Government Dues In Corporate Insolvency: Re- Examining Creditor Hierarchy After Rainbow Papers And The 2025 IBC Amendment
- IJLLR Journal
- Mar 16
- 2 min read
Dhyaanee Riteshkumar Joshi, School of Law, CHRIST (Deemed to be University)
ABSTRACT
The prioritisation of government dues in corporate insolvency proceedings has remained a significant issue within India’s insolvency framework under the Insolvency and Bankruptcy Code, 2016. While the Code introduced a structured creditor hierarchy through the waterfall mechanism under Section 53, placing government dues below secured and unsecured financial creditors, judicial developments have created uncertainty regarding the status of statutory tax claims. The controversy gained prominence after the decision of the Supreme Court of India in State Tax Officer v. Rainbow Papers Ltd., where the Court held that a statutory charge created under a tax statute could confer secured creditor status upon government authorities.
This article analyses the evolving legal position concerning the treatment of government dues under the IBC. It first traces the historical development of the Crown debt doctrine in India and the priority traditionally accorded to government claims in insolvency proceedings. The article then examines the creditor hierarchy established under the IBC, particularly the waterfall mechanism governing the distribution of liquidation proceeds. It further evaluates the implications of the Rainbow Papers judgment and the concerns raised by financial institutions and insolvency professionals regarding the potential disruption of the creditor priority framework. The study also considers subsequent judicial clarification in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., which sought to restrict the broader interpretation of statutory dues as secured claims. In addition, it analyses the proposed Insolvency and Bankruptcy Code (Amendment) Bill, 2025, which aims to clarify that statutory charges arising solely by operation of law do not constitute security interests under the Code.
The article argues that maintaining a predictable creditor hierarchy is essential for ensuring credit market stability, facilitating efficient insolvency resolution, and reinforcing the fundamental objectives of the IBC. Overall, recent judicial developments and proposed legislative reforms reaffirm the structured treatment of government dues within India’s insolvency regime while preserving the primacy of secured creditors.
