Liquidation waterfall

Also called: Waterfall mechanism · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

The liquidation waterfall is the order in which money from selling a failed company's assets is paid out. It is set by Section 53 of the IBC 2016. Each level is paid in full before the next level gets anything.

1. Costs of the insolvency process and the liquidation
2. Secured creditors, and workmen's dues for 24 months (ranked equally)
3. Other employees' dues for 12 months
4. Unsecured financial creditors
5. Government dues and the secured creditors' shortfall
6. Other debts
7. Preference shareholders
8. Equity shareholders

Owners come last because they took the business risk.

Example

Suppose a liquidated firm's assets fetch Rs 100 crore. Process costs are Rs 5 crore, and secured creditors and workmen's dues together are Rs 110 crore. The Rs 95 crore left after costs is shared between the second level alone. Every level below it, including all shareholders, gets nothing.

Don't confuse with

• Haircut: this is the loss a creditor accepts when it recovers less than it is owed. The waterfall decides who bears those haircuts first.

Related concepts

• Insolvency
• Bankruptcy
• Corporate Insolvency Resolution Process
• Committee of Creditors
• Resolution professional
• Haircut
• Pre-packaged insolvency
• Financial and operational creditors
• Cross-border insolvency

Read more

• The Insolvency and Bankruptcy Code: CIRP, pre-packs and haircuts