Section 327 of Companies Act, 2013: Who is included under preferential creditors?

When a company goes into administration or is liquidated, the directors’ actions leading up to the insolvency will be reviewed to see if they did anything incorrect or illegal. Preferential payments are one form of transaction that is being scrutinized in this circumstance. The liquidator has to maximize return for all creditors during the liquidation process. When a particular creditor is given preferential treatment before the bankruptcy bench over the remaining creditors in a group, this is known as ‘preference.’ As per Section 327 of the Companies Act. 2013, preferential payments have to be made in priority, in the order mentioned below:-

1. All revenues, taxes, cesses, and rates owed to the central, state, or local governments that had become due and payable within a year of the winding-up order.
2. All wages or salary, whether working is payable for time or piece work and salary includes which is earned wholly or in part in respect of services rendered to the company, due for up to 4 months only within 12 months before the date of the winding-up order.
3. All accrued holiday remuneration becomes payable to an employee or his legal heirs. This has no limitation clause, which means an employee can claim any due holiday remuneration for the services given to the company by him.
4. All amounts are due in respect of contributions payable during 12 months under the Employee State Insurance Act, 1948.
5. Compensation was due under the Workmen’s Compensation Act, 1923 in respect of the death or disablement of any company employee.
6. Any amount due to any employee from the provident fund, pension fund, and gratuity fund for the welfare of the employees maintained by the company.
7. The expenses of any investigation held in pursuance of Sec. 213 and 216, in so far as they are payable by the company.

Highlights of Section 327 of the Companies Act, 2013

• On the declaration of bankruptcy, preferred credit is the one who should get his money at first priority.
• Conditions under Section 327 shall apply subject to the provision of Sec. 326. This means if no asset is left after distribution under Sec. 326, then no distribution takes place under Sec. 327.
• Section 327 shall not apply in the event of liquidation under the Insolvency or Bankruptcy Code, 2016.
• Unpaid wages and taxes should be at most priority to return for a liquidator.
• The unsecured creditors have a lesser chance of recovering any money owed.