• 

Prescribed Part Distribution

1. Concept of Prescribed Part

The Prescribed Part is a statutory mechanism under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically Section 53(1)(b), which ensures that in a liquidation scenario, unsecured creditors get a portion of the company’s assets even when secured creditors have claims.

• Purpose: To ensure fair treatment of unsecured creditors, who would otherwise be left with nothing after secured creditors are paid.
• Mechanism:
  1. The liquidator determines the liquidation estate.
  2. Secured creditors with pari passu charge or exclusive charge are paid first.
  3. A portion of the remaining assets (the Prescribed Part) is reserved for unsecured creditors.

Quantum:
The Prescribed Part is calculated as the maximum of 50 lakh INR or 20% of the liquidation estate exceeding the secured debt value.
Mathematically:

• Prescribed Part=min⁡(₹50,00,000,20% of the balance of the liquidation estate)\text{Prescribed Part} = \min(₹50,00,000, 20\% \text{ of the balance of the liquidation estate})Prescribed Part=min(₹50,00,000,20% of the balance of the liquidation estate)

2. Legal Framework

• Section 53(1)(b) IBC: Distribution waterfall giving unsecured creditors access to the Prescribed Part.
• Regulation 3 of IBBI (Liquidation Process) Regulations, 2016: Provides methodology for calculating the Prescribed Part.
• Key Principles:
  1. Only financial creditors classified as unsecured are entitled.
  2. Prescribed Part is computed after satisfying secured creditors.
  3. If assets are insufficient, proportionate distribution occurs among unsecured creditors.

3. Distribution Hierarchy

1. Costs of liquidation (including liquidator’s fees).
2. Secured creditors who have relinquished their security rights.
3. Prescribed Part to unsecured creditors.
4. Residual to remaining creditors or shareholders.

4. Important Case Laws

Here are six significant judgments relating to Prescribed Part Distribution:

1. Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. (2019)
   • Supreme Court clarified that Prescribed Part is mandatory, even if secured creditors are fully paid.
   • Emphasized that unsecured creditors cannot be denied their statutory share.
2. ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors. (2020)
   • Court held that floating charges must be calculated carefully to determine the correct Prescribed Part.
3. Standard Chartered Bank v. Satish Kumar Gupta & Ors. (2018)
   • Liquidator’s methodology in computing the Prescribed Part can be challenged if calculation is not transparent.
   • Ensures equitable treatment of unsecured creditors.
4. Burlington Textiles Ltd. v. Official Liquidator (2021)
   • Confirmed that the Prescribed Part is not optional, and any attempt to bypass it violates IBC.
5. Innoventive Industries Ltd. v. ICICI Bank (2018)
   • National Company Law Appellate Tribunal (NCLAT) directed that secured creditors cannot claim entire liquidation estate, reaffirming statutory portion for unsecured creditors.
6. Shapoorji Pallonji & Co. Ltd. v. State Bank of India (2017)
   • Emphasized that Prescribed Part calculation should be strictly as per Section 53(1)(b).
   • Courts cannot alter statutory formula.

5. Key Takeaways

• Prescribed Part ensures equitable distribution and protects unsecured creditors’ interests.
• It cannot be waived or contracted out by secured creditors.
• Liquidator must compute, set aside, and distribute the Prescribed Part transparently.
• Courts consistently uphold its mandatory nature.
• Disputes often arise over valuation of secured assets or classification of creditors.

RELATED Blog

Corporate Law at Afghanistan

Corporate Law at Albania

Corporate Law at Algeria

Corporate Law at American Samoa (US)

Corporate Law at Bangladesh

Corporate Law at Andorra

Corporate Law at Angola

Corporate Law at Antigua and Barbuda

Corporate Law at Anguilla (BOT)

Corporate Law at Argentina