Commercial Correspondence and Secretarial Practice · Ch 7 — Dissolution of a Company
Order of Payment of Debts and Distribution of Assets
Order of Payment of Debts and Distribution of Assets
One of the liquidator's most important duties is to ensure that, once the company's assets are realised, they are applied to pay off claims in the correct order of priority — a company's assets are rarely enough to pay everyone in full, so the law lays down who gets paid first.
Under a Tribunal winding up, the Companies Act, 2013 (Sections 326 and 327) identifies certain overriding preferential payments — notably, the costs and expenses of the winding up itself, and workmen's dues, which rank pari passu (equally, without preference between them) with the claims of secured creditors to the extent their security is insufficient — followed by other statutory preferential payments, such as certain government dues, employees' wages and accrued holiday remuneration for limited periods, before ordinary unsecured creditors are paid.
Under liquidation connected with the IBC (including, in substance, voluntary liquidation), Section 53 of the IBC lays down a clear, sequential waterfall for distributing the proceeds of a liquidation estate. Stated broadly, and in descending order of priority, the waterfall runs approximately as follows:
| Priority | Who gets paid |
|---|---|
| 1 | Insolvency resolution process / liquidation costs and expenses (including the liquidator's fees) |
| 2 | Workmen's dues for the preceding 24 months, ranking equally with debts owed to secured creditors who have relinquished their security |
| 3 | Wages and unpaid dues owed to employees (other than workmen) for the preceding 12 months |
| 4 | Financial debts owed to unsecured creditors |
| 5 | Government dues (Central and State) for the preceding two years, and debts owed to secured creditors for any unpaid amount after enforcing their security |
| 6 | Any remaining debts and dues |
| 7 | Preference shareholders |
| 8 | Equity shareholders / members, who receive whatever surplus is left, if any |