The Supreme Court dismisses the review petition in the case of Rainbow Papers Limited thereby legal position held by the SC that tax authorities, in their pursuit of recovering tax dues, will be entitled to the same rights as secured creditors within the framework of the Insolvency and Bankruptcy Code, 2016 (IBC) waterfall mechanism.


1. The Insolvency and Bankruptcy Code, 2016 provides for a waterfall mechanism under section 53 of the IBC, 2016 which provides for priority in which payments shall be distributed to various stakeholders when a company / corporate debtor is undergoing liquidation.

Clause 53(1)(b) or 53(1)(e) of IBC is reproduced as under,

“(a) ……………;

(b) the following debts which shall rank equally between and among the following: —

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) ………….;

(d) ………;

(e) the following dues shall rank equally between and among the following: —

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;


As can be seen from the above, the dues of the Central Government and State Government(s) were specifically covered under Clause (e) of Sub-Section 1 of Section 53 and were treated as such by all the Authorities.

2. The Supreme Court on 6 September 2022 in State Tax Officer Vs Rainbow Papers Limited (Rainbow Papers) (Two Member Bench) had held that due to the ‘Security Interest’ established in favor of the Government according to GVAT, the State qualifies as a ‘Secured Creditor’ as per the definition within the IBC. In the case of Rainbow Papers, there were dues payable by the Corporate Debtor under the Gujarat VAT Act and the same was treated as falling under Clause (e) and not under Clause (b) of section 53. The SC held that where a Statute provides for the creation of security under the Law, the dues arising therefrom shall be treated as Secured Dues under Clause (b) and hence they shall be in parity with the Secured Creditors whose security interest has been created by assessee itself by way of Charge on its Assets as section 3(30) and 3(31) includes statutory interest as well.

The SC further held that such Statutory Law(s) creating security over the assets under the statute is not in contravention to provisions of section 53 under the IBC and on harmonious interpretation of the two laws together, the statutory dues when law creates security shall be treated as secured under IBC and such provision shall not be treated as a violation to that of IBC and hence question of IBC prevailing over any Local Act(s) does not come into picture.

3. The Ministry of Corporate Affairs, in pursuance to the Order passed by SC in the case of Rainbow Papers came out with the Discussion Paper on 18th January 2023, in which one of the changes was about the priority of statutory dues, wherein it has been mentioned that only when the security interest is created by the asset holder the security will be treated as secured and any security on account of provisions of the code shall not be treated as secured. It further states that in case on account of any agreement between statutory authority and asset holder the security interest is created, then the same shall be treated as a Secured Creditor.

4. The Supreme Court on 17 July 2023 in the case of Paschim Vidyut Vitran Nigam Limited (PVVNL) v/s Raman Ispat Private Limited (Civil Appeal No. 7976 of 2019) (Two Member Bench) wherein SC observed that section 238 of IBC overrides the provisions of Electricity Act, 2003. The provisions of the IBC treat the dues payable to secured creditors are at a higher footing than dues payable to Central or State Government(s).

In the abovementioned case, the electricity department for its recovery had attached the property and the liquidator was unable to sell the property and hence approached the Hon’ble National Company Law Tribunal (NCLT) to remove the attachment. Against the said order, an appeal was preferred first before the Hon’ble National Company Law Appellate Tribunal (NCLAT) and then before the Hon’ble Supreme Court against the vacation of attachment of the property. In this case, the Electricity Department was treated as a secured creditor by the NCLAT, the same was even accepted by the Liquidator.

Further, the reliance placed by the Appellant on the decision in the case of ‘Rainbow Papers’ was rejected by stating that, the priority of payments as prescribed under section 53 had not been considered while deciding the matter, since it was a matter about to State VAT Act which directly concerns with State Government and when that class of dues of State Government is separately specified under section 53, it has to be treated as such and be classified under clause (e). Thus, the Hon’ble Supreme Court stressed the fact that when a statute prescribes a distinct treatment for the secured creditors and the dues payable to the Government(s), they cannot be construed to be on the same footing.

5. After the order was passed by the Supreme Court in the case of Paschim Vidyut Vitran Nigam Limited, it was felt that the issue is Rainbow Papers is settled in favour of Bankers who were secured creditors since the Dues of Statutory Creditors shall fall under Clause (e) and shall not be treated at par with those of Secured Creditors. The Order passed by Hon. Apex Court in the case of Rainbow Papers, was filed for review in 5 Different Applications including one by the Resolution Professional and Secured Creditor of Rainbow Papers.

DECISION OF SUPREME COURT IN REVIEW PETITION (CIVIL) NO 1620 OF 2023 IN CASE OF RAINBOW PAPERS – Judgment dated 31st October 2023 – (Two Member Bench)

The review petition filed was dismissed on the following grounds:

  • The power to review is a special and can be invoked only when there is a prima facie mistake or error in the order of the Court.
  • The error should be evident from the face of the records and should not be one requiring long arguments or reasoning.
  • Any comment conflicting with the previous order on the subject by co-ordinate bench or larger bench by itself cannot be a ground for review.
  • In case the Bench in the case of PVVNL felt that the order in the case of ‘Rainbow Papers’ was not good law, then reference should have been made to the Larger Bench. Since that has not been done, it led to further uncertainty on account of conflicting decisions.
  • The Bench further held that the waterfall mechanism as prescribed under section 53 and other provisions was duly considered by the Bench while passing the order in the case of Rainbow Papers.
  • Hence, the review petitions filed were dismissed.


As can be seen from the above, the Hon’ble Supreme Court while dismissing the review petition has decided the issue more from an angle of whether the order can be reviewed or not rather than on the merits of the case. Yet, with the dismissal of the review petition following position arises:

1. Because of contrary decisions of the Apex Court / Supreme Court, the position that is required to be taken by the Resolution Professional or the Liquidator in ongoing cases becomes a challenge.

2. In cases where the Resolution Plans or Takeover under Liquidation are pending Approval before the NCLT, granting such approval one way or the other would lead to appeals being preferred before the National Company Law Appellate Tribunal

3. Further, on account of such appeals being preferred by the stakeholders, the implementation of the Resolution Plan by the Successful Resolution Applicant shall also get delayed, thereby leading to delays in recoveries and more uncertainties.

4. The recoveries that Banks and Financial Institutions would be expecting to get from the successful resolution of the corporate debtor would also take a hit, if the statutory dues are treated on par with the dues of the secured creditors.


1. The introduction of the Insolvency and Bankruptcy Code by the Legislature has created a distinct category for Central and State Government dues. This distinction is evident in the Code’s preamble, which modifies the order of payment priority for government dues. Additionally, Section 53(1)(e) specifically addresses government dues in the distribution process.

2. Simultaneously, one must not forget the order passed by the Hon’ble Supreme Court becomes the Law of Land as per Article 141 of the Constitution and one must follow the order of the Hon’ble Supreme Court in true letter and spirit. Moreover, such orders from the Supreme Court establish binding precedents for all lower courts, mandating their strict adherence.

3. However, since there are conflicting decisions on the same issue by the Bench of Equal Strength, it has led to a state of uncertainty. Considering the same, it would be appropriate if the Legislature steps in and clarifies the issue and makes appropriate amendments to the Law to avoid two conflicting views on the same issue. The Discussion Paper issued by the Ministry of Corporate Affairs on 18th January 2023 once finalized shall lead to settlement of the controversy in this regard if what has been proposed sees the light of the day by way of Clarificatory Amendment in the Code.