IBC Section 177: Claims of creditors

Section 177 of Insolvency and Bankruptcy Code, 2016: Claims of creditors

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) A creditor who has not proved his debt before the declaration of any dividend is not entitled to disturb, by reason that he has not participated in it, the distribution of that dividend or any other dividend declared before his debt was proved, but-

(a) when he has proved the debt, he shall be entitled to be paid any dividend or dividends which he has failed to receive, out of any money for the time being available for the payment of any further dividend; and

(b) any dividend or dividends payable to him shall be paid before that money is applied to the payment of any such further dividend.

(2) No action shall lie against the bankruptcy trustee for a dividend, but if the bankruptcy trustee refuses to pay a dividend payable under sub-section (1), the Adjudicating Authority may order him to-

(a) pay the dividend; and

(b) pay, out of his own money-

(i) interest on the dividend; and

(ii) the costs of the proceedings in which the order to pay has been made.

Legal Commentary & Landmark Judgments: Section 177

Section 177 governs the rights of late-claiming creditors who prove their debts after an interim dividend has been distributed by the Bankruptcy Trustee.

Catch-Up Dividend Right: A creditor who has not proved his debt before the declaration of an interim dividend is entitled to be paid out of any money for the time being in the hands of the trustee.
Non-Disturbance of Past Distributions: The late-proving creditor cannot disturb or recall any dividend declared before his debt was proved, nor can he question past distributions.
Parity Adjustment: He is entitled to receive catch-up dividends to bring his percentage recovery to parity with earlier distributions before any further dividend is paid to other creditors.

Key Landmark Precedents:

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: The Supreme Court noted that the Code equitably balances the rights of late claimants without unwinding past bona fide dividend payouts.
Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2020) 8 SCC 531: Affirmed that non-disturbance of past distributions is vital to ensure financial stability for receiving creditors.

Courtroom Practice & Strategic Litigation Guidance:

Trustees receiving late proofs of debt must verify whether undistributed estate funds are sufficient to pay catch-up dividends before entertaining any further general distributions.