The controversy over government dues under the Insolvency and Bankruptcy Code (IBC) has been one of the most consequential and contested chapters in Indian insolvency jurisprudence. What began with the Supreme Court’s reasoning in State Tax Officer v. Rainbow Papers Ltd. — which opened the door to classifying certain tax claims as secured — has since produced a cascade of tribunal orders, commentary, and now a legislative counter-move in the IBC Amendment Bill, 2025. The net effect: law and practice are converging toward clarity, but several practical problems remain for resolution professionals, creditors and revenue authorities.
What Rainbow Papers actually did — and why it rattled the IBC framework
In Rainbow Papers, the Court accepted that where a statute creates a charge in favour of a government authority (for example, certain provisions under VAT/GST statutes), that charge could — on its textual footing — be treated as a security interest and therefore give the government the standing of a secured creditor in the insolvency waterfall. Practically, that decision threatened to upend Section 53’s carefully crafted priority: insolvency costs, secured creditors, workmen/employee dues, financial creditors, then operational creditors — with government dues traditionally lower in priority. The Rainbow reasoning therefore created anxiety among financial creditors and practitioners about a partial “crown preference” revival.
NCLAT (and other tribunals) — pushback and re-calibration
Since Rainbow, several NCLAT and NCLT orders have scrutinised government claims closely, often refusing to automatically accord secured status where the legislative frame or factual matrix did not support an actual charge akin to a security interest. Tribunals have focused on substance over form: does the statutory provision create a charge that is comparable to an enforceable security right? Was the charge consistently and effectively perfected? Several recent appellate orders have either limited the scope of Rainbow or required granular inquiry before recognizing government dues as secured — signalling that Rainbow is not a blanket invitation to crown preference.
Legislative reset: IBC Amendment Bill, 2025
Responding to the jurisprudential uncertainty, the Government’s IBC Amendment Bill, 2025, takes a firm position: statutory dues will not automatically be treated as secured debts and the Code’s priority scheme (Section 53) will be respected. The Bill expressly seeks to prevent a jurisprudential drift that would subordinate financial creditors by elevating routine government dues to secured status. This is a major policy reversal from the broad inference some drew from Rainbow, and it restores predictability for lending markets — though it also raises practical questions about genuine statutory charges that mimic security interests.
Key practical consequences for practitioners
- Short-term uncertainty is receding, but due diligence must be sharper. Even with the Bill, resolution professionals should not treat government claims as monolithic; instead, they must investigate whether a statutory provision actually creates a specific charge and whether that charge was perfected and enforceable in the facts of the case.
- Valuation and waterfall stress tests are back on the front burner. Resolution plans and liquidation estimates must model scenarios both with and without crown preference — especially where large tax contingencies exist.
- Revenue authorities must align internal processes. Tax authorities should adapt to insolvency timelines — timely issuance, proper crystallisation and clear communication of claims will reduce litigation and appeal.
- Tribunal litigation is likely until the Bill becomes law. Expect more fact-heavy NCLT/NCLAT decisions testing the scope of statutory charges; some disputes will reach the Supreme Court again.
What resolution professionals should do now — a short checklist
- Rigorously verify claim nature: statutory provision → nature of charge → perfection steps taken.
- Document correspondence with revenue authorities and obtain contemporaneous records of assessments/charges.
- Prepare dual waterfall scenarios (with/without secured status for govt dues) when drafting plans.
- Engage tax counsel early to negotiate compromise or crystallise dues where feasible.
- If liquidation is possible, prepare for avoidance/settlement strategies that consider revenue claims’ disputed nature.
Final take — policy, predictability and practical prudence
Rainbow Papers forced uncomfortable questions on the IBC’s treatment of the “crown.” But the legislative response embodied in the IBC Amendment Bill, 2025, signals a policy choice: protect the priority architecture of the Code and avoid inadvertent crown preference. For practitioners, the takeaway is clear — legal uncertainty may be reducing, but operational complexity remains. The winners will be those who combine legal precision with commercial realism: verify claims, model outcomes, engage stakeholders early, and keep meticulous records. That is the practical path to survival and success in the post-Rainbow era.
I am Insolvency Resolution Professional handled/ handling many insolvency cases. In case of any queries related to IBC, you may contact me at Krit Narayan Mishra, kritmassociates@gmail.com | Mob: 9910859116
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