Unsecured Creditor

IBC, 2016 — Section 53

A creditor who does not hold any security interest over the debtor's assets. In the priority waterfall under SARFAESI/IBC, unsecured creditors rank after secured creditors. Under the IBC liquidation waterfall (Section 53(1)), after the insolvency resolution process and liquidation costs, secured creditors who relinquish their security rank equally with workmen's dues for 24 months (to the extent of the value of the security; any balance ranks as unsecured), financial debts owed to unsecured creditors rank at clause (d), and unsecured debts not covered by a higher class rank under clause (f) as "remaining debts and dues".

In practice, being unsecured determines where a creditor stands in the queue when assets run short, and the answer is usually near the back. Because an unsecured creditor holds no security interest over the debtor's assets, the priority waterfall under SARFAESI and the IBC ranks it after secured creditors. Under the IBC liquidation waterfall in Section 53, after the insolvency resolution process and liquidation costs, secured creditors who relinquish their security rank equally with workmen's dues (to the extent of the value of the security), then come other employees' dues, then financial debts owed to unsecured creditors, then Government dues, and other unsecured debts not covered by a higher class, such as suppliers' dues, rank among the remaining debts and dues, so an unsecured lender frequently recovers only a fraction of its claim once the corporate debtor is liquidated. The practical lesson at the lending stage is to take and perfect security wherever possible, because the difference between secured and unsecured status is the difference between meaningful recovery and a token dividend. At the resolution stage, an unsecured creditor's leverage lies in the resolution plan rather than enforcement. Well-advised lenders confirm their security is validly created and registered before treating themselves as secured.