Corporate Restructuring, Valuation and Insolvency · Liquidation on or after Failing of Resolution Plan

Waterfall Mechanism under Section 53 IBC: Claims and Distribution

Updated 11 October 2026 · Fact-checked

In liquidation under the IBC, the liquidator collects and verifies claims, forms the liquidation estate and distributes sale proceeds under Section 53. Costs come first, then workmen's dues and relinquished secured debts together, then employees, unsecured financial creditors, government dues, remaining debts, preference shareholders and equity. Each class is paid in full before the next.

Understand Claims, Verification and Distribution of Proceeds

Once liquidation starts, the liquidator takes control of the corporate debtor's assets and holds them as a fiduciary for all creditors. These assets form the liquidation estate (Section 36). Some assets stay out, such as assets held in trust for others, bailment assets, and provident fund, pension fund and gratuity fund dues of workmen and employees. Assets of a subsidiary and personal assets of shareholders are also excluded.

Creditors then submit claims to the liquidator with proof. The liquidator verifies each claim, admits or rejects it, and keeps a record. Only admitted claims share in the proceeds. Rejected creditors can challenge the decision before the Adjudicating Authority (check the exact timeline and forum in your study material).

Secured creditors get a choice under Section 52. They can relinquish the security to the liquidation estate and take their place in the Section 53 waterfall. Or they can realise the security themselves under the law that applies to it. The liquidator must first verify the security, through an information utility record or other means the Board specifies.

Section 53 is the waterfall. It starts with the words 'notwithstanding anything to the contrary' in other laws, so it overrides them. Each tier is paid in full before the next tier gets anything. If a tier cannot be paid in full, its members share in equal proportion. The liquidator's fee is deducted proportionately from what each class receives.

The logic is simple: costs that keep the process running come first, then people who depend on wages and those who gave up security, then lenders, then the State, and owners last.

Key rules to remember

Section 53(1) order of priority: (a) CIRP costs + liquidation costs → (b) workmen's dues (24 months) = relinquished secured creditors → (c) employees' wages (12 months) → (d) unsecured financial debts → (e) Government dues (2 years) = secured debt unpaid after enforcement → (f) remaining debts → (g) preference shareholders → (h) equity shareholders or partners; Each tier is paid in full before the next. Tiers (b) and (e) contain two items ranking equally.
Equal ranking rule: Shortfall within a tier → pro rata in equal proportion; Contractual arrangements between equal-ranking recipients that disrupt the priority are disregarded (Section 53(2)).
Liquidator's fee: Fee deducted proportionately from the proceeds payable to each class; Section 53(3). Distribute only after the deduction.
Secured creditor options: Section 52(1): relinquish to the liquidation estate OR realise the security itself; Relinquished security joins the estate (Section 36(3)(g)) and the creditor ranks in Section 53(1)(b).
Deadlines under Liquidation Process Regulations, Reg 21A: Decision within 14 days; payment of share of costs and workmen's dues within 45 days; excess of realised value over admitted claim within 90 days; all from liquidation commencement date; Silence for 14 days means the security is deemed relinquished. Failure to pay makes the asset part of the liquidation estate. Use the regulation as amended up to 22-09-2026.
Shortfall after realisation: Unpaid balance of secured debt ranks under Section 53(1)(e)(ii); Section 52(9). Any surplus must be handed to the liquidator (Section 52(7)).

How to solve Claims, Verification and Distribution of Proceeds questions

Use this sequence for any question on claims, secured creditors or distribution.

1Identify the stage: is it claim submission, verification, a secured creditor's choice, or distribution?
2List the assets that form the liquidation estate. Exclude third-party assets, trust assets and provident, pension and gratuity funds.
3Check each secured creditor: did it relinquish or realise? If silent for 14 days, treat as relinquished.
4If it realised, work out the surplus (to be handed to the liquidator) or the shortfall (which ranks under Section 53(1)(e)(ii)).
5Deduct the liquidator's fee proportionately, then apply the waterfall tier by tier from (a) to (h).
6Within a tier, pay in full or pro rata. For tiers with two equal items, share between both together.
7Check the time limits: 24 months for workmen, 12 months for other employees, 2 years for Government dues.
8Conclude with the amount each class receives and state the section.

Quickest way: Tier-by-tier cash tracker

When to use it: Numerical questions with a pool of proceeds and several creditors.

Write the tiers (a) to (h) in a column with claim amounts beside them.
Start with the net proceeds after the liquidator's fee allocation as the question directs.
Subtract each tier's claim from the pool. If the pool runs out, divide the remainder pro rata among that tier's equal-ranking claims.
Stop once the pool is zero. All lower tiers get nil.
Write one line of reason with the section number for each tier.

Common mistakes in Claims, Verification and Distribution of Proceeds

Placing secured creditors who realise their security in the waterfall at tier (b).
Students assume all secured creditors rank high.
Fix: Only those who relinquish rank at (b). A creditor who realises security takes the asset's proceeds outside the waterfall; any unpaid balance ranks at (e)(ii).
Ranking government dues above unsecured financial creditors.
Carry-over from older laws or the idea that the State always comes first.
Fix: Under Section 53, Government dues rank at (e), below unsecured financial debts at (d).
Treating workmen and other employees as one class.
Both are 'wages' claims.
Fix: Workmen's dues for 24 months rank at (b); other employees' wages for 12 months rank at (c).
Including provident, pension and gratuity funds in the estate.
These are employee dues and look like claims.
Fix: Section 36(4)(a)(iii) excludes them from the liquidation estate. They are not used for recovery.
Using old regulation timelines (30 days, 90 days, 180 days).
Older notes still circulate.
Fix: Regulation 21A as amended up to 22-09-2026 gives 14 days for the decision, 45 days for the first payment and 90 days for the excess.
Forgetting the liquidator's fee deduction.
Students go straight to the waterfall.
Fix: Section 53(3) requires proportionate deduction from each class before the proceeds go to it.

Worked examples

Example 1

Rohini Textiles Ltd is in liquidation. Net proceeds available for distribution (after the fee treatment is already adjusted) are ₹50,00,000. Claims: liquidation and CIRP costs ₹5,00,000; workmen's dues (within 24 months) ₹10,00,000; a secured creditor who relinquished security, admitted claim ₹20,00,000; employees' wages (12 months) ₹5,00,000; unsecured financial creditors ₹30,00,000. Distribute the proceeds.

Show the solution

Tier (a): costs ₹5,00,000 paid in full. Balance ₹45,00,000.
Tier (b): workmen's dues ₹10,00,000 and the relinquishing secured creditor ₹20,00,000 rank equally. Total ₹30,00,000. Paid in full. Balance ₹15,00,000.
Tier (c): employees' wages ₹5,00,000 paid in full. Balance ₹10,00,000.
Tier (d): unsecured financial creditors claim ₹30,00,000 but only ₹10,00,000 is left. They receive ₹10,00,000, which is one-third of their claim.
Balance is nil. Government dues, remaining debts, preference and equity get nothing.

Answer: Costs ₹5,00,000; workmen ₹10,00,000; secured creditor ₹20,00,000; employees ₹5,00,000; unsecured financial creditors ₹10,00,000 (one-third of their claim); all lower tiers nil.

Example 2

In the liquidation of Kaveri Steels Ltd, Bank A holds security over a plant and informs the liquidator that it will realise the security. The plant sells for ₹8,00,000 against Bank A's admitted claim of ₹12,00,000. Explain the position of Bank A and how the balance is treated.

Show the solution

Under Section 52(1)(b), Bank A can realise its security. The liquidator must first verify the security, by information utility records or other means the Board specifies (Section 52(3)).
Bank A must inform the liquidator and identify the asset (Section 52(2)). Under Regulation 21A it must do so within 14 days of the liquidation commencement date.
Bank A applies the ₹8,00,000 to its debt. There is no surplus to hand over under Section 52(7).
The shortfall is ₹12,00,000 − ₹8,00,000 = ₹4,00,000.
Under Section 52(9), this unpaid debt is paid by the liquidator as per Section 53(1)(e), where it ranks equally with Government dues.
Bank A must also pay its share of the costs and workmen's dues, as it would have shared had it relinquished, within 45 days. Otherwise the asset becomes part of the liquidation estate.

Answer: Bank A keeps the ₹8,00,000 from the plant and claims the ₹4,00,000 shortfall at Section 53(1)(e)(ii), ranking equally with Government dues, subject to its payment obligations under Regulation 21A.

Exam tips

Write the waterfall as a numbered list (a) to (h) in every answer. Examiners look for the exact order.
In case questions, first state whether the creditor relinquished or realised. The rest of the answer depends on it.
Always quote Section 52 for the choice and Section 53 for distribution, and Section 36 for what is in or out of the estate.
Mention the equal ranking inside tiers (b) and (e) and the pro rata rule. It is a frequent mark-earner.
Use the current time limits in Regulation 21A and keep your numbers neat in a tier table.

Practice questions from Liquidation on or after Failing of Resolution Plan

Claims, Verification and Distribution of Proceeds: frequently asked questions

What is the order of priority under Section 53 of the IBC?

First costs of the insolvency resolution process and liquidation. Then workmen's dues and relinquished secured debts equally, employee wages, unsecured financial debts, Government dues with unpaid secured debts equally, remaining debts, preference shareholders and equity shareholders.

What is the difference between relinquishing and realising security interest?

If a secured creditor relinquishes, the asset joins the liquidation estate and the creditor is paid through the waterfall at tier (b). If it realises, it enforces the security itself under the applicable law, hands over any surplus, and claims any shortfall at tier (e).

How does the liquidator verify a secured creditor's security?

Before the creditor realises the security, the liquidator checks that it exists, using the records of an information utility or other means specified by the Board. Only the verified security interest may be realised.

What happens if a secured creditor does not decide within the time limit?

Under Regulation 21A, if the creditor does not tell the liquidator its decision within fourteen days of the liquidation commencement date, the assets under the security are deemed relinquished to the liquidation estate.