Section 53 Waterfall: Order of Priority in IBC Liquidation
Eight ranks, paid in order. A worked example shows where the money runs out.
Section 53 of the Code fixes the order in which a liquidator pays out the proceeds of selling the liquidation assets. It opens with a non obstante clause, so it overrides any Central or State law to the contrary. Each class is paid in full before the next receives anything, and within a class every claim is paid in full or in equal proportion.
The order itself has not changed since the cut-off of 4 February 2025. What the 2026 amendment changed is how two kinds of creditor fit into it: secured creditors who relinquish, and governments holding security created by statute.
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The Order of Priority
Section 53(1). Classes marked with the same letter rank equally between themselves.
1
Who is paid
Insolvency resolution process costs and liquidation costs, in full
Clause
53(1)(a)
2
Who is paid
Workmen's dues for the 24 months before the liquidation commencement date, equally with debts of secured creditors who relinquished their security under section 52
Clause
53(1)(b)
3
Who is paid
Wages and unpaid dues of employees other than workmen, for the 12 months before the liquidation commencement date
Clause
53(1)(c)
4
Who is paid
Financial debts owed to unsecured creditors
Clause
53(1)(d)
5
Who is paid
Central and State Government dues for the 2 years before the liquidation commencement date, equally with the unpaid balance of secured creditors who enforced their security
Clause
53(1)(e)
6
Who is paid
Any remaining debts and dues (operational creditors, older government dues, older workmen's dues)
Clause
53(1)(f)
7
Who is paid
Preference shareholders
Clause
53(1)(g)
8
Who is paid
Equity shareholders or partners
Clause
53(1)(h)
| Rank | Who is paid | Clause |
|---|---|---|
| 1 | Insolvency resolution process costs and liquidation costs, in full | 53(1)(a) |
| 2 | Workmen's dues for the 24 months before the liquidation commencement date, equally with debts of secured creditors who relinquished their security under section 52 | 53(1)(b) |
| 3 | Wages and unpaid dues of employees other than workmen, for the 12 months before the liquidation commencement date | 53(1)(c) |
| 4 | Financial debts owed to unsecured creditors | 53(1)(d) |
| 5 | Central and State Government dues for the 2 years before the liquidation commencement date, equally with the unpaid balance of secured creditors who enforced their security | 53(1)(e) |
| 6 | Any remaining debts and dues (operational creditors, older government dues, older workmen's dues) | 53(1)(f) |
| 7 | Preference shareholders | 53(1)(g) |
| 8 | Equity shareholders or partners | 53(1)(h) |
A Worked Example
Ignoring the liquidator's fee, which section 53(3) deducts proportionately from each class.
- 1
The facts
A company in liquidation realises ₹50 crore. CIRP and liquidation costs are ₹2 crore. Workmen are owed ₹3 crore for the last 24 months. Two banks owed ₹60 crore relinquished their security. Employees other than workmen are owed ₹1 crore, an unsecured lender ₹10 crore and operational creditors ₹25 crore.
- 2
Rank 1
Costs of ₹2 crore are paid in full, leaving ₹48 crore.
- 3
Rank 2
Workmen (₹3 crore) and the relinquishing banks (₹60 crore) rank equally. ₹48 crore covers 76.19% of their ₹63 crore, so the workmen receive about ₹2.29 crore and the banks about ₹45.71 crore.
- 4
Everyone else
Nothing is left for employees, the unsecured lender or operational creditors. Had the banks enforced their security instead, their shortfall would have dropped to rank 5.
Rules That Decide Close Cases
- Workmen's dues
- Section 53 borrows the meaning in section 326 of the Companies Act, 2013. Dues older than 24 months fall to rank 6.
- PF, pension and gratuity
- Not in the waterfall at all. Section 36(4)(a)(iii) keeps sums due from these funds out of the liquidation estate, and the Supreme Court held in Sunil Kumar Jain v. Sundaresh Bhatt (2022) that the liquidator has no claim over them.
- Secured creditor who realises
- Takes its asset outside the waterfall but must contribute. At the exam cut-off, regulation 21A(2) required it to pay what it would have borne towards rank 1 and workmen's dues within 90 days of the LCD. Any shortfall is paid at rank 5 (s. 52(9)).
- Contracts between creditors
- A contractual arrangement between recipients of equal rank that disrupts the order is disregarded (s. 53(2)).
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What the 2026 Amendment Changed
In force from 26 May 2026. The exam's version of the law does not include these.
Government with statutory security
At the exam cut-off
Rainbow Papers (2022): a State holding security under section 48 of the Gujarat VAT Act is a secured creditor and ranks with relinquishing secured creditors at rank 2
Now
Security interest created merely by operation of law is not security interest (Explanation to s. 3(31)). Government dues for 2 years go to rank 5, the rest to rank 6, secured or not (Explanation to s. 53(1)(e)(i))
Relinquishing secured creditor whose security is worth less than its debt
At the exam cut-off
Ranks at rank 2 for its whole debt
Now
Secured only up to the value of the security; unsecured for the balance (Explanation to s. 53(1)(b)(ii))
Inter-creditor agreements
At the exam cut-off
Section 53(2) only
Now
Illustrations added: a workmen-versus-secured-creditor priority clause is disregarded; a ranking agreement between two secured creditors is not
Deduction from realising secured creditors
At the exam cut-off
IRP costs only in s. 52(8); workmen's dues via reg. 21A
Now
Section 52(8) now covers both costs and workmen's dues
| Issue | At the exam cut-off | Now |
|---|---|---|
| Government with statutory security | Rainbow Papers (2022): a State holding security under section 48 of the Gujarat VAT Act is a secured creditor and ranks with relinquishing secured creditors at rank 2 | Security interest created merely by operation of law is not security interest (Explanation to s. 3(31)). Government dues for 2 years go to rank 5, the rest to rank 6, secured or not (Explanation to s. 53(1)(e)(i)) |
| Relinquishing secured creditor whose security is worth less than its debt | Ranks at rank 2 for its whole debt | Secured only up to the value of the security; unsecured for the balance (Explanation to s. 53(1)(b)(ii)) |
| Inter-creditor agreements | Section 53(2) only | Illustrations added: a workmen-versus-secured-creditor priority clause is disregarded; a ranking agreement between two secured creditors is not |
| Deduction from realising secured creditors | IRP costs only in s. 52(8); workmen's dues via reg. 21A | Section 52(8) now covers both costs and workmen's dues |
How the Limited Insolvency Examination Tests This
Waterfall questions usually give a pool of money and five or six claims, then ask what one claimant receives. Most wrong answers come from three slips: ranking government dues above unsecured financial creditors (financial debts rank 4, government dues 5), forgetting that a realising secured creditor's shortfall drops to rank 5, and applying the 2026 rule on statutory security to a question set under the law at the cut-off.
FAQs
What is the waterfall mechanism under section 53 of IBC?expand_more
It is the order in which liquidation proceeds are paid: costs first, then workmen's dues (24 months) with relinquishing secured creditors, then other employees (12 months), unsecured financial creditors, government dues (2 years) with secured creditors' shortfall, remaining debts, preference shareholders and finally equity.
Where do operational creditors rank in liquidation?expand_more
Trade and other operational creditors fall under section 53(1)(f), "any remaining debts and dues", below unsecured financial creditors and government dues for the two-year period.
Are government dues secured under IBC after Rainbow Papers?expand_more
In Rainbow Papers (2022) the Supreme Court treated a State with statutory security as a secured creditor. The 2026 amendment reversed that effect from 26 May 2026: security created merely by law no longer counts, and government dues rank under clauses (e) and (f). The exam's cut-off predates the amendment.
Does the waterfall apply to a resolution plan?expand_more
Section 53 governs liquidation. But a resolution plan is measured against it. At the exam cut-off, section 30(2)(b) required a plan to pay dissenting financial creditors at least what they would receive under section 53 in a liquidation. Since 26 May 2026 that test sits in a new clause (ba), which uses the lower of the liquidation amount and the amount they would get if the plan money were distributed in section 53 order.
Next steps
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