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

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 payout 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 payout 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.

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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 on

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

Originally published by International Insolvency & Restructuring Report 2023/24 on the 13th of June, 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Avinash Subramanian
AZB & Partners
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