Section 327 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 327 lists the debts that must be paid ahead of ordinary creditors when a company is wound up under the Companies Act. The list covers government dues for the last twelve months, employees' wages for up to four months, holiday remuneration, contributions such as ESI, compensation, employee fund dues and investigation expenses. Sub-section (7) says that sections 326 and 327 do not apply where the liquidation is under the IBC.
In a winding up, and subject to section 326 (workmen's dues and certain secured creditors' dues, which come first), the debts in section 327(1) are paid in priority to all other debts. They rank equally and are paid in full unless assets fall short, when they abate in equal proportions. If the assets available for general creditors are insufficient, they also take priority over holders of debentures under a floating charge. Sections 326 and 327 do not apply to liquidation under the IBC.
Start with section 327(7): the IBC cut-off
Sub-section (7), inserted by the Insolvency and Bankruptcy Code, 2016 with effect from 15 November 2016, reads: "Sections 326 and 327 shall not be applicable in the event of liquidation under the Insolvency and Bankruptcy Code, 2016". Two consequences follow.
- If a company is being liquidated under the IBC, the order of payment is the one laid down in the Code's liquidation waterfall, not section 327. See the waterfall under section 53 of the IBC.
- Section 327 governs winding up by the Tribunal under the Companies Act, which continues on the grounds left in section 271 (see grounds for winding up by the Tribunal). For companies wound up on those grounds, it still decides who is paid first.
The definition of "relevant date" was also substituted by the IBC, and now refers to winding up by the Tribunal, as set out below.
If you are a creditor, employee or tax authority in a winding up, or a director asking what ranks ahead of what, our legal dispute resolution team can help you check the priority of your claim.
Section 326 comes first
Section 327 opens with "subject to the provisions of section 326". The consolidated text shows section 326 as substituted by the IBC. In the winding up of a company under the Companies Act, workmen's dues, and the debts of a secured creditor who has realised a secured asset to the extent of the shortfall or the workmen's portion in his security (whichever is less, paid pari passu with workmen's dues), are paid in priority to all other debts. The proviso covers certain workmen's dues for two years before the winding-up order or another prescribed period. Section 326(2) then says those proviso payments are made in full before anything goes to secured creditors. Section 327 ranks below this.
The list in section 327(1)
| Clause | Preferential debt | Key limits in the text |
|---|---|---|
| (a) | Revenues, taxes, cesses and rates due to the Central Government, a State Government or a local authority | Due at the relevant date and having become due and payable within the twelve months immediately before that date |
| (b) | Wages or salary, including piece-work wages and commission, of any employee for services rendered | Due for a period not exceeding four months within the twelve months before the relevant date; the amount payable to any workman is capped at such amount as may be notified |
| (c) | Accrued holiday remuneration payable to an employee (or to someone claiming under him if he dies) | On termination of employment before or by the winding-up order, or the dissolution of the company |
| (d) | Contributions payable by the company as employer under the Employees' State Insurance Act, 1948 or any other law | For the twelve months immediately before the relevant date; not applicable if the company is wound up voluntarily merely for reconstruction or amalgamation |
| (e) | Compensation under the Workmen's Compensation Act, 1923 for death or disablement of any employee | Not applicable if the company has, at the commencement, a contract with an insurer with rights capable of transfer to the workmen |
| (f) | Sums due to any employee from the provident fund, pension fund, gratuity fund or any other welfare fund maintained by the company | No time limit stated in the clause |
| (g) | Expenses of any investigation held under sections 213 and 216, so far as payable by the company | Only to the extent payable by the company |
The "relevant date"
Under Explanation clause (c), as substituted, the "relevant date" for a company wound up by the Tribunal is the date of appointment (or first appointment) of a provisional liquidator, or, if none was appointed, the date of the winding-up order. There is an exception: unless, in either case, the company had already commenced to be wound up voluntarily before that date under the IBC. The twelve-month and four-month look-backs in clauses (a), (b) and (d) are counted back from this date. So an early appointment of a provisional liquidator can fix an earlier relevant date than the winding-up order would.
"Employee" versus "workman"
Explanation clause (b) says "employee" does not include a workman. Workmen's dues are dealt with in section 326; section 327(1) covers employees. However, clause (b) of section 327(1) also refers to "any workman" in its cap, so read the text carefully when a person might be treated as either. Meanings of "workman" and "workmen's dues" are in the Explanation to section 326.
Sub-sections (2) to (6)
| Sub-section | Rule |
|---|---|
| (2) | A person who advanced money to pay wages, salary or holiday remuneration has priority for the amount by which the employee's priority was reduced by that payment |
| (3)(a) | The section's debts rank equally among themselves, are paid in full, and if assets are insufficient abate in equal proportions |
| (3)(b) | If assets available to general creditors are insufficient, these debts have priority over debenture-holders under a floating charge and are paid out of property comprised in or subject to that charge |
| (4) | Subject to retention of sums for costs and expenses of winding up, the debts are discharged forthwith so far as assets suffice; formal proof is not required for clause (d) debts except as prescribed |
| (5) | If a landlord or other person has distrained on goods within three months before the winding-up order, the preferential debts are a first charge on the goods or their sale proceeds; the landlord gets the same priority in respect of any money paid under that charge |
| (6) | Remuneration for a period of holiday or absence on medical grounds through sickness or other good cause is deemed wages |
Sub-section (3)(b) is important for lenders. A floating charge does not protect the holder against the preferential debts if general assets run short. Secured lenders should factor this into lending decisions.
Practical examples
Example 1: tax and wages. A company is wound up by the Tribunal and a provisional liquidator is appointed on 1 March. Government dues that became payable in the twelve months before 1 March, and employees' salary for up to four months within that year, are preferential debts. Salary for a longer unpaid period is not preferential beyond the four-month limit.
Example 2: shortfall. The assets available for general creditors are not enough to meet the preferential debts. They abate in equal proportions, and a floating-charge debenture-holder receives only after they are met out of the charged property.
Example 3: IBC liquidation. A company is liquidated under the IBC. Section 327 does not apply, and the Code's own order of payment governs.
Proposed change
No clause of the Corporate Laws (Amendment) Bill, 2026 amends section 327 or section 326. The Bill is pending and is not law as on 30 September 2026.
Need help with priority of claims?
Priority questions turn on the relevant date, the type of debt and the security held. We can review the facts and explain where a claim is likely to rank under the Companies Act. Speak to us about legal dispute resolution.
Key takeaways
- Section 327 sets the preferential debts in a winding up under the Companies Act, subject to section 326.
- Tax and similar dues are preferential for the twelve months before the relevant date; wages for up to four months within that year.
- Preferential debts rank equally and abate proportionately if assets are short.
- They rank ahead of floating-charge debenture-holders when general assets are insufficient.
- The relevant date is the first provisional liquidator's appointment, or the winding-up order if none.
- Sections 326 and 327 do not apply to liquidation under the IBC.
- The Bill, 2026 does not amend these sections and is not law.
Read next
- Section 324: Debts admissible to proof in winding up
- Section 328: Fraudulent preference
- Preferential payments in winding up: who gets paid first
- Distribution of assets in winding up: priority of payments
Disclaimer: Based on the Companies Act, 2013 as amended up to 1 April 2021 (official consolidated text), read with later developments noted in the article; proposals in the Corporate Laws (Amendment) Bill, 2026 are pending and not law as on 30 September 2026. Verify current notifications and rules before acting.