Section 178: Priority of Payment of Debts
Section 178 of the Insolvency and Bankruptcy Code, 2016 prescribes the statutory order in which debts are paid when the final dividend is distributed in a bankruptcy process.
Text of Section 178 - Priority of payment of debts
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or the State Legislature for the time being in force, in the distribution of the final dividend, the following debts shall be paid in priority to all other debts-
(a) firstly, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full;
(b) secondly,-
(i) the workmen's dues for the period of twenty-four months preceding the bankruptcy commencement date; and
(ii) debts owed to secured creditors;
(c) thirdly, wages and any unpaid dues owed to employees, other than workmen, of the bankrupt for the period of twelve months preceding the bankruptcy commencement date;
(d) fourthly, any amount due to the Central Government and the State Government including the amount to be received on account of Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the bankruptcy commencement date;
Explanation to clause (d). For the removal of doubts, it is clarified that any amount, whether or not a security interest is created to secure such amount, due to the Central Government and the State Government, in respect of the whole or any part of the period of two years preceding the bankruptcy commencement date, is distributed under clause (d), and any remaining amount, whether or not a security interest is created to secure such amount, due to the Central Government and the State Government is distributed under clause (e).
(e) lastly, all other debts and dues owed by the bankrupt including unsecured debts.
(2) The debts in each class specified in sub-section (1) shall rank in the order mentioned in that sub-section but debts of the same class shall rank equally amongst themselves, and shall be paid in full, unless the estate of the bankrupt is insufficient to meet them, in which case they shall abate in equal proportions between themselves.
(3) Where any creditor has given any indemnity or has made any payment of moneys by virtue of which any asset of the bankrupt has been recovered, protected or preserved, the Adjudicating Authority may make such order as it thinks just with respect to the distribution of such asset with a view to giving that creditor an advantage over other creditors in consideration of the risks taken by him in so doing.
(4) Unsecured creditors shall rank equally amongst themselves unless contractually agreed to the contrary by such creditors.
(5) Any surplus remaining after the payment of the debts under sub-section (1) shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the bankruptcy commencement date.
(6) Interest payments under sub-section (5) shall rank equally irrespective of the nature of the debt.
(7) In the case of partners, the partnership property shall be applicable in the first instance in payment of the partnership debts and the separate property of each partner shall be applicable in the first instance in payment of his separate debts.
(8) Where there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property; and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property.
Order of priority under Section 178
- First: costs and expenses incurred by the bankruptcy trustee for the bankruptcy process.
- Second: workmen's dues for the preceding twenty-four months and debts owed to secured creditors.
- Third: wages and unpaid dues of employees other than workmen for the preceding twelve months.
- Fourth: qualifying Central and State Government dues for the two-year period specified in clause (d).
- Lastly: all other debts and dues, including unsecured debts.
Meaning of important provisions
Non-obstante clause
The opening words of sub-section (1) give the statutory priority in Section 178 overriding effect where another law enacted by Parliament or a State Legislature contains a contrary rule.
Equal ranking within the same class
Under sub-section (2), debts in the same class rank equally. If the bankrupt's estate cannot pay that class in full, the debts in that class abate in equal proportions.
Creditor who preserves or recovers an asset
Sub-section (3) permits the Adjudicating Authority to give an appropriate advantage in distribution to a creditor whose indemnity or payment resulted in an asset being recovered, protected or preserved, taking account of the risk undertaken.
Unsecured creditors and interest
Unsecured creditors rank equally unless they have contractually agreed otherwise. After debts under sub-section (1) are paid, any surplus is applied towards interest for the period the debts remained outstanding after the bankruptcy commencement date, and such interest ranks equally irrespective of the nature of the debt.
Partnership and separate property
Sub-sections (7) and (8) distinguish partnership property from the separate property of partners and prescribe how each is first applied and how any surplus is subsequently dealt with.
2026 amendment and current framework
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 received Presidential assent on 6 April 2026. The amendment to Section 178 clarifies the treatment of Central and State Government dues under clause (d), including where a security interest exists, and the treatment of remaining government dues under clause (e). Applicability should be read with the relevant commencement notification and current subordinate legislation.
Related IBC provisions
Section 176 deals with final dividend, while Section 177 deals with claims of creditors. Section 178 determines priority when the final dividend is distributed.
Page reviewed for the legal framework available as of September 2026.