Government Dues and IBC Waterfall

Government Dues and IBC Waterfall: Are We Heading Towards a Non-uniform Approach Across Sectors?  


The Insolvency and Bankruptcy Code, 2016 (“IBC”) prescribes an order of priority in which debts owed by the corporate debtor are required to be paid in case of resolution or liquidation. The distribution waterfall under Section 53 of the IBC places the dues owed to any government or government authority equally with other operational dues,[1] except the dues owed to central government or a state government for a period of two years preceding the liquidation commencement date (which are paid in priority over operational dues).[2] In the distribution waterfall, insolvency costs, debts owed to secured creditors, workmen’s dues and financial debts owed to unsecured creditors take precedence over operational dues, including statutory dues. The NCLAT has in the past held that all statutory dues including income tax and VAT fall within the ambit of operational debt and government authorities should be considered “operational creditors”.[3] However, government dues are not of a uniform character and comprise of a variety of dues. As an illustration, the government dues may include (i) dues owed to different departments of the government, i.e., the tax department or the department of telecommunication etc.; (ii) dues secured by a statute, i.e., where the law may provide that the debts owed to the government under that statute should be paid before the other dues; and (iii) dues secured under an agreement or by a transaction.

There appears to be a recent trend to give priority to certain types of statutory dues over other statutory dues and operational dues. Certain recent case law and proposals regarding changes in law which point in this direction are discussed below:


a. In Sales Tax Officer v. Rainbow Papers Limited,[4] the Supreme interpreted the Gujarat VAT department’s “first charge” on the property of the assesse under Section 48 of the Gujarat VAT Act, 2003 (“GVAT Act”) to be a security and the VAT department to be a secured creditor. It was noted that a security interest could be created by operation of law and the definition of secured creditor under the IBC does not exclude any government or government authority.

Relying on the decision of Rainbow Papers, the NCLAT in a subsequent judgment[5] has noted that the Income Tax department should be considered a secured creditor.

b. In the case of Union of India v. Vijaykumar V. Iyer,[6] the government argued that the Department of Telecommunication (DoT) is a secured creditor since the tripartite agreement between the DoT (licensor), the telecom company (licensee) and the lender provides that the DoT shall have first priority over any sale of assets/infrastructure of the corporate debtor in case of a default. The NCLAT accepted this argument and noted that the tripartite agreement creates a first charge in favour of the DoT, and their dues will take precedence over other dues. An appeal against the judgment of the NCLAT is currently pending before the Supreme Court.

c. In Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Taxes and Customs,[7] the customs authority had exercised its first charge on the debtor’s/ assessee’s property and sold the confiscated goods due to non-payment of tax. The Supreme Court relied on Section 142A of the Customs Act, 1962 (“Customs Act”) to hold that the Custom Authority would have first charge on the assets of an assessee, except with respect to cases under falling under the IBC, Section 529A of Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The court further observed that the IBC being the more recent statute and considering Section 238 of the IBC, the waterfall provided in the IBC will override the Customs Act.


The Ministry of Corporate Affairs by its notice dated January 18, 2023 (the “MCA Paper”)[8] invited public comments with respect to certain changes being considered to the IBC. The MCA Paper notes that the term “secured creditor” under the IBC covers creditors whose right, title, interest or claim is secured by a consensual transaction between the parties, and not by mere operation of law. This clarification attempts to address the issues raised by the decision of the Supreme Court in Rainbow Papers. In this regard, the MCA Paper proposes the following changes:

a. all unsecured creditors: financial creditors, operational creditors and any government or government authority other than workmen and employees to be treated equally for distribution under Section 53 of the IBC. The basis for this change is stated to be that the recoveries made by operational creditors under the resolution process/ liquidation are seemingly inadequate when compared to unsecured financial creditors.[9]

b. all debts owed to any government or government authority, whether or not they involve a security interest created by operation of statute, to be treated equally with other unsecured creditors; only if the security interest is created pursuant to a transaction of the government or a government authority with the corporate debtor, should the relevant government or government authority be treated as a secured creditor in the order of priority.[10]

c. separate waterfall mechanism to be introduced in the corporate insolvency resolution process (“CIRP”): creditors to receive proceeds up to the liquidation value for their claims in the order of priority provided under Section 53 and any surplus over such liquidation value to be distributed between all creditors in the ratio of their unsatisfied claims. Any remaining amount or further surplus to be distributed to the shareholders and partners of the corporate debtor.[11]

The proposed change at (b) reinforces the findings in the Vijaykumar judgment. If this change is incorporated in the IBC, government dues will take precedence over other secured financial dues if the government or government authority holds first charge on the property of the corporate debtor under an agreement or pursuant to a transaction.


The Ministry of Telecommunication has invited comments on a draft telecommunication bill dated September 21, 2022 (“Bill”). The Bill provides that:

a. The spectrum should be returned to the central government on failure of payment of dues: If the insolvent telecom company fails to pay dues under the allotted license or assignment agreement including of any fees, charges, and other payable amount, then the assigned spectrum will revert to the control of the central government.[12]

b. Relaxation may be provided at the discretion of the central government:
i. The central government may allow a licensee or assignee to continue to use the spectrum, subject to placing the revenue earned from the license in a separate designated account with license fee and charges applicable being paid first in priority during the insolvency period.[13]

ii. If the central government determines that there exist extraordinary circumstances, including financial stress, consumer interest, maintaining competition in the sector, or reliability and continued supply of telecommunication services or availability of telecommunication network or telecommunication infrastructure, it can allow deferment of payments or writing off such payments or conversion of the amounts due into shares of the licensee or relief from payment.[14]

iii. The central government may also waive the fee, interest, penalty and other charges or grant exceptions under such mitigating circumstances, including, interest of consumers, ensuring competition, reliability and continued supply of telecommunication services, or availability of telecommunication network or telecommunication infrastructure, or any circumstance of public interest or national security.[15]

Pursuant to Section 14 of the IBC, only current dues required for the continued business operations are payable in priority in the CIRP. However, the Bill suggests that all past and current dues of the licensor will be payable in priority to the other secured creditors. Section 14 of the IBC provides that after the initiation of the moratorium, the assets of the corporate debtor or any legal right or beneficial interest therein shall not be transferred, alienated or disposed. But the Bill negates this provision and allows the government to retract the telecom licenses after the initiation of the CIRP. Further, while the IBC grants the resolution professional the right and duty to manage the assets of the corporate debtor, the Bill proposes that the license be returned to the government or handed over to a third-party manager after the initiation of the CIRP. Section 238 of the IBC provides that its provisions shall have an overriding effect. However, the Bill also contains a superseding provision, which can be construed to mean that the provisions of the Bill (once enacted into law) will override the IBC.

Evidently, the Bill attempts to grant the telecommunication sector a special position by allowing dues to the government to take precedence over the dues of secured creditors and other operational creditors. This special treatment is justified in the explanatory statement to the Bill on the grounds that:

a. Spectrum is a reusable natural resource with no physical form and the Bill aims to ensure continuity of telecommunication services.

b. The Bill seeks to balance due utilization of spectrum and realisation of the value of the spectrum for the larger public good.

c. The Bill also seeks to create disincentive for acquiring spectrum at a value lower than auction-determined price. In essence, the Bill aims to retain the value of the public good in the hands of the government.

While these changes aim at public good and optimum utilisation of spectrum, there may be a disconnect in the proposed changes and the intended result. First, the Bill is in clear conflict with the IBC. Second, the return of the license by the corporate debtor will essentially mean that the value of the telecom company that lies substantially in the spectrum will be lost. As a result, there would be a high risk of the entity ceasing to continue as a going concern. Third, in contrast to the stated objective of optimum utilisation of spectrum, the spectrum may be left unutilised for a long time, not resulting in any revenue for the DoT.


The IBC has been a crucial reform, which when implemented effectively and in a timebound manner has produced major gains for the corporate sector and economy as a whole. However, certain recent case law and statutory amendments being considered with respect to government dues threaten to disturb the foundation of a key pillar of the IBC – the distribution waterfall. Giving priority to government dues pursuant to a transaction over the dues of secured lenders in the telecommunication sector will result in a sector specific distribution waterfall.

It is questionable if the IBC principles should be tweaked for particular sectors. The IBC has a broader objective to resolve insolvency and ensure revival of the corporate debtor. However, retracting the most valuable asset in the telecommunication sector despite the express provisions of the IBC would seriously hinder continuation of a corporate debtor in the telecommunication sector as a going concern.

[1] Section 53(1)(f), IBC

[2] Section 53(1)(e)(i), IBC

[3] Pr. Director of Income Tax v. Synergies Dooray Automotive Limited & Ors., Company Appeal No. 1661 of 2020

[4] Civil Appeal No. 1661 of 2020

[5] Commissioner of Income tax v. Assam Company India Limited, Company Appeal (AT) (Insolvency) No. 243 of 2022

[6] Company Appeal (AT) (Insolvency) No. 733 of 2020

[7] Civil Appeal No. 7667 of 2021

[8] Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016 dated January 18, 2023

[9] Paragraph 13.1 of the MCA Paper

[10] Paragraph 14.1 and 14.2 of the MCA Paper

[11] Paragraph 9.6 of the MCA Paper

[12] Paragraph 20(3) of the Bill

[13] Paragraph 20(3) of the Bill

[14] Paragraph 21 of the Bill

[15] Paragraph 22 of the Bill

This insight has been authored by Rajat Sethi (Partner) and Ishita Mathur (Associate). They can be reached at and, respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.