IBBI Examines Giving Higher Priority To Msmes In IBC Liquidation Waterfall

(MENAFN- KNN India) New Delhi, Dec 13 (KNN) The Insolvency and Bankruptcy Board of India (IBBI) is examining the possibility of reviewing the liquidation waterfall mechanism under the Insolvency and Bankruptcy Code (IBC), 2016, to explore whether micro, small and medium enterprises (MSMEs) should be accorded higher priority in the distribution of proceeds.

“The idea to prioritise MSME dues under IBC has been around for quite some time but the government is finally moving forward with a study that will make for a stronger case to classify MSME dues at par with secured creditors,” said an official, according to FE. However, no timeline has yet been fixed for completing the study, the official added.

Current Legal Framework

Under Section 53 of the IBC, MSMEs fall under the category of operational creditors, which places them lower in the priority order during liquidation.

The distinction between financial and operational creditors, and the resulting waterfall structure, was upheld by the Supreme Court in its landmark Swiss Ribbons judgment in January 2019.

In the initial years of the IBC, operational creditors often received relatively higher recoveries under resolution plans, in some cases ahead of financial creditors. Over time, recovery patterns have shifted significantly in favour of financial creditors, with operational creditors, including MSMEs, seeing a decline in their share.

Parliamentary Panel Concerns

A recent parliamentary panel has urged the Ministry of Corporate Affairs to expedite a review of the waterfall mechanism, citing its adverse impact on vulnerable stakeholders such as MSMEs.

The panel noted that despite several amendments to the IBC, the framework offers limited protection to MSMEs, both as creditors and as debtors.

“The pre-packaged insolvency scheme which was designed for MSMEs has not taken off as well due to trust deficit between borrowers and lenders. The amendments to section 53 are long overdue which will help safeguard the interests of MSMEs,” the official said.

Expert Views and Caution

Legal and insolvency experts have, however, urged caution. They note that any revision may yield only limited gains for MSMEs, given the overall recovery rate under the IBC, which stood at about 32.44 per cent as of September 2025.

(KNN Bureau)

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