Page 349 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 14.3 Preferential Payments

In the event of winding up, certain payments are to rank in priority to others. The payments to
be so made first are called preferential payments. Section 529 A and 530 contain such payments.

Overriding Preferential Payments (s. 529A)

This section provides that notwithstanding anything contained in any other provision of this
Act or any other law for the time being in force, the following amounts shall be paid in priority
to all other debts:
(a) Workmen’s dues; and
(b) Debts due to secured creditors, to the extent such debts rank pari passu with workmen’s
dues.
Section 529 provides an illustration to show as to how to assess workmen’s due as against
secured creditors. This is as follows:

(a) The value of the security of a secured creditor is ` one lakh.
(b) The total amount of the workmen’s due is ` one lakh.
(c) The amount of the debts due from the company to its secured creditors is ` 3 lakh.
(d) The aggregate of the amount of workmen’s dues and of the amounts of debts due to
secured creditors is ` 4 lakh.
(e) The workmen’s portion of the security is, therefore, one-fourth of the value of the security,
i.e. ` 25000. In other words, the pari passu share will be 1 : 3 for workmen and secured
creditors respectively in the amount of ` 1 lakh, the value of the security. This comes to
` 25,000 and 75,000 for the workers and the secured creditors respectively.

The aforesaid debts mentioned in s. 529A shall be paid in preference to all other debts in the
winding up of a company and shall be paid in full unless the assets of the company are not
sufficient to meet them, in which case they shall be reduced in equal proportions.
Preferential Payments (s. 530): The provisions of s. 530 are summarized as follows:
1. In a winding up (subject to the provisions of s. 529A), there shall be paid in priority to all
other debts:
(a) All revenues, taxes, ceases and rates due to the Central or State Government or to a
local authority. The amount should have become due and payable within 12 months
before the winding up order;
(b) All wages or salary of any employee, in respect of services rendered to the company
and due for a period not exceeding four months during the twelve months preceding
the winding up. The amount shall not exceed such sum as may be notified by the
central government [presently, ` 20,000] for any one claimant;
(c) All secured holiday remuneration becoming payable to an employee on the
termination of his employment before, or by the effect of the winding up;
(d) All amount due in respect of contributions payable during the 12 months before the
winding up under the Employees State Insurance Act, 1948 or any other law;

(e) All amounts due in respect of any compensation or liability for compensation under
the Workmen’s Compensation Act, 1923 in respect of death or disablement of any
employee of the company;

342 LOVELY PROFESSIONAL UNIVERSITY