IBC: Tax or Creditors – Who Wins?

INTRODUCTION One of the issues which has gained prominence under the Under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), do the tax dues have priority over the secured lenders / creditors? In other words, would the direct and indirect tax claims get paid off before the secured creditors?

The general legal principle (prior to the enactment of the Code) in this respect has been laid down by various Supreme Court decisions, such as, Union of India vs. SICOM Ltd, [2009] 233 ELT 433 (SC) which was in the context of priority of Central Excise dues over those of a financial creditor. It held that the rights of the Crown to recover its debt would prevail over the right of a subject. Crown debt meant the debts due to the State which entitled the Crown to claim priority before all other creditors. Such creditors, however, were held to mean only unsecured creditors.

This issue has gained more prominence because of a Supreme Court decision delivered in 2022. The Supreme Court recently had an occasion to revisit its earlier decision and it upheld the earlier decision.The answer to the above question would depend upon the manner in which the tax Statute in question is worded. Let us understand the position in this respect.