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What happens to a company’s outstanding tax claims when it goes into liquidation?
The liquidator handles tax claims through the IBC’s liquidation distribution framework. In the ordinary case, qualifying central and state government dues fall in the section 53(1)(e) tier. That category covers government dues relating to the whole or any part of the two years before the liquidation commencement date.
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Being in that tier sets the claim’s order of payment; it does not guarantee payment. Higher-ranking claims are paid first, and the amount tax authorities receive depends on the assets available and the claims ahead of them. If a tier’s claims cannot all be paid in full, claimants within that tier share proportionately.
Do tax authorities get paid before banks and other creditors?
Generally, no. Under the section 53 waterfall, qualifying government dues rank below insolvency and liquidation costs, certain workmen’s and employee dues, and unsecured financial debts. They share their tier with the unpaid balance of a secured creditor that enforced its security. The waterfall applies to liquidation-asset proceeds, not to the separate question of how a resolution plan treats claims.
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Section 53 liquidation waterfall, in order
- Insolvency resolution process costs and liquidation costs: paid in full.
- Workmen’s dues and relinquishing secured creditors: workmen’s dues for the 24 months before the liquidation commencement date and debts owed to secured creditors that relinquish their security under section 52 share equally.
- Other employees: wages and unpaid dues owed to employees other than workmen for the 12 months before the liquidation commencement date.
- Unsecured financial debts.
- Government dues and certain secured-creditor balances: qualifying central and state government dues for the relevant two-year period share equally with the unpaid balance of a secured creditor after enforcement of security.
- Remaining debts and dues.
- Preference shareholders.
- Equity shareholders or partners.
This order follows the section 53 text reproduced in an IBBI-hosted NCLT Kolkata Division Bench order, I.A. (IB) No. 1132/KB/2022. The two-year lookback is measured from the liquidation commencement date, not from the date the tax was assessed or demanded.
Can a tax claim be treated as secured?
Possibly, depending on the statute creating the claim and the facts. In State Tax Officer v. Rainbow Papers Limited, the Supreme Court treated the statutory first charge under the Gujarat VAT Act provision at issue as a security interest. That statutory charge affected how the State’s claim was classified. The decision does not mean that every tax demand is secured, or that every tax enactment creates an equivalent charge.
For a specific claim, the relevant question is whether the applicable tax law creates an effective security interest or charge, and whether the circumstances satisfy that law. If it does, the claim’s treatment may differ from the ordinary government-dues tier. The relevant enactment and case-specific facts need to be examined rather than assuming all government claims have identical priority.
Does an attachment order give the tax authority priority?
Not necessarily. An IBBI explanatory publication describes statutory dues as operational debts and statutory authorities as operational creditors. It also discusses Leo Edibles and Fats Ltd., where an attachment order by itself did not create property rights in the attached asset; the authority had to pursue payment through the section 53 distribution process. That point should not be extended to a case where the governing statute independently creates an effective security interest.
How do income-tax dues fit into the IBC process?
An IBBI-hosted NCLAT decision, Company Appeal (AT) (Insolvency) No. 624 of 2020, discusses section 178 of the Income-tax Act and its amendment excluding its application to liquidations initiated under the IBC. In explaining the framework before it, the tribunal applied section 53 to government dues, including income-tax dues. This is a description of that decision’s treatment; the governing statutory text and later decisions should be checked when assessing a particular liquidation.
What to check in a particular liquidation
- The tax law involved: identify the central or state enactment and check whether it creates a statutory charge or security interest.
- The claim period: determine whether the dues relate to the whole or any part of the two years before the liquidation commencement date.
- Security and enforcement: establish whether security was created and whether it was relinquished or enforced, since those circumstances affect the section 53 category.
- The claim’s status: check whether the claim has been submitted and admitted, or is disputed, and how the liquidator has classified it.
- Available proceeds and higher tiers: even an eligible claim may receive only a proportionate distribution, or none, if proceeds are exhausted by claims ahead of it.
Liquidation priority is not resolution-plan treatment
Rainbow Papers also concerned a resolution plan, but that does not make its resolution-plan discussion a statement of the section 53 liquidation waterfall. The Supreme Court’s observation, reproduced in the IBBI-hosted NCLT order, that an adjudicating authority must reject a plan that ignores statutory demands concerns resolution-plan treatment. Liquidation distributions are governed by section 53 and the classification of claims within that framework.
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