Section 53 IBC: The Waterfall Mechanism in Liquidation

When the liquidator sells the estate, the proceeds flow down a fixed order of priority, filling each class in full before anything reaches the next. Section 53 sets out this waterfall. It overrides any other law, reflects deliberate policy choices, such as ranking unsecured financial creditors above government dues, and serves as the benchmark for the minimum payments under resolution plans. This note explains each class, the rules that operate within the waterfall and the 2026 clarifications.

1. The Overriding Rule

Section 53(1) opens with the words notwithstanding anything to the contrary contained in any law enacted by Parliament or any State Legislature for the time being in force. The proceeds from the sale of liquidation assets must be distributed in the order of priority it lays down, within the period and in the manner specified. In Paschimanchal Vidyut Vitran Nigam v Raman Ispat (2023), the Supreme Court relied on this clause and section 238 to hold that dues under other statutes cannot claim a higher priority in liquidation (Topic 43).

2. The Order of Priority, Section 53(1)

Figure 1: The waterfall under section 53(1)

• (a) Costs. The insolvency resolution process costs and the liquidation costs, paid in full (Topics 31 and 58)
• (b) Workmen and relinquishing secured creditors. Ranking equally: (i) workmen's dues for the 24 months preceding the liquidation commencement date; and (ii) debts owed to a secured creditor who has relinquished its security under section 52.
• (c) Employees. Wages and unpaid dues owed to employees other than workmen for the 12 months preceding the liquidation commencement date.
• (d) Unsecured financial creditors. Financial debts owed to unsecured creditors.
• (e) Government and unpaid secured balance. Ranking equally: (i) amounts due to the Central and State Governments, including amounts to be received in the Consolidated Funds, for the whole or part of the two years preceding the liquidation commencement date; and (ii) debts owed to a secured creditor for any amount unpaid following enforcement of its security.
• (f) Remaining debts. Any remaining debts and dues, which include the claims of operational creditors other than workmen, employees and government.
• (g) and (h) Shareholders. Preference shareholders, and then equity shareholders or partners.

3. Rules within the Waterfall

Figure 2: How the waterfall operates

• Equal ranking. Debts ranking equally are paid in full, or, if the proceeds are insufficient, reduced in equal proportion (Explanation, clause (i))
• Workmen's dues. The term has the same meaning as in section 326 of the Companies Act, 2013 (Explanation, clause (ii))
• Liquidator's fee. Under section 53(3), the fee is deducted proportionately from the proceeds payable to each class of recipients, and the balance is distributed.
• Contractual arrangements. Under section 53(2), any contractual arrangement between recipients of equal ranking that disrupts the order of priority is disregarded by the liquidator.

4. Priority among Secured Creditors

Figure 3: The 2026 Illustrations to section 53(2)

• The controversy. Where first and second charge holders both relinquished their security, the question was whether they shared pro rata in clause (b) or whether the first charge holder was paid first; in Technology Development Board v Anil Goel (2021), the NCLAT held that relinquishing secured creditors rank equally regardless of their charges, but the Supreme Court stayed that order, and other decisions differed.
• The 2026 answer. Illustration I to section 53(2) states that an arrangement putting secured creditors ahead of workmen is disregarded, since it disturbs the statutory parity in clause (b); Illustration II states that an arrangement between two secured creditors giving one priority over the other is not disregarded.
• Effect. Inter se priority agreed among secured creditors, such as first and second charges, is respected in the distribution, while the statutory parity between secured creditors and workmen cannot be altered by contract.

5. Other 2026 Clarifications

• Value of relinquished security. A relinquishing secured creditor ranks under clause (b)(ii) only up to the value of its security, and for the balance as an unsecured creditor (Topic 56)
• Government dues. Government dues for the two years before the liquidation commencement date rank under clause (e)(i) whether or not they are secured, and whether any security arises by agreement or by operation of law, with the remainder under clause (f) (Topic 43)

6. The Policy behind the Order

• Workmen with secured creditors. Workmen are protected for two years of dues, as under section 326 of the Companies Act, while secured creditors who give up their security are rewarded with a high rank.
• Financial creditors above government. The Bankruptcy Law Reforms Committee recommended lowering government dues to encourage lending and the availability of credit, a policy upheld in Swiss Ribbons (2019) as having a rational basis.
• Benchmark for plans. The waterfall determines the liquidation value used for the minimum payments to operational and dissenting financial creditors under section 30(2)(b) (Topic 41)

7. Frequently Asked Questions

Do workmen rank above secured creditors in liquidation?

No. Workmen's dues for 24 months rank equally with secured creditors who relinquish their security, in clause (b). Workmen rank above a secured creditor's unpaid balance after it enforces its security, which falls in clause (e)(ii).

Where do ordinary trade suppliers rank?

Under clause (f), among the remaining debts, below unsecured financial creditors and government dues for two years.

Two banks hold first and second charges and both relinquish their security. Who is paid first?

After the 2026 Illustration II to section 53(2), the arrangement between them is respected, so the first charge holder's priority is given effect. Before that, the NCLAT in Technology Development Board v Anil Goel (2021) had held that they share equally, an order stayed by the Supreme Court.

Can a lender agree with the company that its unsecured loan will rank above others?

Such a term cannot disturb the statutory order. Section 53(2) directs the liquidator to disregard contractual arrangements between recipients of equal ranking that disrupt the order of priority.

Are operational creditors ever paid before government dues in liquidation?

No. Government dues for the two years before the liquidation commencement date rank in clause (e)(i), while operational creditors fall in clause (f). Government dues for earlier periods, however, rank alongside operational creditors in clause (f).

Who bears the liquidator's fee?

Every class that receives proceeds. Section 53(3) requires the fee to be deducted proportionately from the proceeds payable to each class, so no single class bears it alone.

8. Related Topics

• Topic 41: Treatment of Operational and Dissenting Creditors. The waterfall as a benchmark.
• Topic 43: Government Dues. Rainbow Papers and after.
• Topic 56: Section 52. Secured creditors in liquidation.