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Prioritizing Fairness: Preferential Creditors in the Insolvency and Bankruptcy Code (IBC)

Radhika Agrawal
February 28, 2024
Preferential Creditors


In the intricate tapestry of insolvency proceedings, the Insolvency and Bankruptcy Code (IBC) of India delineates a structured framework for the resolution of distressed entities, striving for fairness and equilibrium among creditors. Central to this framework are preferential creditors, a distinct class bestowed with priority in the distribution of assets over other creditors. This comprehensive blog elucidates the concept of preferential creditors under the IBC, shedding light on their significance, rights, and pivotal case laws shaping their application.

Understanding Preferential Creditors: 

Preferential creditors represent a specific cohort endowed with priority in the hierarchy of creditors during insolvency proceedings. The rationale behind this prioritization lies in safeguarding interests deemed paramount by law or policy. The IBC delineates the hierarchy of creditors, with preferential creditors holding precedence over unsecured creditors but subservient to secured creditors.

Categories of Preferential Creditors: Under the IBC regime, several categories of creditors are accorded preferential status, including:

1. Employees: Employees occupy a pivotal position among preferential creditors, ensuring that their rightful claims, such as unpaid salaries, wages, and provident fund contributions, are privileged over other unsecured creditors. This provision underscores the imperative of safeguarding employees' rights amidst the financial tumult of the corporate debtor.

2. Workmen: Analogous to employees, workmen, encompassing labourers and individuals engaged in manual labour, enjoy preferential treatment under the IBC. Their claims for overdue wages and statutory dues hold primacy in the asset distribution paradigm during insolvency resolution.

3. Statutory Dues: Certain statutory obligations owed by the corporate debtor to governmental authorities, such as taxes, cess, and duties, are classified as preferential claims. Elevating these dues in the distribution hierarchy ensures the seamless functioning of essential public services and upholds the fabric of the taxation system.

Significance of Preferential Creditors:

The recognition of preferential creditors embodies multifaceted significance within the IBC framework:

1. Protection of Vulnerable Stakeholders: Prioritizing claims of employees and workmen serves as a bulwark against the vulnerability of stakeholders with limited bargaining power or alternative means of sustenance.

2. Upholding Public Interest: By according to precedence to statutory dues, the IBC fortifies the continuity of vital public services and buttresses the integrity of the taxation ecosystem, aligning with broader public welfare imperatives.

3. Fostering Harmonious Industrial Relations: Bestowing priority upon claims of employees and workmen fosters amicable relations between employers and employees, nurturing an environment of mutual trust and respect even amid financial turmoil.

“Case Laws Shaping Preferential Creditors' Rights:

Several seminal judicial pronouncements have profoundly influenced the contours of preferential creditors' rights under the IBC. Highlighted below are a few notable case laws:

1. Innoventive Industries Ltd. v. ICICI Bank & Ors.

The Supreme Court underscored the overarching objective of the IBC to balance the interests of all stakeholders, including preferential creditors like employees and workmen, emphasizing the imperative for resolution plans to proffer equitable treatment to all concerned parties.

2. State Bank of India v. Moser Baer Karamchari Union & Ors.

The National Company Law Appellate Tribunal (NCLAT) affirmed the sacrosanct nature of employee dues, including unpaid salaries and benefits, holding them in primacy over other unsecured creditors, thereby reaffirming the protective mantle extended to employees under the IBC.

3. Union of India v. Infrastructure Leasing & Financial Services Ltd. (IL&FS) Group of Companies

This landmark case reiterated the paramount importance of prioritizing statutory dues, such as tax liabilities, to uphold the sanctity of public services and ensure adherence to legal obligations, thereby underscoring the overarching public interest imperative.


Preferential creditors epitomize a cornerstone of the insolvency landscape, embodying the principles of fairness, equity, and stakeholder protection enshrined within the IBC. The recognition of preferential claims underscores a delicate balance between commercial exigencies and societal imperatives, ensuring the preservation of essential interests and the sustenance of public trust in the insolvency resolution framework. Through seminal judicial pronouncements and evolving jurisprudence, the legal discourse surrounding preferential creditors continues to evolve, reaffirming the indelible commitment towards equitable resolution and stakeholder welfare within the ambit of the IBC.

About the author
Radhika Agrawal

Radhika Agrawal, a proficient company secretary and lawyer with an additional background in business administration through an MBA, brings a wealth of experience spanning three years in the intricate realm of insolvency, bankruptcy, and restructuring field. Her expertise extends to the intricacies of secretarial practices, enriching her holistic understanding of corporate governance. Through her insightful blog, she intricately weaves her expertise, offering invaluable insights into navigating the complexities of corporate law and finance.

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