Liquidation Costs and Creditor Oversight under IBC

Liquidation costs sit at the very top of the waterfall, so every rupee spent on the process is a rupee less for creditors. That makes two questions important: what may be charged as a cost, and who keeps watch over the liquidator who incurs it. For most of the Code's history, oversight was weak, with the liquidator consulting stakeholders but not bound by them. In 2026, the committee of creditors was given a supervisory role. This note explains liquidation costs and the evolution of creditor oversight.

1. Definition of Liquidation Cost

• Section 5(16). Liquidation cost means any cost incurred by the liquidator during the period of liquidation, subject to such regulations as may be specified by the IBBI.
• Regulation 2(1)(ea). The Liquidation Process Regulations list what liquidation cost includes, and what it does not, such as the costs of a compromise or arrangement under section 230 of the Companies Act.
• Priority. Liquidation costs rank in section 53(1)(a), together with insolvency resolution process costs, and are paid in full before any creditor (Topic 57)

Figure 1: Components of liquidation cost

2. What Liquidation Cost Includes

• Fees. The fee payable to the liquidator, and the remuneration of professionals appointed by the liquidator.
• Claims. Costs incurred in verifying and determining claims.
• Preservation. Costs of preserving and protecting the assets, including secured assets, such as security, insurance and maintenance.
• Interim finance. Interest on interim finance for up to twelve months, or until it is repaid, whichever is shorter (Topic 31)
• Contributions. Amounts repayable to creditors who contributed to meet a shortfall in liquidation costs.
• Residuary. Any other cost essential to the completion of the liquidation.
• 2026 change. The Fourth Amendment Regulations of 2026 omitted the item covering the costs of running the business of the corporate debtor as a going concern, consistent with the removal of going concern sales in 2025; commentators have noted uncertainty about how such costs, if incurred, will now be treated (Topic 59)

3. Funding a Shortfall and Controlling Costs

• Regulation 2A. Where the liquid assets are not enough to meet liquidation costs, the liquidator may call on creditors to contribute; under the original regulation, this fell on financial creditors that were financial institutions, in proportion to their debt, and contributions were repayable with interest as part of liquidation cost.
• After 2026. The liquidator may call on members of the committee of creditors to contribute, on terms set by the committee.
• Prior approval. The liquidator must obtain the committee's approval before incurring liquidation costs, and explain any overrun against the estimate at each meeting.
• Liquidator's fee. Under Regulation 4 as amended in 2026, the committee may fix the fee at its first meeting after appointment; otherwise it is a percentage of amounts distributed to stakeholders, tiered by size and declining for later distributions.

4. Oversight before 2026

Figure 2: How creditor oversight of liquidation evolved

• Section 35(2). The liquidator had the power to consult any of the stakeholders entitled to a distribution under section 53, but any such consultation was not binding on him.
• Regulation 31A, 2019. The stakeholders consultation committee was introduced in July 2019, constituted by the liquidator from representatives of secured and unsecured financial creditors, workmen, employees, government, other operational creditors and shareholders or partners, with voting shares based on admitted claims.
• Its role. The liquidator consulted the committee on matters such as the appointment of professionals, the manner of sale of assets and the conduct of litigation; its advice was not binding, but the liquidator had to record reasons for departing from it and report them to the NCLT and the IBBI; it also fixed the liquidator's fee.
• Criticism. Creditors bore the cost of the process but could not direct it, and liquidations often ran for years.

5. The Committee of Creditors in Liquidation

Figure 3: From consultation to supervision

• Section 21(11). Inserted in 2026, it provides that the committee of creditors constituted in the CIRP shall also supervise the conduct of the liquidation; the IBBI may permit other classes of creditors to attend meetings without voting rights.
• Section 35(2). Substituted to make the liquidator subject to the supervision of the committee in the manner specified.
• Regulations. The Fourth Amendment Regulations, notified on 1 June 2026, omitted Regulation 31A, continued the committee into liquidation with secured creditors who have not relinquished their security excluded except for any unsecured portion, required its first meeting within seven days of the liquidation commencement date, and made key decisions, such as private sales and replacement of the liquidator, subject to 66 per cent approval.
• Effect on other stakeholders. Workmen, employees, government and operational creditors lost the formal advisory voice they had in the stakeholders consultation committee, while their priority in the waterfall is unchanged.

6. Frequently Asked Questions

Is the liquidator bound by what creditors say about the sale of assets?

Before 2026, no; the stakeholders consultation committee only advised. After 2026, the liquidator acts under the supervision of the committee of creditors, and a private sale needs its prior approval by 66 per cent, subject to limited exceptions.

What if the corporate debtor has no cash to pay for security guards at its plant?

The cost of preserving assets is a liquidation cost. If liquid assets are insufficient, the liquidator may call on members of the committee to contribute, and their contributions are repaid as part of liquidation cost.

Who fixes the liquidator's fee?

After 2026, the committee of creditors may fix it at its first meeting; otherwise it is a percentage of amounts distributed, under Regulation 4. Before 2026, the stakeholders consultation committee fixed it where the CoC had not.

Do workmen still have a say in liquidation after 2026?

Not through a formal committee vote. The IBBI may permit other classes of creditors to attend committee meetings without voting rights, but the stakeholders consultation committee has been removed.

7. Related Topics

• Topic 31: Interim Finance and Process Costs. Costs during the CIRP.
• Topic 54: The Liquidator. Appointment, powers and duties.
• Topic 57: Section 53. The waterfall mechanism.