Section 326 of Companies Act 2013: Overriding Preferential Payments Explained in Simple Words
When a company shuts down, the biggest question everyone asks is very simple:
“Who should get the money first?”
Employees worry about unpaid salaries.
Banks worry about loan recovery.
Vendors worry about outstanding bills.
This is exactly where Section 326 of the Companies Act 2013 becomes extremely important.
If you are a business owner, director, CA student, finance professional, or even an employee of a struggling company, understanding this section can save you from confusion, disputes, and wrong expectations.
In this blog, I’ll explain Section 326 of the Companies Act 2013 in plain, human language—no heavy legal jargon, no textbook tone. Think of this as a practical conversation, not a law lecture.
Why Section 326 Exists (And Why It Matters)
Let’s start with reality.
When a company goes into winding up (liquidation), there is never enough money to pay everyone fully. Assets are limited, liabilities are huge, and emotions are high.
If there were no clear rules:
- Banks would fight with employees
- Employees would fight with management
- Creditors would fight with each other
To avoid this chaos, the law clearly defines the priority of payments.
That priority system is laid down in Section 326 of the Companies Act 2013, which talks about overriding preferential payments.
What Is Section 326 of the Companies Act 2013?
In simple terms, Section 326 of the Companies Act 2013 says:
Certain payments must be paid first, even before most other debts, when a company is being wound up.
These payments are called overriding preferential payments.
👉 The word "overriding" means they override all other claims.
👉 The word "preferential" means they get preference or priority.
So legally speaking, these dues shall be paid in priority to all other debts.
Meaning of Overriding Preferential Payments
Let’s understand this without legal English.
Overriding preferential payments are those payments that:
- Come at the top of the payment list
- Cannot be ignored
- Must be cleared before paying unsecured creditors and, in many cases, even secured creditors
These payments mainly protect employees and workmen, because the law recognizes that:
- Employees depend on salaries for survival
- Provident fund and gratuity are social security benefits
- Workers should not suffer due to company mismanagement
Who Gets Covered Under Section 326?
Under Section 326 of the Companies Act 2013, two major categories get priority:
1. Workmen’s Dues
2. Secured Creditors (to a limited extent)
Let’s break both down properly.
Workmen’s Dues Explained (Most Important Part)
Workmen’s dues are at the heart of overriding preferential payments.
What Are Workmen’s Dues?
Workmen’s dues generally include:
- Unpaid wages or salaries
- Accrued leave salary
- Bonus
- Provident Fund (PF) contributions
- Gratuity
- Compensation payable under labour laws
These are not optional payments. These are legally protected dues.
Under Section 326 of the Companies Act 2013, workmen’s dues shall be paid in priority to all other debts.
Even banks cannot jump the queue here.
Why Does the Law Protect Workmen So Strongly?
This is where human logic comes in.
A bank has:
- Risk management systems
- Collateral
- Legal teams
But a worker has:
- Monthly household expenses
- EMIs
- Children’s education
- Medical needs
The law recognizes this imbalance. That’s why overriding preferential payments exist.
Secured Creditors: Priority, But With Limits
Now let’s talk about banks and secured creditors.
Normally, secured creditors think:
“We have collateral, so we get paid first.”
But Section 326 of the Companies Act 2013 changes this mindset.
How Secured Creditors Are Treated
Secured creditors get priority only to the extent they rank alongside workmen’s dues.
This means:
- They share priority with workmen
- They don’t automatically override employees
- Their claim is limited by a specific formula
So yes, secured creditors are important, but they are not above workmen.
Understanding “Shall Be Paid in Priority to All Other Debts”
This line is extremely powerful in law.
When the Act says “shall be paid in priority to all other debts,” it means:
- No discretion
- No negotiation
- No adjustment
- No skipping
The liquidator must first clear overriding preferential payments before touching any other liability.
If this rule is violated, the liquidator can be held responsible.
Practical Example to Understand Section 326
Let me explain this with a real-world-style example.
Example Scenario
A company is being wound up. It has:
- Total assets worth ₹1 crore
Liabilities:
- Workmen’s dues: ₹30 lakh
- Secured bank loan: ₹50 lakh
- Unsecured creditors: ₹40 lakh
How Will Payments Happen?
Step 1:
Workmen’s dues of ₹30 lakh are paid first (non-negotiable).
Step 2:
Secured creditors are paid only to the extent they rank with workmen.
Step 3:
If any money is left after clearing overriding preferential payments, then:
- Unsecured creditors may receive something (often very little or nothing)
This is the real power of Section 326 of the Companies Act 2013.
Difference Between Section 326 and Section 327
Many people confuse these two sections.
Section 326
Deals with overriding preferential payments
Top-most priority
Focus on workmen’s dues and secured creditors (limited)
Section 327
Deals with preferential payments
Lower priority compared to Section 326
Includes government dues, taxes, etc.
So always remember:
👉 Section 326 comes before Section 327
Common Misunderstandings About Section 326
Let me clear some myths I often hear.
Myth 1: Banks Always Get Paid First
❌ Wrong. Workmen get priority under Section 326 of the Companies Act 2013.
Myth 2: Employees Can Be Ignored in Liquidation
❌ Completely false. Their dues are overriding preferential payments.
Myth 3: PF and Gratuity Can Be Adjusted Later
❌ No. These must be cleared first.
Importance of Section 326 for Employees
If you are an employee, this section is your legal shield.
It ensures:
- Your unpaid salary is not lost
- Your PF is protected
- Your gratuity is not sacrificed for bank loans
Even if the company collapses, the law stands with you.
Importance of Section 326 for Directors & Founders
If you are a director or founder, ignoring Section 326 of the Companies Act 2013 can be dangerous.
Why?
- Wrong distribution of assets can attract legal action
- Personal liability may arise
- Liquidator reports are closely scrutinized.
Understanding overriding preferential payments helps you stay compliant and avoid unnecessary trouble.
Role of Liquidator Under Section 326
The liquidator’s responsibility is critical.
They must:
- Identify workmen’s dues correctly
- Calculate secured creditor’s eligible portion
- Ensure these dues shall be paid in priority to all other debts
Any mistake here can invalidate the entire liquidation process.
Real-Life Insight From Practice
In many liquidation cases, I’ve seen:
- Employees assuming they’ll get nothing
- Banks assuming full recovery
- Creditors expecting equal treatment
But once Section 326 of the Companies Act 2013 is applied properly, reality hits differently.
Employees often get paid first, and others wait—or walk away empty-handed.
This is why knowing the law beforehand saves emotional and financial shock.
Key Takeaways You Should Remember
Let’s summarize everything clearly:
- Section 326 of Companies Act 2013 governs payment priority during winding up
- It introduces overriding preferential payments
- Workmen’s dues are at the top
- Secured creditors share priority only to a limited extent
- These dues shall be paid in priority to all other debts
- Ignoring this section can lead to serious legal consequences
Final Thoughts
Company winding up is never easy. It affects livelihoods, reputations, and finances.
But Section 326 of the Companies Act 2013 ensures one thing clearly:
👉 Employees are not left behind.
If you are dealing with liquidation, insolvency, or compliance matters, don’t rely on assumptions. Understand the law properly, apply it correctly, and take expert help when needed.
For professional guidance on company law, liquidation, compliance, and taxation matters, you can always explore expert support at callmyca.com—just like in our previous blogs, practical help makes all the difference.
