The Insolvency and Bankruptcy Code, 2016 (“IBC”) ushered in a new era in the Indian insolvency regime by introducing a distribution waterfall mechanism under Section 53 of the IBC. The waterfall mechanism prioritizes dues owed to financial creditors over dues owed to operational creditors and government authorities.
The waterfall mechanism in the IBC is based on the recommendations of the Bankruptcy Law Reforms Committee. The preamble to the IBC also highlights its objective of balancing the interests of the stakeholders, including by alteration in the order of priority of payment of government dues.
There has recently been a rising trend of courts and tribunals seeking to deviate from the distribution waterfall under the IBC. Unfortunately, this tends to put the success of an insolvency resolution process at risk. In this note, we examine three recent examples and discuss why any such deviation could disturb the delicate balance sought to be achieved under the IBC.
