Section 326 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 326 puts workmen's dues at the front of the queue in a winding up. It also gives a secured creditor who has realised his security a claim for the unrealised part of his debt, up to a cap, alongside the workmen. It defines workmen, workmen's dues and the workmen's portion, and ends with an Illustration showing the arithmetic.
In the winding up of a company under the Act, workmen's dues are paid in priority to all other debts. A secured creditor who has realised a secured asset ranks pari passu with the workmen's dues for the unrealised part of his debt, or the workmen's portion of his security, whichever is less. A proviso moves certain sums, for two years before the winding up order or such other period as may be prescribed, ahead of even secured creditors, to be paid within thirty days of sale of assets. If assets are short, the debts abate in equal proportions.
Where section 326 sits
Section 326 is in Chapter XX (winding up), in the group of sections on preferential payments and priorities. It opens the priority ladder. Section 327 on preferential payments works "subject to the provisions of section 326" and shares its definitions of workmen, workmen's dues and workmen's portion; our post on section 324 covers the debts admissible to proof. Section 327(7), which was inserted by the Insolvency and Bankruptcy Code, 2016, is dealt with in the section 327 post and not here.
This article reads the section as printed in the Companies Act, 2013 as amended up to 29 July 2022 (the consolidated text consulted). The section stands as substituted by section 255 of, and the Eleventh Schedule to, the Insolvency and Bankruptcy Code, 2016, with effect from 15 November 2016. Winding up on the ground of inability to pay debts and voluntary winding up are now under the Code; see our post on section 255 and the Eleventh Schedule. No later amendment was found in the texts consulted; later amendments should be checked on the official text.
The procedure for proving debts and workmen's dues is in the Companies (Winding Up) Rules, 2020. Our post on rules 100 to 104 covers notice for proving debts, proof and workmen's dues. This article takes no period, form number or fee from the rules.
If you are a lender or employee representative weighing your position in a liquidation, a legal consultation is a sensible first step.
Sub-section (1): the two priority debts
"In the winding up of a company under this Act, the following debts shall be paid in priority to all other debts":
- (a) workmen's dues; and
- (b) where a secured creditor has realised a secured asset, so much of the debts due to that creditor as could not be realised by him, or the amount of the workmen's portion in his security (if payable under the law), whichever is less, pari passu with the workmen's dues.
So the secured creditor's claim under clause (b) arises only after he has realised a secured asset, and it is capped by the lesser of two figures.
The proviso: two years and thirty days
The sums referred to in sub-clauses (i) and (ii) of clause (b) of the Explanation, payable for a period of two years preceding the winding up order "or such other period as may be prescribed", shall be paid in priority to all other debts, "including debts due to secured creditors", within a period of thirty days of sale of assets, and shall be subject to such charge over the security of secured creditors as may be prescribed. Sub-clauses (i) and (ii) are wages and salary, including compensation under the Industrial Disputes Act, 1947, and accrued holiday remuneration.
Sub-section (2): order of payment and abatement
The debts payable under the proviso are paid in full before any payment is made to secured creditors. Thereafter the debts payable under sub-section (1) are paid in full, unless the assets are insufficient to meet them, in which case they "shall abate in equal proportions".
The Explanation: three definitions
For the purposes of sections 326 and 327:
- (a) "Workmen" means the employees of the company, being workmen within the meaning of clause (s) of section 2 of the Industrial Disputes Act, 1947.
- (b) "Workmen's dues" means the aggregate of: (i) wages or salary, including time or piece work and commission, and compensation under the Industrial Disputes Act, 1947; (ii) accrued holiday remuneration payable on termination of employment before or by the effect of the winding up order or resolution; (iii) subject to the stated exceptions, amounts due as compensation or liability for compensation under the Workmen's Compensation Act, 1923 for the death or disablement of a workman; and (iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the company.
- (c) "Workmen's portion", in relation to the security of a secured creditor, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of the workmen's dues and the debts due to the secured creditors.
The section names the Industrial Disputes Act, 1947 and the Workmen's Compensation Act, 1923 as printed. Check those laws as now in force before applying the definitions.
The Illustration
The section prints this Illustration. The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs.3,00,000. The aggregate of the amount of workmen's dues and the amount of debts due to secured creditors is Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000.
The section at a glance
| Part | What it says | Who benefits | Period as printed |
|---|---|---|---|
| (1)(a) | Workmen's dues paid in priority to all other debts | Workmen | No period printed |
| (1)(b) | Secured creditor's unrealised debt or workmen's portion, whichever is less, pari passu with workmen's dues | Secured creditor who has realised a secured asset | No period printed |
| Proviso | Sums in Explanation (b)(i) and (ii) paid ahead of all debts including secured creditors | Workmen | Two years before the winding up order or such other period as may be prescribed; within thirty days of sale of assets |
| (2) | Proviso debts first; then sub-section (1) debts in full or abating in equal proportions | Workmen, secured creditors | Not applicable |
| Explanation (a) to (c) | Workmen, workmen's dues, workmen's portion | All | Not applicable |
Worked example
Using invented names. Granite Forge Limited is being wound up by the Tribunal. Its bank, Metro Bank, holds security valued at Rs. 1,00,000 and is owed Rs. 3,00,000 in all; the workmen's dues come to Rs. 1,00,000. The bank realises the secured asset. Following the Illustration, the workmen's portion of the security is Rs. 25,000, which is one-fourth of the value of the security.
Under sub-section (1)(b), the bank may claim, pari passu with the workmen's dues, the lesser of the part of its debt it could not realise and the workmen's portion. The workmen's dues are first met in line with sub-section (2), and if the assets are not enough to meet the debts under sub-section (1), they abate in equal proportions. For the wages and salary and accrued holiday remuneration falling within the two-year window of the proviso, the amounts are paid ahead of the bank within thirty days of the sale of assets, subject to such charge over the bank's security as may be prescribed.
Common mistakes
- Treating secured creditors as always ahead. The proviso and sub-section (2) put certain workmen's dues ahead of them.
- Missing the cap in clause (b). The secured creditor's claim is the lesser of the unrealised debt and the workmen's portion.
- Using the wrong denominator for the workmen's portion. It is the workmen's dues over the aggregate of the workmen's dues and the debts due to the secured creditors, applied to the value of the security.
- Reading the "two years" and "thirty days" loosely. They are as printed: two years preceding the winding up order (or such other period as may be prescribed), and thirty days of sale of assets.
- Ignoring abatement. If assets are insufficient, the debts abate in equal proportions.
- Skipping the definitions. "Workmen" turns on the Industrial Disputes Act, 1947, and the other Acts named should be checked as now in force.
Need help with priorities in a liquidation?
If you hold secured debt, are owed wages or fund dues by a company in liquidation, or are advising the liquidator, we can work through the ranking under sections 326 and 327 and the proof of debts. Book a legal consultation.
Key takeaways
- Workmen's dues are paid in priority to all other debts in a winding up under the Act.
- A secured creditor who has realised a secured asset ranks pari passu for the lesser of the unrealised debt and the workmen's portion.
- Wages, salary and accrued holiday remuneration for the two years preceding the winding up order, or such other period as may be prescribed, rank ahead of secured creditors, to be paid within thirty days of sale of assets.
- If assets are short, the debts abate in equal proportions.
- The Illustration gives Rs. 25,000 as the workmen's portion on the stated figures.
Read next
- Section 327: preferential payments in winding up
- Section 329: transfers not in good faith void against the Company Liquidator
- Section 334: transfers after commencement of winding up void
- Section 324: debts admissible to proof
Disclaimer: Based on the Companies Act, 2013 as amended up to 29 July 2022 (the consolidated text consulted on 4 October 2026). Later amendments to the Act, the rules made under it and the Insolvency and Bankruptcy Code, 2016 should be checked. This article is general information, not legal advice; check the official text before acting.