Page 350 - DMGT407Corporate and Business Laws

Unit 14: Winding up and Dissolution of a Company

(f) All sums due to any employee from a provident fund, a pension fund, a gratuity Notes
fund or any other fund for the welfare of the employees maintained by the company;
(g) The expenses of any investigation held in pursuance of s. 235 or s. 237 insofar as they
are payable by the company.
2. The advances made by a third person to pay wages or salary of an employee or holiday
remuneration to him or to any other person on his death, shall have the same right of
priority in winding up, up to the amount by which the employee or other person in his
own right would have been entitled to.
3. The foregoing debts shall rank pari passu, i.e., equally among themselves. In case assets
are not sufficient to meet them, they shall abate (i.e., be reduced) in equal proportion.

4. Where the assets of the company available for payment of general creditors are insufficient
to meet them, the aforesaid debts shall 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.
The order of priority in paying off debts in a winding up shall be as follows:

(i) Workmen’s dues and debts due to secured creditors (s. 529A)
(ii) Costs and expenses of winding up
(iii) Preferential debts (s. 530).
(iv) Floating charge; and

(v) Unsecured creditors.

Example: A Ltd. is being wound up by the court. The official liquidator, after realization
of the assets, has an amount of ` 28 lakh at his disposal towards the payment to the creditors of
the company. The list of creditors is given below:

(i) Dues to secured creditors: ` 20 lakh
(ii) Dues to workers: ` 15 lakh
(iii) Taxes, etc. due to the government authorities: ` 2 lakh

(iv) Unsecured creditors: ` 40 lakh.
The company has created a charge on all the assets of the company in favour of the secured
creditors.

The amount payable under s. 529A to workers is ` 15 lakhs; and to the secured creditors is ` 20
lakhs. This comes to ` 35 lakhs. The amount available is ` 28 lakhs. As it is insufficient to pay
these two debts in full, they shall abate in equal proportion. The workers and the secured
creditors will get ` 12 lakh and ` 16 lakh respectively. The question of payment of tax due to the
government authorities and to the unsecured creditors does not arise.
Self Assessment

Fill in the blanks:
7. In the event of winding up, certain payments are to rank in priority to others, they are
called …………… payments.

8. All secured holiday remuneration becoming payable to an employee on the ……………of
his employment before, or by the effect of the winding up

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