Treatment of Government Dues in Insolvency Proceedings: Emerging Jurisprudence

The evolution of insolvency law in India over the past decade has fundamentally altered the way debts are resolved, priorities are determined, and stakeholders’ rights are balanced. One of the most debated and litigated issues under the Insolvency and Bankruptcy Code, 2016 (IBC) has been the treatment of government dues, such as taxes, duties, and statutory levies, during corporate insolvency proceedings. With multiple rulings from the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), and the Supreme Court, a clearer jurisprudential framework is now emerging.

This blog aims to provide an educational overview of how government dues are treated in insolvency proceedings, the rationale behind recent judicial trends, and the practical implications for creditors, companies, and professionals such as a corporate lawyer or an NCLT insolvency lawyer.

Understanding Government Dues under the IBC

Government dues typically include:

• Income tax, GST, customs, and excise dues

• Municipal taxes and statutory fees

• Penalties and interest payable to government authorities

Before the enactment of the IBC, government authorities often enjoyed preferential treatment in recovery proceedings. They could invoke revenue recovery laws, attach assets, or initiate parallel proceedings before forums such as the Debt Recovery Tribunal (DRT). This often resulted in fragmented recovery actions and poor outcomes for other creditors.

The IBC sought to change this by creating a consolidated, time-bound insolvency resolution framework, where claims—whether private or governmental—are addressed collectively.

Government Dues as “Operational Debt”

A foundational issue was whether government dues qualify as “operational debt” under the IBC. Courts have now largely settled this question.

The definition of operational debt includes claims arising from the provision of goods or services, including statutory dues payable to the government. Consequently, most tax and statutory claims are treated as operational debts. This classification has significant consequences because operational creditors rank below secured financial creditors in the waterfall mechanism under Section 53 of the IBC.

For a corporate insolvency resolution process (CIRP), this means that government departments must submit their claims like any other operational creditor and cannot assert automatic priority merely due to their sovereign character.

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The Waterfall Mechanism and Priority of Payments

Section 53 of the IBC lays down the order of priority for distribution of proceeds in liquidation. Government dues are placed relatively low in this hierarchy, ranking below:

1. Insolvency resolution process costs

2. Secured creditors and workmen’s dues

3. Employee dues

4. Unsecured financial creditors

Government dues fall below unsecured financial creditors and are often grouped with “any remaining debts and dues.” This statutory scheme reflects the legislative intent to prioritize revival and credit availability over sovereign recovery.

Several NCLT and NCLAT rulings have upheld this framework, emphasizing that the IBC is a complete code that overrides other laws, including tax statutes, by virtue of Section 238.

Supreme Court’s Stand: Primacy of the IBC

The Supreme Court has played a decisive role in shaping the jurisprudence on government dues. In landmark judgments, the Court has clarified that once a resolution plan is approved by the NCLT, it is binding on all stakeholders, including central and state governments.

This has meant that even if tax authorities were not fully paid under a resolution plan, they cannot initiate fresh recovery proceedings later. Such claims are deemed extinguished upon approval of the plan.

In several cases, government authorities challenged this position through appeals and even a Special Leave Petition (SLP) before the Supreme Court. However, the consistent judicial approach has been to uphold the finality and sanctity of approved resolution plans, reinforcing certainty in corporate insolvency.

Moratorium and Recovery Proceedings by Government Authorities

Another contentious area has been whether government authorities can continue recovery proceedings during the moratorium under Section 14 of the IBC.

Judicial pronouncements have clarified that once a moratorium is in place:

• Tax recovery proceedings must be stayed

• Attachments and coercive actions cannot continue

• Parallel proceedings before the Debt Recovery Tribunal or revenue authorities are barred

This has aligned government authorities with other creditors, ensuring that the insolvency process is not derailed by fragmented enforcement actions.

Impact on Cheque Bounce and Penal Proceedings

A related but distinct issue concerns cheque bounce cases under Section 138 of the Negotiable Instruments Act. While these are technically criminal proceedings, courts have examined whether they can continue during insolvency.

The prevailing view is that while insolvency does not automatically quash cheque bounce proceedings, recovery-oriented actions linked to monetary claims may be impacted by the moratorium. This creates an interesting intersection between insolvency law and quasi-criminal debt enforcement mechanisms.

For a corporate lawyer advising clients, understanding this overlap is crucial, especially when statutory dues or government-backed claims are involved.

Resolution Plans and Haircuts on Government Dues

One of the most debated outcomes of recent jurisprudence is the acceptance of significant “haircuts” on government dues under resolution plans. Resolution applicants often propose paying only a fraction of outstanding tax liabilities to revive the corporate debtor.

Courts have upheld such plans, provided they meet the requirements of Section 30(2) of the IBC and have been approved by the committee of creditors (CoC). The judiciary has consistently emphasized that commercial wisdom of the CoC is not subject to judicial review, even when government dues are heavily compromised.

This approach underscores the shift from recovery-centric models to revival-focused insolvency resolution.

Government as a Stakeholder, Not a Sovereign Enforcer

A key philosophical shift in insolvency jurisprudence is the treatment of the government as a stakeholder rather than a sovereign enforcer. Under the IBC, the government stands on similar footing as other operational creditors.

This does not mean government claims are ignored, but rather that they are balanced against broader economic considerations such as:

• Maximization of asset value

• Continuity of business operations

• Protection of employment and credit markets

For an Insolvency Law firm in India, this evolving interpretation requires advising government bodies and private clients alike on realistic expectations during corporate insolvency.

Role of NCLT and Insolvency Professionals

The NCLT has emerged as the central forum for adjudicating disputes relating to government dues in insolvency. Its benches have consistently applied the overriding effect of the IBC to resolve conflicts between tax laws and insolvency principles.

Insolvency professionals and an NCLT insolvency lawyer play a critical role in:

• Verifying and admitting government claims

• Ensuring compliance with the moratorium

• Structuring resolution plans that address statutory dues lawfully

Their expertise is vital in navigating the complex interplay between public law obligations and insolvency objectives.

Practical Implications for Businesses and Creditors

The emerging jurisprudence has several practical takeaways:

1. For companies: Insolvency offers a comprehensive mechanism to address even long-standing government dues, provided the process is followed correctly.

2. For government authorities: Timely filing of claims in CIRP is essential, as delayed or absent claims risk extinguishment.

3. For creditors: Predictability in priority rules enhances confidence in lending and investment decisions.

4. For legal professionals: A nuanced understanding of insolvency, tax law, and tribunal practice is indispensable.

Conclusion

The treatment of government dues in insolvency proceedings reflects the broader transformation of India’s insolvency regime, from fragmented recovery to collective resolution. Through consistent rulings by the NCLT, appellate tribunals, and the Supreme Court, the law has moved towards clarity, certainty, and economic rationality.

While debates continue and some matters still reach the Supreme Court through a Special Leave Petition, the core principle is now well established: under the IBC, government dues do not enjoy automatic priority and must yield to the structured framework of corporate insolvency.

For businesses, creditors, and professionals alike, staying informed of this evolving jurisprudence is essential in navigating India’s modern insolvency landscape.