The distribution of liquidation assets, particularly among secured creditors, remains a complex and unsettled issue under the Insolvency and Bankruptcy Code, 2016. The key debate is whether liquidation proceeds should be distributed pro-rata based on admitted claims or according to the security interests held by creditors. The uncertainty has been further heightened by the Supreme Court’s stay on an NCLAT judgment supporting the pro-rata approach. However, the stay is an interim measure and does not finally decide the underlying legal issue.

Until the Supreme Court provides definitive clarity, liquidators and stakeholders must carefully assess existing judicial precedents, the nature of security interests, and the facts of each case to minimise the risk of future disputes or liability. This is particularly important in the context of Asset Liquidation, where distribution decisions can directly affect the recovery of secured creditors.

The Distribution Conundrum in Corporate Liquidation

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Liquidation under the IBC provides a statutory framework for the distribution of assets in liquidation, but difficulties arise when sale proceeds are insufficient to meet competing claims. The issue becomes complex when assets covered by specific security interests are sold and creditors without a charge over those assets also seek a share.

While some secured creditors argue for distribution based on specific security interests, others favour a pro-rata distribution based on admitted claims in the context of liquidation estate distribution, relying on recent judicial developments. This divergence has created uncertainty and disputes in liquidation proceedings, requiring insolvency professionals to proceed carefully and adopt appropriate legal and strategic safeguards, particularly in an Asset Liquidation process where the distinction can materially affect how the available proceeds are allocated.

The Foundational Framework: Section 53 of the IBC and the Waterfall Mechanism

Section 53 of the IBC sets out the ‘waterfall mechanism’ for the distribution of assets in liquidation. It establishes the priority of payments, starting with insolvency and liquidation costs, followed by the dues of workmen and secured creditors who relinquish security.

However, the provision does not clearly address how assets should be distributed among secured creditors with different types or values of security. This gap has resulted in differing judicial interpretations and uncertainty in liquidation proceedings.

A Clash of Principles: Analysis of Conflicting Judicial Precedents

The legal uncertainty stems largely from differing approaches taken by the Supreme Court to the treatment of secured creditors and their security interests under the IBC. The differing approaches have subsequently become relevant to the debate on distribution among secured creditors in liquidation.

  1. India Resurgence ARC Private Limited v. Amit Metaliks Limited & Anr.
    The Supreme Court favoured a pro-rata approach, supporting equitable distribution among secured creditors based on admitted claims. The judgment emphasised equality within the same class of creditors rather than allowing individual creditors to gain a disproportionate advantage from their security.
  2. DBS Bank Limited Singapore v. Ruchi Soya Industries Ltd. & Anr.
    This judgment took a different approach, recognising a secured creditor’s right to recover up to the value of its individual security. This could result in different recoveries among secured creditors. The issue was later referred to a larger bench, leaving the legal position unresolved. It is also worth noting that a 2026 amendment to the IBC, effective from 26th May 2026, has brought some clarity on how the extent of a secured creditor’s status is determined. However, this does not resolve the core issue discussed above the question of how liquidation proceeds are to be distributed among secured creditors in the event of a shortfall remains pending before the Supreme Court’s larger bench.
  3. NCLAT Judgment: State Bank of India v. IDBI Bank Limited & Anr.
    The NCLAT endorsed the pro-rata approach, holding that the earlier Supreme Court ruling should guide liquidation proceedings until the larger bench settles the issue. However, the Supreme Court subsequently stayed the operation of the NCLAT judgment, adding further uncertainty to the position.

Judicial Interpretation and Procedural Developments

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In the absence of a final ruling from the larger bench, courts and tribunals have continued to rely on the earlier Supreme Court judgment where conflicting decisions exist. This approach helps maintain consistency until the legal position is conclusively settled.

In IFCI Limited v. IDBI Bank Limited & Anr., Civil Appeal No. 1424 of 2025, the Supreme Court, by an order dated February 14, 2025, issued notice and stayed the operation of the NCLAT’s judgment dated January 28, 2025, concerning the distribution of liquidation proceeds among secured creditors.

Importantly, the interim stay does not decide the merits of the dispute. The key question whether liquidation proceeds should be distributed on a pro-rata basis or based on the value of individual security interests therefore remains unresolved.

Meanwhile, other NCLAT decisions have continued to support the pro-rata approach. As a result, liquidators and stakeholders must carefully navigate the existing judicial precedents while the Supreme Court’s final position remains awaited.

Managing the Legal Ambiguity: Strategic and Practical Considerations

The liquidator must balance compliance with the current legal position while preparing for possible changes in judicial interpretation that may affect liquidation estate distribution. This is particularly relevant in an Asset Liquidation process, where a later change in the applicable methodology may require amounts already distributed to be recalculated.

Key Strategic Considerations

Risk of Redistribution: If a final ruling favors the security interest-based approach, there may be a requirement to redistribute liquidation proceeds already paid. This could result in logistical challenges and legal complications.

Impact on Secured Lending: A definitive pro-rata ruling may influence credit markets by reducing the enforceability of security interests during liquidation, potentially reshaping credit risk assessments and lending practices in India.

Undertakings from Creditors: To safeguard against potential future reversals, creditors may be required to furnish undertakings to refund any excess amounts received if an alternative mode of distribution is subsequently directed by a judicial authority. Such undertakings have been recognised in prior tribunal proceedings as a prudent risk-management measure in the liquidation process.

Limitation of Prospective Overruling: Although the Supreme Court may apply the doctrine of prospective overruling, its use has been limited, particularly in non-constitutional matters. Reliance on this doctrine as a protective measure remains speculative.

Conclusion

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The distribution of assets in liquidation under the IBC remains unsettled, particularly with respect to the rights of secured creditors. While Section 53 establishes the broad distribution hierarchy, it does not clearly address the distribution among secured creditors with different security interests.

Until the Supreme Court provides a final ruling, liquidators should follow the prevailing judicial position while adopting practical safeguards, such as creditor undertakings, to manage the risk of future changes in the law.

Why Choose Ascentium India?

Navigating liquidation proceedings under the Insolvency and Bankruptcy Code, 2016, particularly where the law on Liquidation Estate Distribution remains unsettled, requires more than a working knowledge of the statute. At Ascentium India, we support liquidators, secured creditors, lenders and other stakeholders in evaluating distribution methodologies, reviewing security-related issues, assessing judicial developments, and supporting statutory and procedural compliance. We also assist with creditor communications, undertakings, distribution workings, legal-risk assessment and compliance under the Insolvency and Bankruptcy Code, 2016, while helping stakeholders document decisions taken during Asset Liquidation. To learn more about our services, please email us at in-info@ascentium.com or reach out to us via WhatsApp at (+91) 77380 66622.

Authored by:
Dushyant Singh | IBC

 

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