Order of Disbursement to be Made by the Liquidator

When a company is wound up, the liquidator realises the assets and distributes the proceeds among various claimants. The liquidator cannot distribute funds arbitrarily; he must follow the statutory order of priority prescribed under the Companies Act, 2013 and the Insolvency and Bankruptcy Code (IBC), 2016. This order ensures equitable treatment, legal compliance, and protection of weaker stakeholders, especially employees and workmen.

• Liquidation Costs and Expenses

The first priority in the order of disbursement is given to the costs and expenses of liquidation. These include the liquidator’s remuneration, legal and professional charges, valuation expenses, and costs incurred for safeguarding, preserving, and realizing the company’s assets. Since liquidation proceedings cannot be carried out without meeting these essential expenses, the law grants them absolute priority over all other claims. Payment of liquidation expenses ensures that the winding-up process is conducted efficiently, lawfully, and without interruption. No distribution to creditors or shareholders can be made until these expenses are fully settled.

• Overriding Preferential Payments

After meeting liquidation costs, the liquidator must discharge overriding preferential payments. This category mainly includes workmen’s dues and secured creditors’ dues, to the extent the secured creditors have relinquished their security. Under the Insolvency and Bankruptcy Code, these claims rank pari passu, meaning they are paid proportionately without preference among themselves. The objective of granting this priority is to protect the economic interests of employees and workers who depend on wages for their livelihood. Overriding preferential payments enjoy priority over all other debts except liquidation expenses.

• Preferential Payments

The next level in the order of disbursement consists of preferential payments as specified under the Companies Act, 2013. These include wages and salaries of employees, accrued holiday remuneration, and employer’s contributions to provident fund, pension fund, and gratuity fund. Certain government dues such as taxes, duties, and cess also fall under this category, subject to prescribed time limits. Preferential payments are given statutory protection and are paid in full, as far as possible, before settling the claims of unsecured creditors. This ensures social and economic justice.

• Secured Creditors Who Realise Their Security

Secured creditors may choose not to relinquish their security and instead realise their security independently. In such cases, the secured asset is sold, and the proceeds are applied towards settlement of the secured debt. If the amount realised is insufficient, the deficiency becomes an unsecured claim and ranks along with unsecured creditors. This option allows secured creditors to protect their interests while maintaining fairness in the overall distribution process. Their treatment depends on the nature of security and their decision during liquidation.

• Unsecured Creditors

After all preferential claims have been settled, the liquidator proceeds to pay unsecured creditors. This category includes trade creditors, unsecured loan creditors, and debenture holders without any charge on the company’s assets. Unsecured creditors do not enjoy any priority and bear higher risk in liquidation. If the available assets are insufficient, unsecured creditors are paid proportionately on a pari passu basis. This principle ensures equitable treatment among creditors belonging to the same class and prevents discrimination.

• Interest on Unsecured Claims

Interest on unsecured debts is payable only after the principal amounts of all unsecured creditors have been paid in full. If the assets are insufficient to cover the principal, no interest is paid at all. This rule ensures fairness and equality among creditors and prevents undue advantage to any particular creditor. Interest is treated as a secondary claim and is settled only when surplus funds are available. Thus, interest payments occupy a lower position in the order of disbursement.

• Preference Shareholders

Once all outside liabilities are fully discharged, the liquidator distributes the remaining assets to preference shareholders. They are entitled to the return of their preference share capital and any arrears of dividend, provided such arrears are allowed under the Articles of Association. Preference shareholders rank ahead of equity shareholders but after all creditors. Their preferential rights are limited to the terms of issue and do not override the claims of creditors. Payment to preference shareholders signifies nearing completion of liquidation.

• Equity Shareholders

Equity shareholders occupy the last position in the order of disbursement. They are the residual owners of the company and are entitled to receive any surplus remaining after all liabilities and preference share capital have been paid. The surplus, if any, is distributed among equity shareholders in proportion to their shareholding. In most cases of insolvent liquidation, equity shareholders receive nothing, as assets are usually insufficient. This reflects the fundamental principle that ownership carries the highest risk in business.