WATERFALL DISTRIBUTION UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

All monies, including cheques and demand drafts, received through sell of assets of the Corporate Debtor have to be deposited in bank account opened in the name of Corporate Debtor following by word “in liquidation” in a scheduled bank. Such monies have to be deposited without any deduction and not later than next working day.

The Liquidator has to maintain a cash of one lakh rupees or such higher amount as may be permitted by the Adjudicating Authority to meet Liquidation Costs.  All payments out of the account by the Liquidator above five thousand rupees have been made by cheques drawn or online banking transactions against the bank account.

The Liquidator can commence distribution only after List of Stakeholders and the Asset Memorandum has been filed with the Adjudicating Authority.  The Liquidator has to distribute the proceeds from realisation within ninety days from the receipt of amount to the stakeholders.

DISTRIBUTION OF ASSETS

Proceeds from sale of assets has to be distributed as per order of priority given under Section 53. Section 53 is reproduced as under:

Distribution of assets. – (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely: –

 (a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following: (i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

 (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

 (e) the following dues shall rank equally between and among the following: –

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the Liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.

 Explanation. – For the purpose of this section-

(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are 59 insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013 (18 of 2013)

Order of Priority

Section 53 (1) provides for order of priority in distribution of assets to creditors of a Corporate Debtor. The proceeds from sale of assets have to be paid first to a creditor who rank higher in the order of priority. If there remains any balance of proceeds, next creditor in order of priority will be paid.  Because of priority involved in payment to creditors, it is also called waterfall distribution.

Firstly, the Insolvency Resolution Process Costs and the Liquidation Cost have to be paid in full.

Secondly, workmen’s dues for the period of twenty-four months preceding the liquidation commencement date and debts owed to a Secured Creditor if such Secured Creditor has relinquished security have to paid.

Thirdly, wages and any unpaid dues owned to employees other than workmen for the period of twelve months preceding the liquidation commencement date have to be paid.

Fourthly, Financial Debts owed to the unsecured Creditor have to be paid

Fifthly, any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of the State in respect of whole or any part of the period of two years preceding the liquidation commencement date and debts owed to a Secured Creditor for any amount unpaid following the enforcement of security interest have to be paid

Sixthly, any remaining debts and dues have to be paid.

Seventhly, preference shareholders have to be paid.

Eighthly, equity shareholders or partners, as the case may be, have to be paid.

Disregard of Contractual arrangement

Section 53 (2) provides that the Liquidator has to disregard any contractual arrangements between the recipients with equal ranking, which disrupts the order of priority.

Deduction of Fee payable to the Liquidator

Section 53 (3) provides that fees payable to the Liquidator has to be deducted proportionately from the proceeds payable to each class of recipients and the proceeds to the relevant recipient will be distributed after such deduction.

Pari Passu Distribution at each stage

Section 53 envisages Pari passu distribution at each stage. As per Explanation (i) to Section 53, at   each stage of distribution of   the proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full.

Workmen Dues

As per Explanation (ii) to Section 53, workmen’s dues have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. 

Return of Money by a Creditor

A stakeholder has to forthwith return any money received by him in distribution, which he was not entitled to at the time of distribution or subsequently became not entitled to.

Inter se distribution among Secured Creditors

A charge to property of the Corporate Debtor can be first charge or second charge of third charge.  NCLAT in Technology Development Board¹ has held that such differentiation is irrelevant for the purposes of Section 53 (1). The relevant para is as under:

10. In “ICICI Bank vs. Sidco Leathers Ltd. & Ors. (2006) 10 SCC 452”, the Hon’ble Apex Court, while taking note of Section 48 of Transfer of Property Act, observed that the claim of first charge holder shall prevail over the claim of the second charge holder and where debts due to both the first charge holder and the second charge holder are to be realised from the property belonging to the mortgager, the first charge holder will have to be repaid first. The Hon’ble Apex Court observed that while enacting the Companies Act parliament cannot be held to have intended to deprive the first charge holder of the said right. Such a valuable right must be held to have been kept preserved. It referred to an earlier judgment titled ‘Workmen of Firestone Tyre and Rubber Company of India vs. Management & Ors.’ observing that if such valuable right of first charge holder was intended to be taken away, Parliament, while amending the Companies Act would have stated so explicitly. The view taken by the Adjudicating Authority on the basis of judgment of Hon’ble Apex Court in “ICICI Bank vs. Sidco Leathers Ltd. (supra)” (which is pre-IBC), ignoring the mandate of Section 53 of I&B Code which has an overriding effect and came to be enacted subsequent to the aforesaid judgment rendered by Hon’ble Apex Court explicitly excluding operation of all Central and State legislations having provisions contrary to Section 53 of I&B Code, is erroneous and cannot be supported.

Dues of Workmen/Employees towards Provident Fund, Gratuity Fund and Pension Fund

Dues of Workmen/Employees towards provident fund, gratuity fund and pension fund does not form part of Liquidation Estate under Section 36 (4)   and hence Section 53 will not apply to such dues.  The Supreme Court in Sunil Kumar Jain² has held as under:

13. Now so far as the dues of the workmen/employees on account of provident fund, gratuity and pension are concerned, they shall be governed by Section 36(4) of the IB Code. Section 36(4)(iii) of the IB Code specifically excludes “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund”, from the ambit of “liquidation estate assets”. Therefore, Section 53(1) of the IB Code shall not be applicable to such dues, which are to be treated 32 outside the liquidation process and liquidation estate assets under the IB Code. Thus, Section 36(4) of the IB Code has clearly given outright protection to workmen’s dues under provident fund, gratuity fund and pension fund which are not to be treated as liquidation estate assets and the Liquidator shall have no claim over such dues. Therefore, the concerned workmen/employees shall be entitled to provident fund, gratuity fund and pension fund from such funds which are specifically kept out of liquidation estate assets and as per Section 36(4) of the IB Code, they are not to be used for recovery in the liquidation.

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1. Technology Development Board vs Anil Goel; CA (AT) (Ins) 731 of 2020
2. Sunil Kumar Jain Vs. Sundaresh Bhatt & Ors; Civil Appeal No. 5910 of 2019