Answer By law4u team
The Insolvency and Bankruptcy Code (IBC) prescribes a specific order of priority for distributing assets of a corporate debtor during liquidation. This hierarchy ensures fair and legally compliant treatment of creditors and stakeholders, balancing their interests in the recovery process.
Order of Priority in Asset Distribution Under IBC
Liquidation Costs and Insolvency Resolution Costs:
All costs associated with the liquidation process, including fees payable to the liquidator and insolvency professionals, are paid first to ensure smooth and effective administration.
Secured Creditors (Under Certain Conditions):
Secured creditors with valid security interests are next in line. They have the option to enforce their security outside liquidation or receive proceeds from the liquidation estate.
Workmen’s Dues for 24 Months:
Salaries and wages due to workmen for the 24 months preceding the liquidation commencement date receive high priority.
Unpaid Dues to Secured Creditors for 12 Months:
Any operational dues owed to secured creditors relating to goods or services supplied during the 12 months before liquidation.
Financial Creditors (Unsecured):
Financial creditors without security interests receive payment following secured creditors and workmen dues.
Operational Creditors:
These include suppliers, service providers, and employees not categorized as workmen. They are paid after financial creditors.
Government Dues:
Statutory dues such as taxes, cess, and other government claims.
Other Creditors:
Creditors not covered above, including contingent or unsecured claims.
Equity Shareholders:
Only after all creditor claims are fully satisfied, any remaining surplus is distributed to equity shareholders.
Important Notes:
- The IBC priority order differs from traditional bankruptcy laws, emphasizing protection for employees and secured creditors.
- Liquidation costs always take precedence to facilitate the process.
- Workmen’s dues get priority to protect employee interests.
- Equity shareholders are last in line and often receive nothing if liabilities exceed assets.
Example:
A company under liquidation has assets worth ₹12 crores and liabilities to various stakeholders. The liquidator pays ₹1 crore towards liquidation expenses first. Secured creditors owed ₹5 crores receive payment from their secured assets. Workmen dues amounting to ₹2 crores are paid next. Financial creditors get ₹2.5 crores, followed by operational creditors paid ₹1 crore. Government dues of ₹0.5 crore are cleared next. No surplus remains for equity shareholders.
