Answer By law4u team
During liquidation under the Insolvency and Bankruptcy Code (IBC), the corporate debtor’s assets are converted into cash and distributed among various stakeholders. The distribution follows a strict legal hierarchy designed to ensure fair treatment of creditors and maximize value recovery.
Asset Distribution Process During Liquidation
Creation of Liquidation Estate:
Upon commencement of liquidation, all assets of the corporate debtor become part of the liquidation estate. The liquidator manages this estate.
Realization of Assets:
The liquidator sells the assets by auction, tender, or private sale, aiming to maximize proceeds.
Order of Priority for Distribution:
The IBC specifies a clear order for distributing proceeds from liquidation:
Liquidation Costs and Insolvency Resolution Process Costs:
Expenses related to the liquidation process and insolvency professional fees are paid first.
Secured Creditors:
Secured creditors are paid next from the proceeds of assets secured against their loans. They may enforce their security interest outside the liquidation if permitted.
Workmen’s Dues for 24 Months:
Wages and dues payable to employees (workmen) for the 24 months preceding liquidation are prioritized.
Unpaid Dues to Secured Creditors for 12 Months:
Any unpaid amounts to secured creditors related to services or supplies for 12 months before liquidation.
Financial Creditors:
Financial creditors without security interests are paid after secured creditors.
Operational Creditors:
Includes suppliers, service providers, and employees not covered under the workmen’s dues.
Government Dues:
Taxes, duties, and other statutory dues owed to government authorities.
Other Creditors:
Any remaining creditors and claimants.
Equity Shareholders:
If any surplus remains after all creditors are paid, it is distributed to equity shareholders.
Distribution According to Admitted Claims:
Only claims admitted by the liquidator after verification are eligible for distribution.
Proportional Distribution:
When funds are insufficient, payments are made on a pro-rata basis within each class of creditors.
Important Points:
- The order of priority under the IBC protects secured creditors and workmen while ensuring operational creditors also receive due payment.
- Liquidation costs have the highest priority to ensure smooth winding up.
- Government dues are settled before unsecured creditors.
- Equity shareholders receive payment only after all creditors are fully paid.
Example:
ABC Ltd. goes into liquidation with assets worth ₹10 crores and liabilities of ₹15 crores to various creditors. The liquidator first pays ₹50 lakhs towards liquidation costs. Secured creditors owed ₹6 crores receive payment from their secured assets. Workmen dues of ₹1 crore are then paid, followed by financial and operational creditors. Since assets are insufficient to cover all dues, operational creditors receive proportional payment. No amount remains for equity shareholders.
