The Companies Act, 1956
530. Preferential payments.
(1) In a winding up 1[subject to the provisions of section 529A, there shall be paid] in priority to all other debts
(a)all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become due and payable within the twelve months next before that date;
(b)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 employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date 2[***] subject to the limit specified in sub-section (2);
(c)all accrued holiday remuneration becoming payable to any employee, 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;
(d)unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, all amounts due, in respect of contributions payable during the twelve months next before the relevant date, by the company as the employer of any persons, under the Employees’ State Insurance Act, 1948 (34 of 1948), or any other law for the time being in force;
(e)unless the company is being wound up voluntarily merely for the purposes of reconstruction or of 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 (8 of 1923), rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company;
(f)all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company; and
(2) The sum to which priority is to be given under clause (b) of sub-section (1), shall not, in the case of any one claimant, 3[exceed such sum as may be notified by the Central Government in the Official Gazette].
(3) Where any compensation under the Workmen’s Compensation Act, 1923 (8 of 1923), is a weekly payment, the amount due in respect thereof shall, for the purposes of clause (e) of sub-section (1), be taken to be the amount of the lump sum for which the weekly payment could, if redeemable, be redeemed if the employer made an application for that purpose under the said Act.
(4) Where any payment has been made to any employee of a company,
(i)on account of wages or salary; or
(ii)to him, or in the case of his death, to any other person in his right, on account of accrued holiday remuneration,
out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid, up to the amount by which the sum in respect of which the employee or other person in his right would have been entitled to priority in the winding up has been diminished by reason of the payment having been made.
(5) The foregoing debts shall
(a)rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and
(b)so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.
(6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given by clause (d) of sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise prescribed.
(7) In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within three months next before the date of a winding up order, the debts to which priority is given by this section shall be a first charge on the goods or effect so distrained on, or the proceeds of the sale thereof:
Provided that, in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made.
(8) For the purposes of this section
(a)any remuneration in respect of a period of holiday or of absence from work through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period;
(b)the expression “accrued holiday remuneration” includes, in relation to any person, all sums which, by virtue either of his contract of employment or of any enactment (including any order made or direction given under any enactment), are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday, had his employment with the company continued until he became entitled to be allowed the holiday; 5[***]
6[(bb)the expression “employees” does not include a workman; and]
(c)the expression “the relevant date” means
(i)in the case of a company ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless in either case the company had commenced to be wound up voluntarily before that date; and
(ii)in any case where sub-clause (i) does not apply, the date of the passing of the resolution for the voluntary winding up of the company.
(9) This section shall not apply in the case of a winding up where the date referred to in sub-section (5) of section 230 of the Indian Companies Act, 1913 (7 of 1913), occurred before the commencement of this Act, and in such a case, the provisions relating to preferential payments which would have applied if this Act had not been passed, shall be deemed to remain in full force.
Whenever any creditor seeks to prove his debt against the company in liquidation, the rule enacted in section 46 of the Provincial Insolvency Act should apply and only that amount which is ultimately found due from him at the foot of the account in respect of mutual dealings should be recoverable from him and not that the amount due from him should be recovered fully while the amount due to him from the company in liquidation should rank in payment after the preferential claims provided under section 530; Official Liquidator of High Court of Karnataka v. Smt. V. Lakshmikutty, 1981 (51) Comp. Cas. 566: AIR 1981 SC 1483.
1. Subs. by Act 35 of 1985, sec. 6, for “there shall be paid” (w.e.f. 24-5-1985).
2. Certain words ins. by Act 65 of 19
60, sec. 184 (w.e.f. 28-12-1960), and omitted by Act 35 of 1985, sec. 6 (w.e.f. 24-5-1985).
3. Subs. by Act 5 of 1997, sec. 9, for “exceed one thousand rupees” (w.e.f. 1-3-1997).
4. Proviso omitted by Act 35 of 1985, sec. 6 (w.e.f. 24-5-1985).
5. The word “and” omitted by Act 35 of 1985, sec. 6 (w.e.f. 24-5-1985).
6. Ins. by Act 35 of 1985, sec. 6 (w.e.f. 24-5-1985).