All the king’s horses and all the king’s men couldn’t put Humpty together again.[1]

All the king’s horses and all the king’s men couldn’t put Humpty together again.[1]

By Avinash Subramanian, Saloni Thakkar and Simrann Venkkatesan, AZB Partners

It is globally accepted that inter se priority of the secured creditors should be respected as part of the liquidation waterfall. However, the Indian story has unfolded with multiple twists and turns with an unclear path ahead. This article traces this history as well as the way forward.


The Bankruptcy Law Reforms Committee (“BLRC”) a committee set up by the Indian Finance Ministry, in its report dated November 2015, recommended that secured creditors should have first  priority on realisations (from insolvency or liquidation, as applicable), a practice followed globally and in India (under the erstwhile companies law) (“BLRC Report”). This recommendation was  adopted under the (Indian) Insolvency & Bankruptcy Code, 2016 (“Code”), which accorded priority to secured creditors.

While the Code sets this in clear terms, complexity in factual matrices in  multiple judicial deliberations as well as subsequent statutory amendments  has resulted in the inter-se priority amongst secured creditors taking a roller  coaster ride over the years.

This paper aims to take its readers along this roller coaster ride with respect to distribution to secured creditors under insolvency and liquidation waterfalls and the road ahead proposed by the Ministry of Corporate Affairs, Government of India (“MCA”) to the Code.2

With the evolving private credit and deal environment in India and borrowers  becoming more mature and looking beyond public sector lending, it is  essential that the liquidation waterfall for secured creditors is unambiguous and in line with global standards. In addition to providing predictability in  recovery to global fund managers while assessing private credit opportunities,  clarity on the liquidation waterfall will send across a positive signal to global investors on the seriousness of the Indian credit and enforcement market.

“… If a secured creditor is given the equivalent of a first priority at the time of  distribution (or receives directly the proceeds of the sale of collateral), it facilitates the provision of secured credit.3

Position prior to 2016

The (Indian) Companies Act, 1956 (“1956 Act”),4 recognised the priority of  claims of secured creditors, as senior to all other unsecured creditors (subject  to pari-passu ranking (only) with identified workmen dues). This recognition  of seniority of secured creditors’ claims continued under the (Indian)  Companies Act, 2013 (“2013 Act”).5 It was commonplace that any priority of ranking between secured creditors were respected by the liquidation waterfall  both under the 1956 Act as well as the 2013 Act.6

In the case of ICICI Bank versus SIDCO Leathers,7 the Hon. Supreme Court of India (“SC”) upheld the priority of a secured mortgagee over the proceeds from sale of the mortgaged property relying on the provisions of the 1956 Act  as well as the Transfer of Property Act, 1857.

Introduction of the code

The Code was enacted in May 2016 as a major reform for addressing the  distressed debt situation in the Indian market and as part of the measures  taken by the Indian Government to clean up the balance sheets of several  public sector banks.

The BLRC, responsible for conceptualising the Code in its current form, in its  BLRC Report, recommended that secured creditors have first ranking priority, at par (only) with capped workmen dues, and junior only to process costs, “in order to bring the practices in India in-line with global practice, and to ensure  that the objectives of the proposed Code is met.”

This recommendation was originally incorporated in Section 53 of the Code,  which lays down the liquidation waterfall and provides for secured creditors  to have superior ranking, pari passu with capped workmen dues and second
only to the process costs. However, when this provision was judicially tested  and as the coming paragraphs of this article would suggest, it proved to be  insufficient in clarifying the inter-se priority of secured creditors.

Jurisprudence under the Code

In a saga of many twists and turns that captured the front pages of all business papers in India for more than a year in 2018-19, one of the major points of  contention in the acquisition of Essar Steel by ArcelorMittal-Nippon Steel was the pay out to Standard Chartered Bank (“SCB”) as had been decided by the  lender committee while approving the restructuring plan for Essar Steel. While SCB held security provided by Essar Steel that was considered negligible in comparison to the security held by the majority of lenders to Essar Steel, SCB contended that the restructuring plan approved by the  lenders proposed an inferior pay out to them as compared to other secured lenders. The basis for SCB’s contention, amongst others, was a literal reading  of Section 53 of the Code which did not differentiate between secured creditors on the basis of their priority or value of security.

In what came as a shock to the entire lending fraternity in India, the National  Company Law Appellate Tribunal (“NCLAT”), in Standard Chartered Bank  versus Satish Kumar Gupta, RP of Essar Steel,8 upheld this contention of SCB and disallowed the lenders from allocating recoveries to SCB commensurate  with the value of the assets.

The NCLAT observed that financial creditors cannot be sub-classified as  ‘Secured’ or ‘Unsecured” for the purpose of preparation of the ‘Resolution  Plan’ by the ‘Resolution Applicant’; and directed that SCB should be  distributed proceeds from the resolution of the corporate debtor in the same  proportion as other financial creditors, notwithstanding that the value of the
assets secured to SCB was almost negligible.

Statutory amendments to stay on track

In response to the above fiasco, Section 30 of the Code was amended via the  Insolvency & Bankruptcy (Amendment Act) 2019 (“2019 Amendment”), to  include that a resolution plan under the Code must provide for the manner of distribution proposed, which may take into account “the order of priority  amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor.”

Additionally, it was also specified that such a resolution plan should  mandatorily “provide for the payment of debts of financial creditors, who do  not vote in favour of the resolution plan, in such manner as may be specified  by the Board, which shall not be less than the amount to be paid to such  creditors in accordance with sub-section (1) of section 53 in the event of a  liquidation of the corporate debtor.” It appeared that the purported anomaly in the Code had been put to rest with the 2019 Amendment and lenders having security were accorded the priority status that was originally envisaged under the Code.

This further received a stamp of authority when the NCLAT order was  overturned in a landmark decision given by the SC in Committee of Creditors of Essar Steel India Limited (through the Authorised Signatory) versus Satish  Kumar Gupta & Ors,9 wherein it upheld the distribution to SCB basis the  value of the assets secured to it as being fair and equitable and not  discriminatory in nature.

The aforesaid position was further emphasised by the observations of the  Insolvency Law Committee (“ILC”) in its February 2020 report, where the ILC noted:

“…the Code aims to promote a collective liquidation process, and towards this end, it encourages secured creditors to relinquish their security interest, by  providing them second-highest priority in the recovery of their dues, as under  Section 53(1)(b). Thus, they are not treated as ordinary unsecured creditors  under the Code, as they would have been under the Companies Act, 1956. It  was noted that, to some extent, this provision intends to replicate the benefits  of security even where it has been relinquished, in order to promote overall  value maximisation.

A new chapter unfolds post 2019

While the chapter on minority creditors (unsecured or with negligible  security) challenging lender decisions was closed with the Essar Steel case,
a new chapter started unfolding across various resolution processes wherein  the committee of creditors overruled the minority creditor/s by providing  them with recoveries pro rata to the recoveries of the other creditors,  notwithstanding the unarguably more valuable security granted in favour of  such creditors.10

In the corporate insolvency resolution process of Amit Metalliks, India  Resurgence Limited raised a challenge before the SC, on the grounds,  interalia, that the creditors could not have approved the resolution plan which failed to consider the priority and value of security interest of the creditors  while deciding the manner of distribution to each creditor even though the  legislature in its wisdom has amended Section 30(4) of the Code, requiring  the committee of creditors (“CoC”) to take into account the order of priority  amongst creditors as laid down in Section 53(1) of the Code. However, the SC  held that it was within the commercial wisdom of the committee of creditors to distribution resolution proceeds not taking into account the value of the  assets securing a particular creditor. The SC observed that:

The NCLAT was,  therefore, right in observing that such amendment to sub-section (4) of  Section 30 only amplified the considerations for the Committee of Creditors while exercising its commercial wisdom so as to take an informed decision in regard to the viability and feasibility of  resolution plan, with fairness of distribution amongst similarly situated  creditors; and the business decision taken in exercise of the commercial  wisdom of CoC does not call for interference unless creditors belonging to a class being similarly situated are denied fair and equitable treatment.”

“… It has never been laid down that if a dissenting financial creditor is having a security available to him, he would be entitled to enforce the  entirety of the security interest or to receive the entire value of the security  available to him. It is but obvious that his dealing with the security interest,  if occasion so arise, would be conditioned by the extent of value receivable by him.”

Position tabled by the MCA – final chapter in the roller coaster?

To lay to rest the aforesaid issue and to make the distribution process ‘fairer  and equitable to all stakeholders’, the MCA has proposed a revised waterfall in its paper on proposed changes to the Code (“MCA Discussion Paper”)  discussion,11 summarised as follows:

(a) Secured creditors to receive proceeds up to the debtor’s liquidation value  for their claims in the order of priority provided under Section 53 of the Code;
(b) Amounts in surplus over the liquidation value of the debtor to be rate-ably distributed between all creditors in the ratio of their unsatisfied claims.

At this juncture, it may be relevant to double back to the matters influenced  by these considerations. The UNCITRAL noted in its 2004 guidelines12 that “To the extent that different creditors have struck different commercial bargains with the debtor, the ranking of creditors may be justified by the  desirability for the insolvency system to recognise and respect the different  bargains, preserve legitimate commercial expectations, foster predictability in commercial relationships and promote the equal treatment of similarly  situated creditors. Establishing a clear and predictable ranking system for   distribution can help to ensure that creditors are certain of their rights at the time of entering into commercial arrangements with the debtor and, in the case of secured credit, facilitate its provision.


The proposed amendments to the Code vide the MCA Discussion Paper in  relation to the distributions to secured creditors leaves much to be desired. There is still no clarity on whether inter-se priority amongst secured creditors  will be respected while running through the liquidation waterfall. It also  provides no clarity on the manner of distribution when the plan value is lower  than the liquidation value. While appearing to close the chapter on equitable  treatment of creditors while taking a haircut, it appears to open up a proverbial pandora’s box in relation to entitlement of unsecured creditors  even while the entire debt of secured creditors has not been discharged.

The concern is that the proposed distribution waterfall goes against the  commercial expectations evolved over years of jurisprudence; this, in turn, is  expected to be a legitimate concern in the evolution of credit practices in  India. The proposed distribution waterfall may also disrupt the lending  market in India. This amendment may, thus, satisfy the need of the hour in  putting to rest contentions raised by unsecured lenders and trade creditors on  unfair treatment being meted out to them by the secured majority lenders.  However, it may very well happen that this amendment leads to a fresh set of  new disputes and logjams in decision making by lenders and we could be revisiting this provision when the time arrives. While this chapter ends, it  would be premature to assume this to be the finale.

1 By Avinash Subramanian, Saloni Thakkar and Simrann Venkkatesan, AZB & Partners. These are the views and opinions of the author(s) and do not  necessarily reflect the views of the Firm. This article is intended for general  information only and does not constitute legal or other advice and you acknowledge that there is no relationship (implied, legal or fiduciary) between you and the author/AZB & Partners. AZB & Partners does not claim that the  article’s content or information is accurate, correct or complete, and disclaims all liability for any loss or damage caused through error or omission.
2 MCA Discussion Paper available here 
3 Orderly & Effective Insolvency Procedures, Legal Department International Monetary Fund 1999
4 Sections 529, 529A and 530 of the (Indian) Companies Act, 1956
5 Section 326 of the (Indian) Companies Act, 2013.
6 The SC in the matter of ICICI Bank v. Sidco Leathers (Civil Appeal no 2332 / 2006) 27688. pdf (, observed the following: “Section 529A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read therein to things, which the Parliament did not comprehend. The subject of mortgage, apart from having been dealt with under the common law, is  governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract.” “Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated.”
7 Supra FN 6
8 Company Appeal (AT) (Ins.) No. 242 of 2019
9 CIVIL APPEAL NO. 8766-67 OF 2019
10 Ruchi Soya (DBS Bank’s super security was not taken into account) (Ruchi Soya Industries Ltd v. Union of India (available here) and India Resurgence v. Amit Metaliks SC (Civil Appeal) 1700 / 2021 (available here)
11 MCA paper on changes being considered to the Code : “it is proposed that  the Code may be amended to statutorily provide an equitable scheme of distribution of proceeds received pursuant to a resolution plan(s) through a  separate waterfall mechanism in the CIRP. As per this scheme, creditors will receive proceeds up to the CD’s liquidation value for their claims in the order of priority provided in section 53. Any surplus over such liquidation value will  be rateably distributed between all creditors in the ratio of their unsatisfied claims. Finally, any remaining amount or further surplus would be distributed to the shareholders and partners of the corporate debtor, as the  case may be. It is expected that this will make the distribution process fairer and more equitable for all the stakeholders.”

12 UNCITRAL Legislative Guide on Insolvency Law, Part Two, 2004.


Avinash Subramanian, Partner
Tel: 022 4072 9999



Saloni Thakkar, Senior Associate
Tel: 022 4072 9999



Simrann Venkkatesan, Associate
Tel: 022 4072 9999



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