Q.Explain the order of priority in which the debts of a company are generally paid on its winding up or liquidation.

Winding-up/liquidation costs and workmen's dues rank first, followed by other employees' dues and preferential government claims, then unsecured creditors, with equity shareholders paid last, if anything remains.

One of the most important duties of a liquidator is to distribute the proceeds of a company's realised assets strictly in the order the law lays down, since those proceeds are almost always insufficient to satisfy every claim in full.

Under a Tribunal winding up (Companies Act, 2013). Sections 326 and 327 identify certain overriding preferential payments — chiefly, the costs and expenses of the winding up itself, and workmen's dues, which rank pari passu (equally, without one taking priority over the other) with the claims of secured creditors to the extent their security proves insufficient to cover their debt. After these, other statutory preferential payments are made — such as certain taxes and government dues, and employees' wages/holiday remuneration for limited preceding periods — before ordinary unsecured creditors are paid anything.

Under liquidation connected with the IBC. Section 53 of the IBC sets out a clear, sequential waterfall mechanism for distributing the proceeds of a liquidation estate, broadly running: (1) the costs of the insolvency resolution process/liquidation itself; (2) workmen's dues for the preceding 24 months, ranking equally with secured creditors who have given up their security; (3) wages and dues of other employees for the preceding 12 months; (4) financial debts owed to unsecured creditors; (5) government dues for the preceding two years, together with any unpaid balance owed to secured creditors after enforcing their security; (6) any remaining debts; (7) preference shareholders; and (8) equity shareholders/members, who receive the residue, if any. …

A frequent error is to assume shareholders and creditors rank equally, or that secured creditors are always paid before workmen's dues — in fact, workmen's dues rank pari passu with secured creditors' claims to the …