Privilege leave encashment was not a preferential debt in winding up absent any earmarked fund or statutory priority.

Employees' claim for money equivalent of unavailed privilege leave was not a preferential debt in winding up. The court held that, although the leave accrued under service conditions and leave provisions, the company had no earmarked fund or trust from which the amount was payable, so the liability was not impressed with a trust. The claim also did not qualify under the Companies Act preferential categories for wages, salary, provident fund, pension fund, gratuity fund, or similar employee welfare funds. The later express provision for accrued holiday remuneration in the Companies Act, 1956 underscored that the earlier Act contained no such entitlement. The employees were therefore not entitled to priority payment.

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Issues: Whether the employees' claim for money equivalent of unavailed privilege leave could be treated as a preferential debt in winding up and paid in priority under the Companies Act.

Analysis: The accumulated leave arose from service conditions and the statutory leave provisions, but the company had not constituted or maintained any fund for the employees out of which the amount was payable. In the absence of such a fund, the liability could not be treated as impressed with a trust. The claim also did not fall within section 230(1)(b), because it was not wages or salary for services rendered within the prescribed period, and it did not fall within section 230(1)(e), because no provident fund, pension fund, gratuity fund, or other employee welfare fund existed. The court noted that the Companies Act, 1956 later made express provision for accrued holiday remuneration, which highlighted the absence of such a provision in the earlier Act.

Conclusion: The employees were not entitled to preferential payment of the amount claimed for unavailed leave.

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