IBC (Amendment) Bill 2025: Re-ordering creditors’ rights and govt’s place in the waterfall

The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 introduced in Parliament during the monsoon session proposes the most extensive changes to India’s insolvency regime since 2016.

- ‘TDG NETWORK

The draft legislation has been referred toa select committee and is widely expected to be taken up in the Winter Session. One of the most debated issues is how the bill treats government dues, which had briefly been elevated in priority by the Supreme Court’s Rainbow Papers ruling (2022). The bill clarifies that statutory dues do not rank as secured debt and rewrites the distribution waterfall.

In State Tax Officer v. Rainbow Papers Ltd. the Supreme Court held that VAT dues could be considered equivalent to certain secured creditors, placing the government alongside banks in the payout hierarchy. Although subsequent cases limited the ruling’s scope, confusion persisted. The amendment inserts an explanation in Section 3(31) and clarifies that a security interest does not arise merely by operation of law; statutory dues therefore fall under clause (e) of the waterfall for amounts due in the two years preceding liquidation and under clause (f) for older dues. This firmly positions government dues below secured financial creditors and, for amounts older than two years, even below operational creditors.

Other major reforms -