Distribution of Assets under Insolvency and Bankruptcy Code

Introduction

Insolvency and Bankruptcy Code (Hereinafter referred as Code) provides in detail liquidation process from Section 33 to 54.

The fact the company is going through liquidation mean company's business is not that good. It also mean that they have to pay money to lot of people.

When money is realized, it has to be distributed to lot of people. What if Company owes 100 Crore, but after selling assets money collected is only 60 Crore? Who will get the priority over these money ? How should money to be distributed ? 

Section 53 answers these questions. Lot of creditors or other people who want money from company are as below:



At the end of the post, you will be able to rank above people in priority of getting their money back.

Before going into order of who will get the money first, there is crucial and important provision related to Secured financial Creditor. 

Provision related to Secured Creditor

Let's understand these by example. Suppose SBI had given a loan of 500 Crore to Kingfisher Ltd. Kingfisher Ltd have given some security say their building at Marine Drive in Mumbai. 

Once the Kingfisher Airlines default and insolvency process is brought against Kingfisher Ltd, this process resulted into liquidation.

Now SBI(Financial Creditor) have two options
  1. Give Building back to Creditor and asks money from realization of assets
  2. Sell Building and recover the loan amount
Which option should Bank choose ? Simple, they should choose an option from where they will make maximum recovery of their loan.

If they choose option 2, they will loose priority which we are going to discuss in next paragraph.

Creditor decides which option to choose from circumstance of the case. Sometimes they may recover more money if they go for option 2 if security value is high. Sometime they may go for option 1 where security value is low and Company going under insolvency have other valuable assets. 

Order of distribution of Asset

First, from realized money the cost incurred for carrying out insolvency process and liquidation process will be paid. Resolution Professional is happy.

Second, if money is left (It will be, all the money won't be taken by Resolution Professional),  two people have similar priority. They are
  • Workmen, whose preceding 24 months dues will be paid. Workmen is different from Employees. Check Workmen Compensation Act
  • Secured creditor who have exercised option 1 in earlier paragraph. (Meaning they give back secured asset to liquidator) 
Third, Wages of Employees for preceding/previous 12 months will be paid.

Fourth, dues of Unsecured Creditors will be paid. This generally will include operation creditor. (Like vendors, supplier etc)

Fifth, below people will be distributed money in proportion as they rank similar in distribution of asset
  • Central and State Government Taxes
  • Those secured creditors who have exercised option 2 in earlier paragraph. (See Section 52) 
Sixth, any remaining debts and dues will be paid.

Seventh, money will be paid to preferential shareholders. (in layman language, preferential shareholders get fixed dividend, and their shares are redeemed after certain period.)

Eighth, Equity shareholder will get the money. In most of the case, they will never get, but added in law to I think make law look good. So far no equity shareholder got the money from liquidation after IBC coming into force !

Now in fifth and Second points two kinds of people are ranked at same level. How then money is distributed to them?

It's in proportion. What does that mean?

For example Workmen have dues of 50 Crore, Secured Creditor have dues of 200 Crore and money left to distribute is 100 Crore. So who will get how much ?

Workmen's share is 20% whereas Secured Creditors Money is 80%, so Workmen will get 20 Crore and Secured Creditor will get 80 Crore.

Conclusion.

Hope you able to rank the priority in distribution of asset. Section 53 and 52 should be read together to understand the distribution of asset.

Now think about this. Government's money is Citizen's money. Taxes is government's money which is ranked way below in order. Loosing that money is loosing people's money. Shouldn't it be on higher priority say after Workmen's dues ?

Read this. Out of 9600 Crore dues, only 96 Crores recovered. :'(










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