Waterfall Mechanism

                                 

Introduction

The Waterfall mechanism under Insolvency and Bankruptcy Code 2016 provides a structure wherein the case of liquidation of the company gives priority to higher tired creditors over lower tired creditors. Section 53 of the Insolvency and Bankruptcy code 2016 deals with the distribution of proceeding from the sale of the liquidation assets. After the insolvency of a company and realization of the amount from the sale of liquidation assets a question to whom an account is settled first arises, Sec 53 of IBC gives an order of priority regarding whom gets paid first from such amount. Under this section, which deals with the waterfall mechanism, the topmost priority, however, is given to costs related to the liquidation process and dues of workmen of the corporate debtor. The dues of the workmen include all their salaries, provident, pension, retirement, and gratuity fund, as well as any other funds maintained for the welfare of the workmen.

Provision of Section 53

Sub-clause 1 of section 53 deals with the order of priority, states as 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

  • the insolvency resolution process costs and the liquidation costs paid in full
  • the following debts which shall rank equally between and among the following:—
  1. workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
  2. debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52
  • wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date
  • financial debts owed to unsecured creditors
  • the following dues shall rank equally between and among the following:—
  1. 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
  2. debts owed to a secured creditor for any amount unpaid following the enforcement of security interest
  • Any remaining debts and dues
  • Preference shareholders, if any
  • Equity shareholders or partners, as the case may be.

Priorities u/s 53 (1) are in steps from top to bottom as follows :

Conclusion

Section53 of IBC provides an order of priorities regarding the repayment of dues to the creditors of the company. This section deals in prioritizing the repayment of dues to the needed creditors of that company.

 

 

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