Introduction — When a Company Fails, Who Deserves to Be Paid First?
When a company shuts down or goes into liquidation, one uncomfortable question immediately arises:
Who gets paid first — banks, lenders, investors, or the workers who kept the company running?
Most people assume secured creditors or banks automatically come first. However, Indian company law follows a different approach — one that is more balanced and more humane.
Under Section 326 of the Companies Act, 2013, workmen’s dues receive priority over most other debts. These payments are called overriding preferential payments, because they stand ahead of many competing claims during winding up.
📘 Official Act Reference — Companies Act, 2013:
https://www.mca.gov.in/content/mca/global/en/acts-rules/companies-act.html
In simple words, when a company is wound up, workers should not suffer last. The law places them first in line.
Let’s walk through Section 326 in a practical, real-world way — without jargon or complexity.
What Section 326 of the Companies Act, 2013 Really Means
When a company enters liquidation, its assets are sold and the proceeds are used to pay creditors. Even so, not everyone stands in the same priority queue.
Section 326 clearly states that some payments must be cleared before others. These are known as:
👉 Overriding Preferential Payments
At the top of this list are:
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workmen’s wages and dues
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a proportional share of debts owed to secured creditors, linked to the workmen’s interest in the security
🧾 Related — IBC liquidation priority framework:
https://ibbi.gov.in
Ultimately, the law ensures that people who depended on the company for their livelihood are not left helpless when the organisation collapses.
Who Qualifies as a “Workman”?
Under Section 326, workmen generally include employees engaged in:
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skilled or unskilled labour
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technical and operational roles
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manual or clerical work
Their dues usually cover:
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unpaid wages or salary
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allowances
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leave encashment
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gratuity
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bonus
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PF, pension and welfare fund contributions
📌 Related — Employees’ Provident Fund Organisation:
https://www.epfindia.gov.in
When these amounts remain unpaid, the law treats them as top-priority obligations during liquidation.
Overriding Preferential Payments — What Falls Under Priority?
The section identifies two key categories of preferential claims:
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workmen’s unpaid dues
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a defined portion of secured creditors’ recoverable amounts
(equal to the workmen’s share in the secured asset)
Because of this, secured creditors must share part of the asset value with workers, up to the statutory limit.
In effect, Section 326:
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protects employees financially during winding up, and
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prevents secured creditors from absorbing the entire security value
As a result, the law creates a fair balance between creditor rights and social justice.
Section 326 vs Secured Creditors — How Does Priority Work?
Ordinarily, secured creditors hold the strongest repayment position because their loans are backed by collateral. Under Section 326, the situation changes.
A secured creditor cannot claim the full value of their security when workmen’s dues remain unpaid. Instead, the law requires proportional sharing, which ensures workers do not lose their dues simply because the asset is tied to a bank-backed loan.
A Simple Real-World Example
Consider this scenario:
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Company assets — ₹1 crore
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Unpaid workmen’s dues — ₹20 lakh
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Secured loan — ₹80 lakh
Under Section 326:
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workmen receive their dues first
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a corresponding share of the secured creditor’s recovery contributes to that payout
➡️ The secured creditor does not get absolute priority.
Both parties share recoveries proportionately, which protects workers from total loss.
Why Section 326 Exists — The Human Logic Behind It
Without Section 326, liquidation would unfold very differently:
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banks would recover secured loans
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investors would receive whatever remains
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employees would often get nothing
That outcome would clearly be unfair.
Workers invest their time, effort, and livelihood into the organisation. Many depend entirely on monthly wages and do not have the financial cushioning that lenders or investors enjoy. For that reason, the law recognises that workers are not ordinary creditors — their survival is directly impacted.
This principle forms the foundation of overriding preferential payments.
Common Misunderstandings About Section 326
Mistake 1 — Thinking banks always get paid first
In reality, workmen’s dues rank ahead of most debts.
Mistake. 2 — Assuming all employee dues automatically qualify
Only legally – defined workmen dues are covered.
Mistake. 3 — Believing secured creditors lose all rights
They don’t. They simply share recoveries proportionately.
In short, Section 326 promotes fairness, discipline, and balance.
How Section 326 Interacts With the Insolvency & Bankruptcy Code (IBC)
Today, many corporate insolvency cases proceed under the IBC framework, where priority rules differ slightly. Even then, the spirit of worker protection remains intact.
📄 Learn more about the liquidation waterfall under IBC:
https://ibbi.gov.in/en/laws-and-regulations
Section 326 continues to apply in winding-up proceedings under the Companies Act.
How Companies & HR Teams Should Prepare (Practical Steps)
Step 1 — Maintain complete employee records, including:
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wage registers
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bonus and leave encashment statements
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PF and gratuity documents
Step. 2 — Avoid piling up unpaid dues
Once liquidation begins, these dues turn into priority liabilities.
Step. 3 — Communicate openly during financial distress
Transparency prevents panic, mistrust, and avoidable disputes.
Pro Tips for Business Owners, Creditors & Employees
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Treat employee dues as non-negotiable obligations
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Lenders should assess workmen liability risk before funding
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Employees must document unpaid dues formally
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Companies should treat Section 326 as serious compliance, not paperwork
A proactive approach reduces conflict, litigation, and financial uncertainty.
Conclusion — Section 326 Puts People Before Assets
Section 326 of the Companies Act, 2013 stands for a simple but powerful principle:
👉 When a company collapses, the people who worked for it should not stand last in line.
By prioritising workmen through overriding preferential payments and proportionate sharing by secured creditors, the law protects dignity, fairness, and livelihoods.
That makes Section 326 a vital pillar of India’s corporate justice framework.
Call to Action
If you’re a business owner, employee, or creditor dealing with liquidation or winding-up issues, share your situation — I’ll help you understand your rights and payment priority under Section 326 in clear, practical language.
