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The commencement of the Insolvency and Bankruptcy Code in 2016 in India, introduced to give balanced rights to the Financial Creditors and Corporate Debtors, giving Debtors the attempt to


The commencement of the Insolvency and Bankruptcy Code in 2016 in India, introduced to give balanced rights to the Financial Creditors and Corporate Debtors, giving Debtors the attempt to resolve the financial catastrophe put upon them while protecting the due rights of the Creditors. A similar question of law was raised recently in the supreme court where the rights of the government claiming its statutory dues at stake were in question. This article deals with the placing of statutory dues owed to the government by the corporate debtor and the position of secured creditors in the waterfall scheme section 53 of the Insolvency and Bankruptcy Code 2016, decided in the latest judgement, State Tax Officer vs Rainbow Papers Limited decided on 6 September 2022 pronounced by honourable Justice Indira Banerjee.

Factual background

  • This case concerns the respondent company Rainbow Papers Ltd. against whom a petition was filed by one Operational Creditor to the respondent for instituting the ‘Corporate Insolvency Resolution Proceeding’ (CIRP) before the Ahmedabad Bench of NCLT.
  • It was the case of the appellant that approximately Rs. 47.36 was payable by the respondent to the appellant under the GVAT Act. It was informed by the Resolution Professional to the appellant that the entire claim of outstanding tax dues had been paid off. The Appellant challenged the Resolution Plan that the Government dues are not paid off.     

Rulings of the Court

  • National Company Law Tribunal– The ‘Adjudicating Authority (AA), i.e. NCLT, rejected the application and held that the ‘Committee of Creditors’ (CoC) duly approved the ‘Resolution Plan’ by voting with a majority standing at 79.79% in its favour.
  • National Company Law Appellate Tribunal- The appellant, State Tax Officer, then filed an appeal before the NCLAT against the order of NCLT, NCLAT dismissed the appeal by observing that the appellant approached the resolution professional and made the claim at a belated stage when the ‘Resolution Plan’ was already authorised by the CoC.

Supreme Court observations: Priority of statutory dues to the Government and other authorities under IBC

  • Liquidation in case of Insolvency- If a company which has turned insolvent is unable to pay its dues, including unpaid taxes to the government authorities, and when there is no plan in place to dissipate those debts in a phased manner the company must be liquidated and its assets sold and distributed following the scheme laid down in Section 53 of the IBC.
  • Dues owed to Governmental Authority- The Supreme Court remarked that the ‘CoC’, which included financial institutions and other financial creditors, cannot assure their dues at the sacrifice of any statutory rights that they owe to any Governmental Authority. The Committee of Creditors must consider these outstanding dues to the Government authority when voting on the resolution plan.
  • The issue under Consideration- The question presented in the appeal was whether the provisions of the IBC, specifically Section 53, superseded “Section 48” of the Gujarat Value Added Tax (GVAT) Act. The Bench observed that the IBC’s definition of “Secured Creditor” is wide enough to encompass all security interests generated in favour of a ‘Secured creditor’.
  • Effect of Ignoring Governmental Dues- The honourable Court further observed, “If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.”
  • Relation Between Section 48 and Section 53- The Court determined that Section 48 of the GVAT Act is not in conflict with Section 53 or any other provision of the IBC. According to Section 53(1)(b)(ii), For 24 months preceding the initiation date of liquidation, debts obligated to a secured creditor, which includes the State under the GVAT Act, rank equally with other specified obligations, including debts on account of workman’s dues.

On the question of Discretionary powers of Adjudicating Authority

  • Requisite to meet conditions in Section 30(2)- It is mandatory for the resolution plan to meet all requirements provided under section 30 sub-section 2 of the IBC, non-compliance of which leaves the resolution plan invalid and the same does not bind the Central/State government, statutory or any other authority if there are any outstanding dues by the Corporate Debtor to such authority.
  • Limits to Discretion of Adjudicating Authority- On the question of discretionary powers of Adjudicating Authority the Honourable Supreme Court stated that the discretion given under section 31(1) is to be performed in such a way that if the resolution plan is not in conformity with any law concerned therein, the Resolution plan will have to be repudiated. Despite the wording of Section 31(1) “may” signifying discretion, the Supreme court stated that such discretion is subject to the facts and circumstances of the case. And if the circumstances stipulate, the word “may” can be interpreted as “shall”.

Author’s Analysis

  • On precedence of Income tax Authorities over Secured Creditors- In the past, the Supreme Court (SC) dealt with a similar question relating to Income Tax laws, customs laws and other related laws. But, in all the cases the SC has supported the priority of Secured Creditors over tax dues. The Apex Court cited Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) and said categorically that income-tax dues, being Crown obligations, do not take precedence over the secured creditors which are private entities. Notably, in Dena Bank, the Apex Court found, “the common law doctrine of priority of crown debts would not extend to providing preference to crown debts over secured private debts”. In a similar vein, the Andhra Pradesh High Court explicitly stated in Leo Edibles and Fats Limited v. the Tax Recovery Officer (2018) that the Income-tax authorities cannot be likened to secured creditors and so cannot claim precedence.
  • Interpretation of Security Interest- However, in the authors’ opinion, interpreting the terms ‘security interest’ and ‘secured creditors’ provided under sections 3(31) and 3(30) of the IBC, respectively, a secured creditor has to have a ‘security interest’. A ‘security interest’ is defined as a Right or Title formed by a ‘transaction’ that ensures the payment or execution of a Due. As a result, the idea of security interest, as applied in the SARFAESI Act and the IBC is intimately linked to a mutual agreement or transaction between the parties.
  • Hierarchy under Section 53- The IBC’s payment structure is specified, the secured creditors together with workmen’s dues are listed second in order of precedence under Section 53 of IBC, whereas government dues are ranked fifth. Suppose the lawmakers’ objective (and hence the IBC’s construction) was to place tax authorities on the same pedestal as secured creditors the purpose of establishing a different rank for Government dues is disorienting and unclear. And to say that tax dues will not form part of statutory dues is altogether contradictory.


The honourable Court stated that if the Resolution Plan completely neglects the statutory obligations payable to any State Government or other legal authorities, the Adjudicating Authority is allowed to reject the Resolution Plan. Under GVAT act, the Supreme Court deemed the state to be a secured creditor and noted that according to Section 30(3) of the IBC, a secured creditor to whom a security interest is credited. And by operation of law, such a security interest might be formed. The court also remarked that any Government or Governmental Authority is not excluded from the definition of a ‘secured creditor’ under the IBC. While putting the rights of the stakeholders in the Corporate Insolvency Resolution Process on the weighing scale, the waterfall mechanism designed in the section 53 of the IBC must be taken into the light of the judicial application. Each of the pari passu Financial Creditors must be given the rights as accrued to it by the law and rendering the Resolution Plan not binding and invalid wholly because it does not provide payment of the government dues proposes questions.

Authors Name: Biprojeet Talapatra & Neerja (Campus Law Centre, Delhi University)