Provisions Applicable to Every Mode of Winding Up

In one line

Every claim, however contingent, may be proved; workmen's dues and part of a secured creditor's shortfall are paid before everything else; then taxes, wages, holiday pay, insurance contributions, compensation, welfare fund dues and investigation expenses; preferences given within six months, transfers not in good faith within a year and floating charges created within twelve months can be undone; onerous property may be disclaimed; and the officers who caused the failure can be punished, made personally liable without limit, and ordered to restore what they took.

In exam wording: section 326 is overriding preferential payments, section 327 preferential payments, sections 328 to 335 the avoidance provisions, section 333 disclaimer of onerous property, and sections 336 to 341 the offences and personal liability.

Why the law has this at all

The general rule of a winding up is that the unsecured creditors share the assets rateably, each taking the same proportion of his debt. That rule is fair between creditors who lent money on the same terms, and unfair in two situations the Act therefore corrects.

The first is the creditor who could not choose. A workman did not lend the company anything; he worked for wages he has already earned, and he has no way of securing himself. The State did not lend either; taxes accrue by law. So sections 326 and 327 lift them out of the ordinary queue.

The second is the creditor who was preferred. A company that knows it is failing can pay a friendly creditor in full, mortgage its assets to a director, or transfer a factory at an undervalue, and the rateable rule is defeated before the winding up begins. Sections 328 to 335 look back in time and undo those transactions, each with its own period.

And the third correction is not about creditors at all. A company fails because people ran it badly or dishonestly, and the corporate form should not shelter them. Sections 336 to 341 make them criminally liable, personally liable without limitation, and liable to restore the money.

Some words this chapter uses

To prove a debt is to establish it in the winding up. The relevant date is defined in the Explanation to section 327. Workmen's dues and workmen's portion are defined in the Explanation to section 326. A fraudulent preference is a transaction putting a creditor in a better position than he would otherwise have been. A floating charge is one that hovers over a class of assets until it crystallises. Onerous property is property that costs more to hold than it is worth. Misfeasance is a wrongful act in the performance of an office.