Government Dues under IBC after 2026: Statutory Charge

Government dues have been one of the most litigated areas of the Code. Rainbow Papers (2022) treated a statutory charge as making the State a secured creditor, unsettling many plans. The 2026 Amendment reversed that reasoning. Questions now test whether the student applies the amended definitions, ranks government dues correctly in liquidation, and knows what happens to dues that are not claimed or are left out of the plan.

1. The Law in Brief

• Status. Dues payable under any law to the Central Government, a State Government or a local authority are operational debts (section 5(21))
• Security interest, 2026. The Explanation to section 3(31) provides that a security interest exists only where created by agreement between parties, and does not include one created merely by operation of law.
• Liquidation, 2026. Under the Explanation to section 53(1)(e), government dues for the two years before liquidation rank under clause (e)(i), whether or not secured, and the balance under clause (f)
• After the plan. An approved plan binds governments (section 31(1)), and claims not provided for in it are extinguished (Ghanashyam Mishra, 2021; section 31(6), inserted in 2026)

Figure 1: Government dues before and after 2026

2. Is the State a Secured Creditor after 2026?

• Issue. Whether a State with a statutory first charge is a secured creditor whose dues must be treated as secured in a resolution plan.
• Law. In State Tax Officer v Rainbow Papers (2022), the Supreme Court treated such a charge as a security interest under section 3(31). The 2026 Amendment added an Explanation to section 3(31) that a security interest exists only where it is created by agreement between parties and does not include one created merely by operation of law. Government dues are operational debts under section 5(21)
• Application. The department's charge arises solely by statute, not by agreement with LM Ltd. After the amendment, it is not a security interest, and the department is an operational creditor.
• Conclusion. The plan's treatment is lawful if it pays the department at least the operational creditors' minimum under section 30(2)(b). Rainbow Papers cannot be relied on for this purpose after 2026.

3. Can Unclaimed Tax Be Recovered after the Plan?

• Issue. Whether a government authority may recover dues for the period before the plan that were not included in it.
• Law. Section 31(1) makes an approved plan binding on the Central Government, State Governments and local authorities. In Ghanashyam Mishra and Sons v Edelweiss ARC (2021), the Supreme Court held that all claims not part of the plan, including government dues, stand extinguished on approval, and no proceedings can be continued or initiated for the earlier period. Section 31(6), inserted in 2026, now expressly provides for extinguishment of claims against the corporate debtor not provided for in the plan.
• Application. The demand relates to a year before the plan, and the department did not claim it in the CIRP. The plan has been approved.
• Conclusion. The demand is unenforceable against NO Ltd and must be withdrawn. The department's remedy lay in filing a claim during the CIRP.

4. Can Tax Authorities Attach Receivables during CIRP?

• Issue. Whether tax authorities may recover dues from the corporate debtor's receivables or goods during the moratorium.
• Law. Section 14(1)(a) and (c) bar proceedings and recovery against the corporate debtor and its assets during the moratorium, and section 238 gives the Code overriding effect. In Sundaresh Bhatt v CBIC (2022), the Supreme Court held that customs authorities could only assess duty and file a claim, and could not sell the debtor's goods.
• Application. The sum owed by the customer is PQ Ltd's asset, and diverting it to the department is recovery of a claim against the debtor. The sale of goods by customs is likewise barred.
• Conclusion. Both actions are barred. The departments must file claims with the resolution professional, who may approach the NCLT under section 60(5) if they persist.

Figure 2: Ranking government dues in liquidation

5. How Are Government Dues Ranked in Liquidation?

• Issue. The rank of government dues in the liquidation waterfall after the 2026 Amendment.
• Law. Section 53(1)(e) ranks (i) government dues for the two years before the liquidation commencement date and (ii) debts owed to secured creditors for amounts unpaid after enforcement of security, equally. The 2026 Explanation provides that government dues rank under clause (e)(i) whether or not secured, with the balance under clause (f). Paschimanchal Vidyut Vitran Nigam v Raman Ispat (2023) held that section 53 prevails over priorities in other statutes.
• Application. The State's ₹30 crore for two years and the lender's ₹50 crore shortfall rank equally under clause (e), a total of ₹80 crore. The ₹40 crore available is shared rateably: ₹15 crore to the State and ₹25 crore to the lender. The State's ₹20 crore for earlier years falls under clause (f) and receives nothing here.
• Conclusion. The State receives ₹15 crore and the secured lender ₹25 crore. The statutory charge gives the State no higher rank.

6. Frequently Asked Questions

Does the 2026 Explanation affect land authorities claiming lease premium?

Yes. Unless they hold a security interest created by agreement, their claims rank as government dues or operational debts, not as secured debts (Topic 43).

Can tax authorities continue assessment proceedings during the CIRP?

They may determine the amount of a claim in order to file it, but cannot enforce or recover it against the debtor during the moratorium.

Why does the Code rank government dues below financial creditors?

The long title of the Code refers to altering the order of priority of government dues, reflecting a policy choice to encourage credit and resolution.

7. Related Topics

• Topic 43: Government Dues under IBC. Rainbow Papers and after.
• Topic 80: IBC, Income Tax and GST. Tax issues in insolvency.
• Topic 117: Commercial Wisdom of CoC. Limits of review.