DMPQ: What do you mean by Waterfall mechanism?

Section 53 of the Insolvency and Bankruptcy Code creates a waterfall mechanism, whereby the proceeds from the sale of the liquidation assets in respect of a corporate debtor are required to be distributed in a certain order of priority. Topping the list are the costs associated with insolvency resolution process and liquidation, which are followed by workmen’s dues during the 24 months preceding the liquidation commencement date and debts owed to secured creditor(s), both ranking equally. Interestingly, like labour laws, the IBC distinguishes between workmen and employees, such that the dues in relation to employees (that is, persons not falling in the category of ‘workman’ under the Industrial Disputes Act 1947) are placed at a lower pedestal than the dues in relation to workmen.

 

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