Insolvency and Bankruptcy Code, 2016: Order of Priority of Payment of Debts

The IBC specifies the order of priority of payment of debts to the creditors of a corporate debtor in the event of liquidation. The priority is as follows:

  1. Liquidation costs

These are the costs incurred by the liquidator in winding up the affairs of the corporate debtor. This includes the costs of advertising the sale of the corporate debtor’s assets, the costs of valuation of the assets, and the costs of legal and professional fees.

  1. Workmen’s dues

These are the unpaid wages and other dues of the workmen of the corporate debtor. This includes the wages, bonus, and other statutory dues of the workmen.

  1. Unsecured creditors

These are the creditors who do not have any security interest over the assets of the corporate debtor. This includes the suppliers, vendors, and other creditors who have not been paid for their goods or services.

  1. Secured creditors

These are the creditors who have a security interest over the assets of the corporate debtor. This includes the banks, financial institutions, and other creditors who have lent money to the corporate debtor and have taken a mortgage or charge over its assets.

  1. Government dues

These are the dues payable to the government, such as taxes, duties, and penalties.

Notes:

  • The debts in each class rank equally amongst themselves, and shall be paid in full, unless the estate of the corporate debtor is insufficient to meet them, in which case they shall abate in equal proportions between themselves.
  • The order of priority of payment of debts is applicable only in the event of liquidation of the corporate debtor. In the event of a resolution plan being approved by the creditors and the Adjudicating Authority, the creditors will be paid in accordance with the terms of the resolution plan.

MCQs on Order of Priority of Payment of Debts:

  1. What is the order of priority of payment of debts under the IBC?
    • Liquidation costs, workmen’s dues, unsecured creditors, secured creditors, government dues.
  2. Who are the liquidation costs?
    • The costs incurred by the liquidator in winding up the affairs of the corporate debtor.
  3. Who are the workmen?
    • The employees of the corporate debtor.
  4. Who are the unsecured creditors?
    • The creditors who do not have any security interest over the assets of the corporate debtor.
  5. Who are the secured creditors?
    • The creditors who have a security interest over the assets of the corporate debtor.
  6. Who are the government dues?
    • The dues payable to the government, such as taxes, duties, and penalties.