The Liquidator and Preferential Payments — Company Law Notes

The Liquidator and Preferential Payments

When a company dies, someone must run the estate — sell the assets, chase the debtors, and pay the creditors in the exact order the law commands. That person is the liquidator, the company’s undertaker and administrator rolled into one. Pay the wrong creditor first and he answers for it.

The liquidator

The liquidator is the person appointed to conduct the winding up — to take custody of the company’s assets, realise them, settle the list of creditors and contributories, pay the debts in order, and distribute any surplus. In Tribunal winding up he is the Company Liquidator (from the panel of insolvency professionals); in voluntary winding up he is appointed by the members/creditors.

Appointment. By the Tribunal (compulsory winding up) or by the members/creditors (voluntary). On appointment, the powers of the Board cease and vest in the liquidator.

Powers and functions (s.290 and related):

• to carry on the business so far as necessary for beneficial winding up;
• to sell the company’s property and things in action;
• to institute or defend legal proceedings in the company’s name;
• to raise money on the security of assets;
• to settle the list of contributories and make calls;
• to pay creditors and distribute surplus; to do all acts necessary for winding up.

Powers exercisable only with sanction vs without sanction. Some powers the liquidator may exercise freely; others (e.g. carrying on business, compromising debts, paying a class of creditors in full) require the sanction of the Tribunal or the committee of inspection. Acting without required sanction exposes the liquidator to liability.

Preferential payments (s.327)

When distributing the assets, certain debts must be paid in priority to all others (after the costs of winding up and secured creditors). These preferential payments include:

• wages/salaries of employees for a limited period, up to a ceiling;
• amounts due to employees under provident fund, pension, gratuity and other welfare funds;
• compensation for workmen for death/disablement;
• certain taxes and revenues due to government within a period before winding up.

(Under the IBC 2016, the waterfall in s.53 governs the priority in insolvency liquidations: liquidation costs → secured creditors/workmen dues → other employee dues → unsecured creditors → government dues → residual to equity.)

Section 327(1): in a winding up, “there shall be paid in priority to all other debts… all revenues, taxes… all wages or salary… of any employee… all accrued holiday remuneration…” (preferential payments).

In Simple Terms: The liquidator is the company’s undertaker — he takes over from the Board, sells the assets, sues and defends, and pays out the estate. He needs the Tribunal’s sanction for the big steps. And he must pay in a fixed order: costs and secured creditors first, then preferential debts (employees’ wages, PF/gratuity, taxes), then ordinary creditors, and only then the members.

flowchart TD
    ROOT["Liquidator"]:::root
    ROOT --> A["Appointment: Tribunal / members / creditors"]:::leaf
    ROOT --> B["Powers (s.290): sell, sue, carry on, settle list, distribute"]:::leaf
    ROOT --> C["Big powers need Tribunal sanction"]:::mid2
    ROOT --> D["Order of payment"]:::mid
    D --> D1["First: winding-up costs + secured creditors"]:::leaf
    D --> D2["Then: preferential payments (s.327) - wages, PF, taxes"]:::leaf
    D --> D3["Then: unsecured creditors -> surplus to members"]:::leaf
    classDef root fill:#FFF8DC,stroke:#000,color:#000;
    classDef mid fill:#DCFCE7,stroke:#166534,color:#000;
    classDef mid2 fill:#FDE2E2,stroke:#991B1B,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

🧩 WORKED EXAMPLE — order of payment in winding up

Facts. On winding up, a company’s realised assets must cover: liquidation expenses, a secured creditor, employees’ unpaid wages, government tax, and ordinary trade creditors.

Rule. Payment follows a fixed order: winding-up costs and secured creditors first, then preferential payments (wages, PF, taxes — s.327), then unsecured creditors, then members.

Apply. The liquidator pays expenses and the secured creditor, then the employees’ wages and government tax as preferential debts, then the trade creditors from any balance.

Conclusion. Trade (unsecured) creditors rank after preferential debts; if funds run out at the preferential stage, unsecured creditors get nothing.

Case Laws

• Knowles v Scott (1891) — a liquidator is an agent, not a trustee, but owes duties in the winding up.
• Pantmaenog Timber Co., Re (2003) — the liquidator’s powers to investigate and recover.

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