The liquidator, preferential payments and insolvency under the IBC

Company Law · Unit V · Topic 22 of 22 · 7 min read

Appointment, powers and duties of the Company Liquidator under sections 275 and 290, overriding and ordinary preferential payments under sections 326 and 327, fraudulent preference, and a short account of the corporate insolvency resolution process, liquidation and the distribution waterfall under the Insolvency and Bankruptcy Code, 2016 as amended up to 2026.

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On this page

1. Appointment of the Company Liquidator
2. Position of the liquidator
3. Powers and duties: section 290
4. Order of payment in a winding up under the Act
5. Corporate insolvency resolution under the IBC: an outline
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. The liquidator is the officer who winds up the company: he collects the assets, settles the claims and pays them out in a fixed order. Two orders of payment now exist. In a winding up by the Tribunal under the Companies Act, sections 326 and 327 apply. In a liquidation under the Insolvency and Bankruptcy Code, section 53 of the Code applies instead (section 327(7) of the Act says so expressly). Know which regime the question is about.

1. Appointment of the Company Liquidator

On making a winding up order the Tribunal appoints an Official Liquidator or a liquidator from the panel as the Company Liquidator (section 275(1)). Since the Code, a provisional liquidator or Company Liquidator is appointed from among insolvency professionals registered under the Code (section 275(2)). The Tribunal may limit a provisional liquidator's powers (section 275(3)), fixes the terms of appointment, and may remove and replace the liquidator for misconduct, fraud, misfeasance, professional incompetence, failure to exercise due care, inability to act, or conflict of interest (section 276). In Indian law the Official Liquidator is an officer attached to the Tribunal and appointed by the Central Government (section 359).

2. Position of the liquidator

The liquidator is not a trustee for individual creditors or contributories in the strict sense; he is an officer of the Tribunal and an agent of the company, standing in a fiduciary relation to it. The company's property does not vest in him; he takes it into his custody (section 283). He must act impartially, with due care, and under the Tribunal's control.

3. Powers and duties: section 290

Subject to the Tribunal's directions, the Company Liquidator may:

carry on the business so far as necessary for beneficial winding up;
execute deeds and documents in the company's name, using its seal where needed;
sell the company's property and actionable claims, by public auction or private contract, and sell the whole undertaking as a going concern;
raise money on the security of the assets;
institute or defend suits and prosecutions in the company's name;
invite and settle claims of creditors, employees and others, and distribute the sale proceeds in the order of priority;
inspect the company's records with the Registrar and other authorities;
prove in the insolvency of any contributory;
draw and endorse negotiable instruments;
take out letters of administration to a deceased contributory's estate;
obtain professional assistance; and
apply to the Tribunal for orders or directions.

His duties include taking custody of all property (section 283), settling the list of contributories and making calls, keeping proper books, submitting reports to the Tribunal (section 281 within sixty days of the order), and examining the conduct of promoters, directors and officers, reporting fraud and misfeasance (sections 300, 340). When the affairs are completely wound up he applies for dissolution (section 302).

4. Order of payment in a winding up under the Act

Overriding preferential payments (section 326). These are paid in priority to all other debts: (a) workmen's dues; and (b) where a secured creditor has realised his security, the shortfall due to him or the workmen's portion in his security, whichever is less, ranking equally with workmen's dues. Wages and salary of workmen for two years before the winding up order, and compensation due under labour laws for that period, are paid in full within thirty days of sale of assets, ahead even of secured creditors.

Preferential payments (section 327). Subject to section 326, the following are next paid in priority to all other debts:

revenues, taxes, cesses and rates due to the Central or a State Government or a local authority that became due within the twelve months before the relevant date;
wages or salary of any employee for services in the four months within the twelve months before the relevant date, up to the notified amount per workman;
accrued holiday remuneration;
contributions payable by the company as employer under employees' state insurance and similar laws for the twelve months before the relevant date (unless the winding up is voluntary for reconstruction);
compensation for the death or disablement of employees, unless covered by insurance;
sums due to employees from provident, pension, gratuity and welfare funds; and
expenses of investigations under sections 213 and 216.

They rank equally among themselves and abate proportionately if the assets are insufficient. They have priority over the claims of holders of a floating charge to the extent the assets available to general creditors are insufficient. After these come the secured creditors' balances, unsecured creditors, and finally the members according to their rights.

Fraudulent preference (section 328). Where the company, within six months before the winding up application, does anything that puts a creditor, surety or guarantor in a better position than he would otherwise have in liquidation, the Tribunal may set it aside as a fraudulent preference and restore the position. A transfer not in good faith, or not for valuable consideration, within a year before the application is void against the liquidator (section 329).

5. Corporate insolvency resolution under the IBC: an outline

Initiation. On a default of at least one crore rupees (the threshold notified in 2020 under section 4): by a financial creditor (section 7), an operational creditor after a demand notice (section 9), or the corporate debtor itself (section 10), before the NCLT as Adjudicating Authority. In Innoventive Industries Ltd. v. ICICI Bank, 2017 INSC 837, (2018) 1 SCC 407, the Court held that on a financial creditor's application the only question is whether a default has occurred. Since 26 May 2026, under the Insolvency and Bankruptcy Code (Amendment) Act, 2026, section 7(5) requires the NCLT to admit within fourteen days if a default is proved and the application is complete, and forbids rejection on any other ground. An operational creditor's application fails where a pre-existing dispute exists: Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., 2017 INSC 975, (2018) 1 SCC 353.
Moratorium (section 14): on admission, suits, enforcement of security and transfer of assets are barred; an interim resolution professional takes over management from the Board.
Committee of creditors (section 21) of financial creditors decides on a resolution plan by sixty-six per cent of voting share; its commercial wisdom is not open to judicial review on merits: K. Sashidhar v. Indian Overseas Bank, 2019 INSC 148, (2019) 12 SCC 150; Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, 2019 INSC 1256, (2020) 8 SCC 531.
Time limit (section 12): 180 days, extendable once by up to 90 days, and to be completed in all within 330 days including litigation time.
Liquidation (section 33) follows if no plan is approved within time or the committee so decides; assets are distributed under section 53: (a) insolvency and liquidation costs; (b) workmen's dues for twenty-four months and secured creditors who relinquished security, equally; (c) other employees' dues for twelve months; (d) financial debts to unsecured creditors; (e) Government dues for two years and secured creditors' unpaid balance after enforcing security, equally; (f) remaining debts; (g) preference shareholders; (h) equity shareholders.

The Code was upheld in Swiss Ribbons (P) Ltd. v. Union of India, 2019 INSC 95, (2019) 4 SCC 17, including the distinction between financial and operational creditors. The 2026 amendments in force from 26 May 2026 also restricted withdrawal of an admitted application (section 12A: ninety per cent of the committee, and not before the committee is formed or after the first invitation for resolution plans), and clarified the treatment of Government dues and partly relinquished security under section 53. The new creditor-initiated insolvency resolution process (Chapter IV-A) and group insolvency provisions (Chapter V-A) in that Act were not among the provisions brought into force by the May 2026 notification.

How this is examined

June 2025 set short notes on “preferential payment” and “liquidator”. For the liquidator: appointment under section 275 from insolvency professionals, position, the powers in section 290, and his duties ending in dissolution. For preferential payments: section 326, then section 327 item by item, then a line that in IBC liquidation section 53 applies instead, with its order. Where a question on winding up modes or insolvency is asked, the IBC outline in part 5 is enough for a 6-mark answer.

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