a secured asset realised outside the winding up: the workmen's portion adjudicated under Section 326 must be carved out and paid to the Official Liquidator before the secured creditor keeps the balance.
The holding above is the ratio decidendi as extracted from the judgment by eCourts India, reproduced unaltered — it is a rendering of the court's reasoning, not a substitute for its words. Read the order itself before relying on it.
Judgments citing this section
These may be obiter dicta or a precedent, for you to study. These are the judgments where this section is quoted.
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… of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and ( ii ) the term "workmen's dues" shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013 (18 of 2013)." - 39. The Airtel entities have contested the conclusion by urging that Section 30 of the IBC seeks to ensure that the assets and liabilities of the corporate debtor, as recorded in the resolution plan, correspond to the liquidation estate of the corporate debtor in the …
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… so done on the basis of an organic evolution of law and consultative process, after due consideration of the requirements of a new Code governing liquidation. 3.12 It is submitted that Section 53 Explanation (ii) of IBC states that the term "workmen's dues" shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. It is submitted that thereafter, the Eleventh Schedule to the IBC proposes Amendments to be made to Companies Act, 2013. It is submitted that importantly, Clause 18 of the Schedule omits erstwhile Section 325 of the Companies Act, 2013. It is submitted that Clause 19 of the Schedule …
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… so done on the basis of an organic evolution of law and consultative process, after due consideration of the requirements of a new Code governing liquidation. 3.12 It is submitted that Section 53 Explanation (ii) of IBC states that the term "workmen's dues" shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. It is submitted that thereafter, the Eleventh Schedule to the IBC proposes Amendments to be made to Companies Act, 2013. It is submitted that importantly, Clause 18 of the Schedule omits erstwhile Section 325 of the Companies Act, 2013. It is submitted that Clause 19 of the Schedule …
Made under this section, and citing it
1 instrument names this provision in its title or its text without being made under it.
Questions about Section 326
What have the courts held on Section 326 of the Companies Act?
Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India (02 May 2023) is the leading judgment on this section among those set out below: Overriding preferential payments to workmen; definition of workmen's dues incorporated into IBC by reference. Another 2 judgments on this section are set out below, 2 of them from the Supreme Court. They run from 2019 to 2023.
How do I find court cases under Section 326 of the Companies Act?
In judgments and charge sheets this section is written several ways, and each form finds a different set of orders. These search the full text of every order eCourtsIndia holds, best matches first: Companies Act 326, section 326 Companies Act, section 326 of the Companies Act. People searching for it also type section 326 companies act 2013. Each opens the full list of orders on eCourtsIndia, where it can be narrowed by court, year and outcome. 3 reported judgments on this section are set out on this page, beginning with Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India (02 May 2023).
What should I read with Section 326 of the Companies Act, and has it changed?
Its own text turns on section 327 (Preferential payments), Industrial Disputes Act 2 (Definitions), Workmen’s Compensation Act 14 (Insolvency of employer), so none of them can safely be read on its own. 3 other provisions in this corpus refer back to it. One instrument names it without being made under it, most recently Commencement notification dated 07.12.2016 (2016).
When did Section 326 of the Companies Act come into force?
Section 326 of the Companies Act, cited as Companies Act 326, came into force on 01 Apr 2014, having been enacted on 29 Aug 2013. It is in force as at the date shown on this page.
Other sections of this Act
- 2. Definitions5089 words
- 143. Powers and duties of auditors and auditing standards1867 words
- 230. Power to compromise or make arrangements with creditors and members1432 words
- 232. Merger and amalgamation of companies1416 words
- 149. Company to have Board of Directors1403 words
- 217. Procedure, powers, etc., of inspectors1390 words
Source and method. Compiled from the enactments of Parliament and of the State legislatures as published on India Code, and republished together with commentary and other original matter under section 52(1)(q)(ii) of the Copyright Act, 1957. Structured, cross-referenced and maintained by eCourtsIndia. Text as in force on 15 Oct 2026. This page is not a substitute for legal advice.