During liquidation under IBC, a state tax department cannot be treated as a secured creditor because Section 238 overrides statutory first charges. The Rainbow Papers judgment applies to CIRP, not liquidation.

Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Sections 52, 53, and 238 - Haryana Value Added Tax Act, 2003 - Section 26 - The appeal challenged the order of NCLT which considered the Excise and Taxation Department as a secured creditor under Section 53 of the IBC based on the judgment in State Tax Officer vs Rainbow Papers Limited, despite the corporate debtor being in liquidation. The Tribunal held that the Rainbow Papers judgment was passed in the context of a resolution plan, not during liquidation. It clarified that the waterfall mechanism under Section 53 governs distribution during liquidation, and a state tax department does not hold a security interest within the meaning of Section 52 read with Section 53(1)(b)(ii). Section 238 of the IBC overrides any inconsistent provision in other laws, including Section 26 of the Haryana VAT Act.

(B) The claim of a secured financial creditor who has relinquished security interest ranks higher than statutory dues of a state government in the waterfall mechanism under Section 53 of the IBC.

Facts of the case:
The Operational Creditor initiated CIRP against the Corporate Debtor under Section 9 of IBC. The CIRP was initiated on 11.12.2019, followed by liquidation on 12.01.2022. The Appellant (Federal Bank) filed a claim of Rs. 6,09,82,591/- by relinquishing its security interest. An asset was sold for Rs. 4,91,00,000/-. The Liquidator distributed only Rs. 3,55,72,021/- to the Appellant, withheld Rs. 1,05,54,823/-, and included the Excise and Taxation Department, Gurgaon as a secured creditor for distribution under Section 53 of IBC, relying on the Rainbow Papers judgment. The Liquidator stopped payment of a cheque of Rs. 90,00,000/- issued to the Appellant.

Findings of Court:
The Adjudicating Authority erred in ignoring the judgment of the Hon'ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. vs Raman Ispat Private Limited & Ors. which held that interpretation of Section 53 differs during CIRP and liquidation. The Rainbow Papers judgment was passed in the context of a resolution plan, not during liquidation. The Excise and Taxation Department does not hold any security interest within the meaning of Section 52 read with Section 53(1)(b)(ii) of the IBC. Section 238 overrides Section 26 of the Haryana VAT Act. The Liquidator's proposal for indemnity was rejected as being against settled law.

Issues: The main issue was whether a state tax department, claiming a statutory first charge under the Haryana VAT Act, can be treated as a secured creditor for distribution under Section 53 of the IBC during the liquidation process.

Ratio Decidendi: The court ruled that during the liquidation process, the waterfall mechanism under Section 53 of IBC governs distribution. A state tax department, even with a statutory charge, does not qualify as a secured creditor under Section 52 and 53(1)(b)(ii) of the IBC. Section 238 of IBC prevails over any inconsistent provision in other laws, including Section 26 of the Haryana VAT Act. The Rainbow Papers judgment was distinguished as being passed in the context of CIRP, not liquidation.

Result: Appeal allowed.

Table of Content
1. what are the facts of liquidation and distribution dispute? (Para 1 , 2 , 3 , 4 , 5 , 6 , 7 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16)
2. what is the court's analysis on applicability of rainbow papers and the waterfall mechanism? (Para 17 , 18 , 19 , 20 , 21 , 22)

[Per: Arun Baroka, Member (Technical)]

The present Appeal is filed by the Appellant - Federal Bank against the Order dated 30.05.2025 passed by the Hon'ble National Company Law Tribunal, New Delhi Bench, Court - 4 in I.A. No. 2341 (ND)/ 2024 in CP (IB) No. 1581 (ND)/ 2019 vide which the Adjudicating Authority finds no merit in the contentions raised by the Appellant - Federal Bank – Bank and directed to take steps as per the provisions of law.

2. Brief facts as narrated by the Appellant - Federal Bank are that the present Appeal is against the Order dated 30.05.2025 passed by the Hon'ble National Company Law Tribunal, New Delhi Bench, Court-4 in I.A. No. 2341 (ND)/2024 in CP (IB) No. 1581 (ND)/ 2019.

3. The Operational Creditor, M/s Roofs and Ceilings (I) Private Limited, had filed an application bearing no IB- 1581(ND) / 2019 under Section 9 of the Insolvency and Bankruptcy, 2016 for initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor M/s. Dugal Associates Private Limited. Vide an order dated 11.12.2019, the Hon'ble Adjudicating Authority had initiated the CIRP of the Corporate Debtor. Further, on the application made by the Respondent, the then Resolution Professional under Section 33(2) of Insolvency and Bankruptcy Code, 2016 liquidation proceeding was initiated vide an order dated 12.01.2022.

4. Upon initiation of the liquidation process, the Appellant - Federal Bank had filed its claim with the Respondent - Liquidator for an amount of Rs. 6,09,82,591/- on 11,03.2022 by relinquishing security interest on free hold industrial property having plot area 600sq yards and double storey building with basement; mazanine floor having area 5264.89 sq ft at plot no. F-38/2 Okhla Industrial Area, Phase II, New Delhi 110020.

5. During the liquidation process the aforesaid asset was sold for a sum of Rs. 4,91,00,000/- against a reserve price of Rs. 4,90,00,000/- vide e-auction dated 12.07.2023 and the Respondent – Liquidator has intimated the same to the members of the Stakeholders Consultation Committee (SCC) in 13th meeting dated 04.08.2023.

6. In terms of Section 53 of the insolvency and Bankruptcy Code, 2016 read with Regulation 42 of IBBI (Liquidation Process) Regulations, 2016, the Respondent - Liquidator is supposed to distribute the sale proceeds within 90 days to the creditors.

7. The Respondent - Liquidator in the 15th meeting of Stakeholders Consultation Committee (SCC) has intimated that the pending assets such as AC, fans, Almirah, Furniture, electric equipment's generators etc. were sold on auction dated 11.09.2023 for a sum of Rs. 3,15,000/-. Apart from these the Respondent has also sold Toyota Innova Car and Tata Safari Car in the auction process. Respondent has duly received the sale proceeds for both the assets sold. 8. Further the receipts and expenditures has been discussed in the 15th meeting of the SCC dated 26.03.2024. The Respondent - Liquidator has intimated that out of total Receipts/ Sale realization, it has distributed the sum of Rs. 3,55,72,021/- to the Appellant - Federal Bank (as Rs. 3,00,00,000 towards the claim filed during the liquidation process and Rs. 55,72,021 towards the CIRP cost contributed earlier). It is submitted that the Respondent after the distribution of the above mentioned amount has withheld the amount of Rs. 1,05,54,823/- and has not distributed the same as per the mandate under Regulation 42 of the Liquidation Process Regulation, 2016 within 90 days from the date of receipt of the amount from the sale realisation.

9. After the distribution of amount of Rs. 3 crores the Respondent has issued a cheque of Rs. 90,00,000/- but after issuing the said cheque, the Respondent has instructed fo

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2026 Supreme(Online)(NCLAT) 535

NATIONAL COMPANY LAW APPELLATE TRIBUNALArun Baroka, Member (Technical)Federal Bank Limited – AppellantVersusLiquidator – RespondentI.A. No. 2341 (ND)/ 2024 in CP (IB) No. 1581 (ND)/ 2019

During liquidation under IBC, a state tax department cannot be treated as a secured creditor because Section 238 overrides statutory first charges. The Rainbow Papers judgment applies to CIRP, not liquidation.

Cases Referred (1)

NATIONAL COMPANY LAW APPELLATE TRIBUNAL
Arun Baroka, Member (Technical)
Federal Bank Limited – Appellant
Versus
Liquidator – Respondent
I.A. No. 2341 (ND)/ 2024 in CP (IB) No. 1581 (ND)/ 2019