A Critical Analysis Of Waterfall Mechanism Under Insolvency And Bankruptcy Code, 2016
- IJLLR Journal
- 4 days ago
- 1 min read
Amee Shah, Unitedworld School of Law, Karnavati University
Dr. Mayura Sabne, Assistant Professor of Law at Unitedworld School of Law, Karnavati University
ABSTRACT
This paper critically analyses the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016, which governs the priority of claims during liquidation. While the provision establishes a structured distribution framework to promote legal certainty and financial discipline, it often results in inequitable outcomes for stakeholders with limited bargaining power. Secured creditors and resolution process costs receive the highest priority, whereas operational creditors, employees, government dues, and shareholders are relegated to lower tiers. The study examines the impact of this hierarchy on stakeholder recoveries, highlighting issues such as inadequate protection for unsecured creditors, ambiguity in inter se priority among secured creditors, and the inconsistent treatment of statutory employee benefits and government claims. Judicial decisions have attempted to clarify these areas but have also introduced interpretative inconsistencies. Drawing on comparative practices from jurisdictions like the United Kingdom and the United States, the paper proposes reforms including ring- fencing a prescribed asset portion for unsecured creditors, enhancing operational creditor participation, and allowing flexible, creditor-specific restructuring plans. These measures aim to balance efficiency with fairness. The research concludes that while Section 53 provides essential legal structure, evolving it into a more inclusive and balanced framework is imperative for the IBC’s equitable and effective application.
