When a company's Corporate Insolvency Resolution Process fails to produce an approved resolution plan within the statutory timeline, it generally moves into liquidation, where a liquidator sells the company's assets and distributes the proceeds according to the strict priority order set out in Section 53 of the IBC -- starting with insolvency process costs and workmen's dues, then secured creditors who relinquish their security, then other employees' dues, then unsecured financial creditors, and only much later government dues and equity shareholders. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 reportedly tightens liquidation timelines and gives the Committee of Creditors greater oversight of the liquidator. This platform recommends unsecured NRI creditors in particular understand where they sit in this priority order, since recovery in liquidation is often only a fraction of the amount owed, and unsecured creditors are paid only after several higher-priority categories are satisfied in full.
When liquidation begins, and the 2025 Amendment's tightened timelines
Liquidation generally follows when CIRP concludes without an approved resolution plan within the
statutory 330-day outer limit, when the Committee of Creditors specifically resolves to liquidate the
company rather than pursue further resolution attempts, or when an approved resolution plan is later
found to have been contravened. On a liquidation order, a liquidator (often the same person who served as
resolution professional, though this can change) takes over the company's assets, forms a liquidation
estate, and proceeds to sell assets -- individually, in groups, or as a going concern where feasible -- to
maximise recovery for creditors. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 reportedly
introduces stricter timelines for this stage, including a requirement that liquidation orders themselves
be passed within 30 days of the relevant trigger and that the liquidation process itself generally
complete within 180 days, extendable by up to 90 days -- alongside removing the liquidator's earlier
quasi-judicial power to independently adjudicate creditor claims and instead placing the Committee of
Creditors in a more direct supervisory role, including power to appoint or remove the liquidator. This
platform recommends confirming which of these changes are actually in force at the time of a specific
case.
The Section 53 waterfall: who gets paid first
Section 53 of the IBC sets out a strict, sequential priority order for distributing liquidation
proceeds, and each category must generally be paid in full before the next category receives anything.
In broad order: first, the costs of the insolvency resolution and liquidation process itself; second,
workmen's dues for a specified look-back period ranking equally with secured creditors who have
relinquished their security interest to the liquidation estate; third, wages and unpaid dues owed to
other employees for a specified period; fourth, financial debts owed to unsecured creditors; fifth, a
tier covering government dues (including certain tax dues) ranking equally with any remaining secured
creditor debt after enforcing their security separately; sixth, any remaining debts; seventh, preference
shareholders; and finally, equity shareholders or partners, who are typically paid only if funds remain
after every prior category is satisfied -- which in practice is uncommon. This platform recommends any
creditor, particularly an unsecured one, realistically assess where they sit in this order before
assuming a specific recovery amount.
What this means practically for NRI creditors and secured lenders
A secured creditor -- one holding a mortgage, charge, or hypothecation over specific company assets --
can choose to either enforce that security independently outside the liquidation process (subject to
IBC procedural requirements) or relinquish the security to the liquidation estate and rank within the
Section 53 waterfall instead; which option yields a better outcome depends heavily on the value and
marketability of the specific secured asset. An unsecured NRI creditor -- for example, a supplier owed
money, or an NRI who lent money informally to a company without taking security -- generally ranks well
below secured creditors and workmen's dues, and recovery in a liquidation, as opposed to a successful
resolution plan, is often only a partial fraction of the amount owed, sometimes very small. This platform
recommends NRI creditors, where possible, actively participate in the CIRP stage (submitting a claim
promptly and engaging with the resolution professional) rather than waiting passively for liquidation,
since a successful resolution plan generally offers a materially better prospect of recovery than
liquidation proceeds distributed through the Section 53 waterfall.
Common mistakes people make with the liquidation waterfall:
- Assuming an unsecured claim will be paid in full during liquidation -- unsecured financial
creditors rank well below secured creditors and workmen's dues under Section 53.
- Not deciding in time whether to enforce security independently or relinquish it to the
liquidation estate, a choice with real financial consequences.
- Waiting until liquidation to engage with the process, rather than actively participating during
CIRP when a resolution plan may offer better recovery prospects.
