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What’s Hot: The Rainbow Judgement

Neha Garg
October 11, 2022

Resolution Plan Which Ignores Statutory Dues Payable to State Government/Legal Authority Liable to be Rejected

Recently, in the case of State Tax Office vs Rainbow Papers Ltd, the question before Supreme Court was whether the provisions of Section 53 of the Insolvency and Bankruptcy Code (IBC) 2016 overrides Section 48 of the Gujarat Value Added Tax (GVAT) Act 2003

Supreme Court held that NCLT & NCLAT clearly erred in its observation that Sales Tax approached RP at belated stage, after approval of Resolution Plan – claim was not filed within time. As observed by SC, delay in filing a claim cannot be the sole ground for rejecting a claim. Further, SC held that NCLAT also erred in law in rejecting the application/ appeal on the following grounds:

a. Sales Tax Department is not a secured creditor

b. Section 48 cannot override Section 53

Rainbow Judgement Credit

Going into the scheme of both the Statutes, the Apex Court said that Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is created. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority. Likewise, the State is a secured creditor under the GVAT Act.

Elaborating further, the Apex Court stated that section 48 of GVAT is not inconsistent with IBC and hence, it was held that IBC does not override GVAT. The SC went on to rule that by virtue of section 3(30) the debts owed to a secured creditor, which would include the State under the GVAT Act, so should the debts owed to the State be put at the same pedestal as the debts owed to workmen under the scheme of section 53(1)(b)(ii).

It was, hence, held by the Supreme Court that –  

  • 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. (Para 52)
  • If a company is unable to pay its debts, which should include statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC. (Para 53)
  • The CoC, 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, any other dues. (Para 54)


Based on the following observation, the interpretation adopted by the Supreme Court appears to be contrary to the history and intention of the Code, as well as the principles of interpretation of statues:

1. Waterfall Mechanism

The waterfall mechanism in terms of payment in Section 53 is quite clear where dues to the government are ranked fifth in order of priority. The verdict of the SC saying, “the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues” is clearly disturbing the position of “orders of priority” mentioned in Section 53 of the IBC. If the intent was to give the tax dues the status of a secured creditor, then mentioning a separate rank for Government dues is dubious in nature. Further, it is be noted that due to non-clarification in the provision, the term, ‘secured creditor’ in section 53(1)(b)(ii) of the Code can be a financial or operational creditor.


The Bankruptcy Law Review Committee (BLRC) Report is one of the most critical documents to understand the interpretation and intention of provisions of the IBC. The BLRC had clearly envisaged priority of secured creditors over government dues in its final report. It plainly shows that the order of SC is totally going against the BLRC report and the provisions of the Code.

3. Secured Creditor

The definition of ‘Secured Creditor’ & ‘Security Interest’ must read with Section 3(33) of the Code. The ‘security interest’ has to be linked with the arrangement or transaction between with the parties as per Section 3(33) of the IBC. Therefore, in no way, the claim of the tax department of the State falls within the meaning of ‘security interest’ as defined in section 3(31). Further, the construct of IBC would lead one to believe that tax and other dues to the government were not intended to be given the status of a secured creditor.  

4. Overriding Effect

In this case, Section 48 of the GVAT Act 2003 and section 53 of the IBC 2016 each contain a non-obstante clause, “Notwithstanding anything inconsistent therewith contained in any other law for the time being in force ......" In cases where two or more provisions applied to the same area contain non-obstante clauses, there arises confusion as to which provision will prevail over the others. In such instances, the court must look into the object and purpose of all the laws involved. This view was taken by SC in the case of Shri Swaran Singh and Anr. v. Shri Kasturi Lal (1977). In this, SC held that –  

“The special and specific purpose which motivated the enactment of section 14A and Chapter IIIA of Delhi Rent Control Act would be frustrated if the provisions of the Slum Clearance Act were to prevail over them. Therefore, the newly introduced provisions of the Delhi Rent Act must hold the field and be given full effect despite anything to the contrary contained in the Slum Clearance Act.”

“Yet another test is that the later enactment must prevail over the earlier one. Section 14A and Chapter IIIA having been enacted with effect from December 1, 1975, are later enactments in reference to s. 19 of the Slum Clearance Act which was placed on the statute book with effect from February 28, 1965, and in reference to section 39 of the same Act which came into force in 1956 when the Act was passed. The Legislature gave overriding effect to s. 14-A and Chapter IIIA with the knowledge that ss. 19 and 39 of the Slum Clearance Act contained non-obstante clauses of equal efficacy.”

Further, SC in Innoventive Industries Limited v. ICICI Bank [(2018) 18 SCC 786] held that “In view of Section 238 of the IBC, the provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”  

Non-obstante clause is used by the legislature to give an overriding effect to a new provision that could potentially clash with another law. However, in the present case, SC held that Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC without properly analysing the objects and purpose of the laws involved. Hence, SC is creating a conflict with its own earlier judgements.  

5. Timeline

In this case, insolvency proceedings were initiated on 8th July 2016. On 22nd October, 2018 the appellant “Sales Tax department” called upon the RP to confirm the claim towards outstanding tax dues. The claim was filed beyond the time. Prior to amendment with effect from 4th July 2018, Regulation 12(2) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provided that A creditor who fails to submit proof of claim within the time stipulated in the public announcement, may submit such proof to IRP or RP, till the approval of the Resolution Plan by the Committee.” The Appellant, in this case, approached the RP at belated stage not only before RP but also before the AA as when the claim was filed by the Appellant, the Resolution Plan was approved by AA.  

Also Read: Personal Guarantors to Corporate Debtors Under Insolvency and Bankruptcy Code 2016

SC, in para 24 in its judgement, says that Regulation 12 of CIRP Regulations has to be read with Regulation 14(2) which enables the Interim Resolution Professional or the Resolution Professional, as the case may be, to revise the amounts of claims admitted, including the estimates of claims made under Sub-Regulation (1) of the said Regulation as soon as might be practicable, when he came across additional information warranting such revision. Here, the provision of the Code clearly says that IRP or RP has to revise the amounts of the claims which were admitted and should make the best estimate of the amount of the claim based on the information available with him. In the present case, the appellant filed the claim at a belated stage when it had already been approved by the AA. Hence, no question of determination of the appellant’s claim could be raised.  

Rainbow Judgement claims which admitted

Further, SC time and again held that the timelines stipulated in the IBC even for completion of proceedings are directory and not mandatory. It is to be noted that in order to avoid huge delays with the process, IBC was introduced emphasising on timelines in the insolvency process. However, with the present ruling of the SC saying, the timeline stipulated in IBC is not mandatory but only directory contradicts the legislative intent. Ideally, a mere delay of few days can be condoned but huge delays can cause chaos in the timelines of the insolvency proceedings.  

6. Financial Creditors (FCs)

Looking from FCs point of view, the ruling of this judgement is going to hit them a lot. While looking into practical scenario, application to initiate insolvency proceedings under Section 10 is not that welcoming under IBC. Also, application under Section 9 has reduced its effect since the threshold limit has been increased to 1 crore from 10 lakhs. And now, with this judgement, there is potentially a drastic change to the existing jurisprudence of the Code as till now, as SC said that –  

  • Financial Creditors cannot secure their own dues at the cost of statutory dues owed to any government or Governmental Authority.  
  • Adjudicating Authority is bound to reject the Resolution Plan, if it ignores the statutory demand payable to any State Government or Legal Authority.

Due to this verdict, the Resolution Plans pending for approval before Adjudicating Authority are likely to be affected to a great extent and may lead to huge delays with the sub – judice process.  

7. Ex parte Decision

The decision of the Supreme Court in the present case, could be seen as an ex parte order. As the same can be concluded while looking at its Judgement where no disputed points have been mentioned on behalf of the Respondents.

With this decision of the Supreme Court, the effectiveness of the IBC could be jeopardised and a rise in government debt claims could be foreseen. The IBC was introduced to provide an effective legal framework for timely resolution of such disputes. The judgement of the SC has a precedent value to possible future litigations and with a contradictory judgement like this, it might stretch the insolvency process for years and increase the scope of intervention by Adjudicating Authority.

About the author
Neha Garg

Neha is the IP support executive at Ancoraa and a budding professional in the field of insolvency. She supports CIRP and PG engagements at Ancoraa and keeps track of NCLT proceedings throughout the admission process. She has a background in Law and CS.

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