Secured Creditor v. Government Dues: Unravelling the Judicial Stance in India


In 2016, India implemented the Insolvency and Bankruptcy Code (the Code) as a solution to the ineffective previous schemes like the Corporate Debt Restructuring System (CDR Scheme) and the Sick Companies (Special Provision) Act, 1985 (SICA) in addressing insolvency issues. Despite attempts to resolve the problem through the debtor in possession system under SICA, it failed to provide relief to creditors. As a result, the Code was introduced to rectify these shortcomings and establish a comprehensive ‘creditor in control’ mechanism, replacing the earlier ‘debtor in possession’ system. The primary aim was to establish a more efficient and reliable process for handling corporate insolvency.

Under the framework of the Code, government dues have now been accorded the status of ‘secured debts’, thereby garnering priority in insolvency proceedings. This article delves into the judicial stances on this subject, highlighting how the judiciary interprets and addresses the myriad challenges posed by the evolving insolvency laws. The author aims to dissect pivotal cases and the transformative impact of recent judgments, such as State Tax Officer v. Rainbow Paper Mills Ltd., shedding light on the ongoing legal debates.

The Government Dues Debate

The Code’s definition of ‘secured creditor’ hinges on consensual arrangements or transactions securing payment, posing a challenge when applied to statutory charges. The contention emerges from the seeming inconsistency between the legislative intent of the Code and the inclusion of tax authorities as ‘secured creditors’ for charges created by operation of law.

The Code distinctly delineates government dues from secured creditors, underlining a prioritization of financial institutions aimed at fostering economic growth. The legislative stance, as manifested in the Code’s waterfall mechanism, positions government dues, including taxes, below financial creditors. However, the Rainbow Papers’ Judgment introduces a noteworthy perspective by categorizing tax claims as ‘secured debt.’ This adjustment prompts fundamental inquiries into the original intent of the Code, its overall coherence, and its alignment with economic objectives.

Priority to ‘Secured Creditors’ in Light of The Code’s Preamble

In the case of M/s Innoventive Industries Limited v. ICICI Bank, 2017, the Supreme Court (SC) delivered a landmark judgment under the Code, emphasizing the timely conclusion of the corporate insolvency resolution process (CIRP) and reaffirming the Code’s overriding authority. The Court highlighted the crucial role of time in determining the successful revival of a corporate entity to avoid liquidation.

Furthermore, the Court reiterated that the Code serves as a comprehensive law, providing an exhaustive framework for matters related to insolvency concerning corporate entities. Enacted under Entry 9, List III, in the 7th Schedule of the Constitution, the Code specifically addresses “Bankruptcy and Insolvency”. Consequently, the Court clarified that the later non-obstante clause of the Parliamentary enactment takes precedence over the limited non-obstante clause present in Section 4 of the Maharashtra Act. This landmark ruling solidified the Code’s supreme authority in matters of corporate insolvency, establishing it as the primary legislative mechanism governing such issues across the country.

Status of Government Dues under Section 53 of the Code

In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors, 2023, the SC decisively upheld the superior authority of Section 238 of the Code, 2016 over the provisions of the Electricity Act, 2003. Due to unpaid dues, the properties of Raman Ispat (corporate debtor) were attached to prevent any potential sale or transfer. As the insolvency resolution efforts under the IBC failed, the corporate debtor faced liquidation. The NCLT approved the application for the immediate release of the attached property to facilitate its sale and distribution of proceeds in line with the IBC’s provisions. The appellant’s appeal to the NCLAT was dismissed, and subsequently, the SC reaffirmed the paramount authority of Section 238 of the Code, rejecting the appellant’s argument that the provisions of the Electricity Act should take precedence.

The corporate debtor’s assets were charged under the Electricity Act, 2003, and relevant agreements, designating PVVNL as a secured operational creditor. The term “government dues” lacks a specific definition under the Code. Section 53(1)(e) of the Code, however, makes it clear that ‘government dues’ include amounts owed to the Central and State Governments. Significantly, these dues hold a lower priority compared to other creditor classes mentioned in clauses (a) to (d), thereby creating a structured hierarchy within the insolvency framework. Consequently, the Code treats government dues distinctly from secured and other creditors. This distinction has been consistently upheld through various judicial pronouncements.

Section 36(4) emphasizes on the different types of statutory dues. While certain creditors, such as workmen, employees, and specific statutory corporations have separate treatment, dues payable to the treasury, such as tax and tariffs, are categorized as ‘government dues’ under section 53(1)(e) of the Code. Despite government participation, entities like PVVNL are not regarded as part of the State Government, making their dues ineligible to be classified as ‘government dues’ under the Code, especially considering the liberalized electricity supply and distribution functions that can be managed by other private and public entities.

The Supreme Court’s Rainbow Papers Mills Case

The judgement of the SC in the case of State Tax Officer v. Rainbow Paper Mills Ltd. came as a surprise and created ripples in already troubled eco-system under the Code, by holding that “the CoCs, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter” and declared the tax dues under the Gujarat VAT Act being secured claim. This judgment effectively put the government dues in the same bracket as that of workmen and secured creditors. From the author’s perspective, this judicial qualification introduces a noteworthy paradigm shift, challenging traditional creditor hierarchies and emphasizing the need for a nuanced approach in balancing the interests of various stakeholders within the insolvency landscape.

The interpretation of the law deviated from the BLRC’s recommendation. The Bankruptcy Law Reforms Committee (BLRC) suggested a separate provision to ensure secured creditors’ priority rights on their security interests, irrespective of any tax or revenue claims under state or central laws. Similarly, in practice, the Code’s preamble and Section 53 placed Governmental dues in the fifth position, alongside secured creditors’ claims for the remaining amount. This priority for secured creditors, established by state laws, applied to all Central enactments governing recovery processes for banks and financial institutions, safeguarding the financial sector amidst the rise of non-performing accounts.

Post the Rainbow judgment, there have been other rulings that support the rights of secured creditors to get their money first. However, on account of the issues highlighted in the Rainbow Judgment, Government bodies by and large contest resolution plans claiming status of secured creditor at par with secured financial creditors and workmen dues. Due to these practices, Tribunals are now compelled to first determine status of their claims which adds to the uncertainty over the resolution process, invariably delaying the resolution process.

The Overlooked ‘Waterfall Mechanism’ in Rainbow Papers Mills Case

In the Rainbow Papers case, the court did not consider the ‘waterfall mechanism’ mentioned in Section 53, which determines the priority of claims from various types of creditors. It is crucial to note that this case was related to a resolution process, not liquidation. According to Section 53, government dues are ranked lower in priority than secured creditors, unsecured creditors, and operational creditors. The court might have overlooked or not considered this provision in the Code, resulting in the judgment’s failure to recognize the higher priority of secured creditors compared to dues owed to the Central or State Government.

The SC observed that under the Gujarat Value Added Tax Act, 2003, there is a provision for creating a charge for amounts due and payable. While some might argue that the State should be treated as a ‘secured creditor’ due to this provision, the distinct treatment of amounts owed to secured creditors and dues owed to the Government indicates that Parliament intended to treat them differently, with the latter having lower priority. For instance, if a company undergoing insolvency process owed tax payments to the State, the Rainbow Papers case might apply, designating these tax dues as secured claims due to their urgency and the legislative framework governing such obligations. Therefore, it is instructive that reliance on the Rainbow Papers judgment should be circumscribed to specific circumstances, particularly those mirroring urgent statutory dues, and should not be universally applied across all contexts.

IBC Overrides Electricity Act

The dues owed to the Central Government and State Government are treated separately from those of other creditors, including those with secured interests. The references in various reports and the Code’s itself emphasize this distinction, signifying that these dues should be treated differently from those owed to secured creditors. The General Clauses Act, 1897, defines the Central Government and State Government. In this case, the court determined that the dues or amounts payable to PVVNL do not fall under Section 53(1)(f) of the Code. The SC reiterated the supremacy of the Code under Section 238, even though other enactments have specific provisions with non-obstante clauses. This point was further supported by the Court’s reference to previous judgments in cases like Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs and CIT v. Monnet Ispat & Energy Ltd., among others.

The SC also noted that the absence of charge registration can lead to significant implications. Under Section 77 of the Companies Act, 2013, the liquidator cannot acknowledge a charge unless it is properly registered. However, if the company fails to register the charge, Section 78 allows the charge holder to apply for registration. It’s important to note that the Code defines ‘security interest’ broadly, and since the Appellate Authority and NCLAT have already recognized PVVNL as a secured creditor, the liquidator cannot dispute this status at this stage.

Analysis of the Judgement

Prioritizing claims and establishing a waterfall mechanism are pivotal components of insolvency laws, with secured creditors consistently granted precedence over operational creditors and government dues in decisions by the SC. For example, in PR Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., the SC underscored that income tax dues, considered crown debts, do not supersede secured creditors who are private entities. Similarly, in Moser Baer Karamchari Union thr. v. Union of India & Ors, the SC emphasized the meticulous consideration of priority payments under the Code to maintain equity among creditors during liquidation proceedings.

However, the Rainbow Papers ruling has introduced uncertainty by suggesting that government authorities could be treated as secured creditors under the IBC, causing state tax departments to file new claims in ongoing liquidation proceedings. Recognizing the pressing need for clarity, the Ministry of Corporate Affairs proposed addressing the treatment of statutory security interests within the Code. Fortunately, the SC’s recent judgment in the same matter has clarified the stance on secured debts, once again confirming the paramount authority of the IBC and resolving the uncertainty stemming from the Rainbow Papers ruling.


The SC in the Raman Ispat case (supra) provided clarity on the prioritization of claims under the Code and exemplified the use of the ‘Waterfall Mechanism’ from Section 53 in reaching its decision. The SC held that Section 238 of the Code supersedes the provisions of the Electricity Act, 2003, establishing secured creditors’ debts as having a higher priority than those owed to the federal or state governments. The court also explained that the waterfall mechanism operates on a structured mathematical formula to establish a hierarchy for debt payments, subject to specific restrictions. Any modifications to this mechanism could lead to disruptions, instability, and have a cascading impact on the rights and interests of operational creditors, the Central and State Governments, and secured creditors.

The SC’s final decision in favour of the liquidator and its endorsement of the NCLAT’s stance regarding electricity dues being excluded from “security interests” reaffirms the prioritization of claims under the Code during the process of liquidation. By providing explicit reasoning for distinguishing between various creditors based on their actions in the insolvency proceedings, this ruling brings much-needed clarity to the distribution of assets. By offering lucid reasoning for the differentiation among various creditors, the SC has instilled much-needed clarity in the insolvency and liquidation landscape. The decision serves as a precedent, guiding future proceedings and harmonizing the treatment of creditors. Such judicial clarity is vital for the smooth functioning of the Code, instilling confidence in its efficacy as a robust and comprehensive framework for managing insolvency and liquidation proceedings.

(This article has been authored by Basil Gupta a 4th year B.A., LL.B. (Hons.) student at National Law University, Jodhpur)

CITE AS: Basil Gupta, ‘Secured Creditor v. Government Dues: Unravelling the Judicial Stance in India’ (The Contemporary Law Forum, 23 December 2023) <> date of access

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