Section 53 IBC Waterfall: Worked Examples with Figures

Waterfall questions are arithmetic, but they reward method. Take the proceeds, pay each class in order, and where a class cannot be paid in full, share what is left in proportion to the claims. The 2026 Amendment added two twists: relinquishing secured creditors rank in clause (b) only up to the value of their security, and contracts giving one secured creditor priority over another are now respected. The four questions below work through the figures.

1. The Law in Brief

• Order of priority. (a) CIRP and liquidation costs; (b) workmen's dues for 24 months and relinquishing secured creditors, equally; (c) employees' dues for 12 months; (d) unsecured financial creditors; (e) government dues for two years and unpaid secured balances, equally; (f) remaining debts; (g) preference shareholders; (h) equity shareholders or partners.
• Equal ranking. Debts in the same class are paid in full or, if the proceeds are insufficient, in equal proportion (Explanation)
• Contracts, section 53(2). Arrangements between recipients of equal ranking that disrupt the statutory order are disregarded; after 2026, Illustration I disregards an arrangement putting secured creditors ahead of workmen, and Illustration II respects an arrangement giving one secured creditor priority over another.
• Fee, section 53(3). The liquidator's fee is deducted proportionately from the proceeds payable to each class.

2. How Are Liquidation Proceeds Distributed?

• Issue. How the proceeds are distributed under section 53, applying the 2026 cap on secured priority.
• Law. Each class is paid in full before the next, and shared pro rata if insufficient. After 2026, AB Bank ranks under clause (b)(ii) only up to the value of its security, ₹400 crore, and as an unsecured financial creditor under clause (d) for the balance of ₹200 crore.
• Application. Clause (a): ₹20 crore, leaving ₹480 crore. Clause (b): workmen ₹60 crore and AB Bank ₹400 crore, total ₹460 crore, paid in full, leaving ₹20 crore. Clause (c): employees are owed ₹30 crore but only ₹20 crore remains, so each receives two-thirds of its claim. Nothing remains for clause (d), which now includes AB Bank's ₹200 crore balance and the unsecured creditors' ₹100 crore, or for clauses (e) and (f)
• Conclusion. Costs ₹20 crore; workmen ₹60 crore; AB Bank ₹400 crore; employees ₹20 crore; all others nil. Before 2026, AB Bank would have ranked in clause (b) for its full ₹600 crore and taken most of the proceeds.

Figure 1: Worked computation

3. How Do First and Second Charges Rank after 2026?

• Issue. How clause (b) is shared between workmen and secured creditors, and the effect of contractual priorities after 2026.
• Law. Clause (b) ranks workmen and relinquishing secured creditors equally, so if the amount is insufficient they share pro rata. Illustration I to section 53(2) disregards an arrangement putting secured creditors ahead of workmen. Illustration II respects an arrangement between secured creditors giving one priority over the other.
• Application. Clause (b) claims total ₹560 crore against ₹400 crore. Workmen receive 60/560 of ₹400 crore, about ₹42.86 crore; the secured class receives about ₹357.14 crore. Within the secured class, EF Bank's first charge is respected, so it receives ₹300 crore and GH Bank the balance of about ₹57.14 crore. The agreement putting the banks ahead of workmen is disregarded.
• Conclusion. Workmen about ₹42.86 crore; EF Bank ₹300 crore; GH Bank about ₹57.14 crore, with its unpaid ₹142.86 crore ranking as unsecured. Before 2026, the NCLAT in Technology Development Board v Anil Goel (2021) had held that relinquishing creditors share equally regardless of charges, a question the 2026 Illustration II now settles the other way.

Figure 2: Sharing clause (b) between workmen and secured creditors

4. How Do Government Dues Share in Clause (e)?

• Issue. How clause (e) and clause (f) are applied.
• Law. Clause (e) ranks equally (i) government dues for the two years before the liquidation commencement date and (ii) debts owed to secured creditors for amounts unpaid after enforcement. After 2026, government dues rank under (e)(i) whether or not secured, with the balance under clause (f), which also covers remaining debts such as trade creditors.
• Application. Clause (e) claims are ₹20 crore and ₹40 crore, total ₹60 crore, against ₹30 crore available, so each receives half. Nothing remains for clause (f)
• Conclusion. Two years' GST ₹10 crore; the bank's shortfall ₹20 crore; older GST and trade creditors nil.

5. How Is the Liquidator's Fee Borne?

• Issue. How the liquidator's fee is borne, and how surplus is distributed among shareholders.
• Law. Section 53(3) requires the liquidator's fee to be deducted proportionately from the proceeds payable to each class of recipients. After all debts, preference shareholders are paid under clause (g), and equity shareholders or partners take the remainder under clause (h)
• Application. The fee must be spread across all recipients in proportion to what each receives, not charged only to shareholders. After the fee, ₹216 crore is available; debts of ₹180 crore are paid, subject to their proportionate share of the fee; preference shareholders are paid ₹20 crore, subject to theirs; the balance goes to equity shareholders.
• Conclusion. The liquidator's proposal is wrong; the fee is deducted proportionately from all classes. Creditors are paid in full less their share of the fee, preference shareholders then receive up to ₹20 crore, and equity shareholders take what remains.

6. Frequently Asked Questions

What is the meaning of workmen's dues?

The same as in section 326 of the Companies Act, 2013, by the Explanation to section 53.

Do statutes giving priority to other dues override section 53?

No. Section 53, read with section 238, prevails (Paschimanchal Vidyut Vitran Nigam v Raman Ispat, 2023).

Is the waterfall relevant in a resolution plan?

Yes, as the benchmark for the minimum payments to operational and dissenting financial creditors (Topic 115).

7. Related Topics

• Topic 57: Section 53. The waterfall mechanism.
• Topic 127: Secured Creditor in Liquidation. Section 52.
• Topic 129: Liquidator's Claims Decisions, Asset Sales and Dissolution. Claims, sales and dissolution.