Gambling, Skill, and Money: Supreme Court Upends Decades Old Jurisprudence – II

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In Part-I, my focus was on contextualising the dispute and providing a background. In this part, let me focus on the Supreme Court’s observations in Junglee Games case. The Supreme Court sub-divided the issues for consideration into nine different categories. Let me try and group them into five categories and analyse the Supreme Court’s observations on each issue. 

I. Scope and Interpretation of Entry 34, List II 

The Supreme Court relied on an extract of Constituent Assembly debates where a concern was expressed by some members that people in the State of Bombay (‘as it was then’) play rummy with such high stakes that it amounted to gambling. The Supreme Court cited this excerpt from the debates to hold that even a game of skill such as rummy, if played for money, can amount to gambling. And the Constituent Assembly intended games of skill, involving monetary stakes, to be regulated by States under Entry 34, List II. Relatedly, the Supreme Court held that if States were deprived of the power to regulate betting on games of skill, it would render them ‘powerless to prohibit the activity of betting and gambling.’ (para 223) 

While a reference to the Constituent Assembly debates typically enhances the meaning and understanding of underlying Constitutional issues. However, in this case the reference to the Constituent Assembly debates did not serve the intended purpose. The Constituent Assembly members were concerned about preventing gambling and playing rummy was used as an example. The debate was not about the meaning of gambling. In fact, Dr. B.R. Ambedkar only stated that Entry 34, List II was to give States power to regulate gambling without defining what amounts to gambling. The question of what amounts to gambling was answered by the Supreme Court in RMDC-I case. The Supreme Court also observed that if Entry 34, List II is interpreted to exclude games of skill, it would denude States power to regulate games of skill. And, the ‘constitutional position’ needs to be respected. This was a questionable reason because the Constitution only permitted States to regulate gambling and not games of skill in the garb of regulating gambling. If the Constitution only permits States to regulate gambling/games of chance then the boundaries of such regulatory powers also need to be respected. Merely because States will be unable to regulate games of skill is not a justifiable reason to expand the scope of a legislative entry. The Union can always – and already has stepped into regulate online gaming.      

II. Re-Interpretation of RMDC-I case 

The Supreme Court underlined the import of RMDC-I case and the RMDC-II case. In the former while delineating the scope of games of skill, the Supreme Court had held that if the general public was invited to ascertain the result of an uncertain event then to assess if the game pre-dominantly involved skill or chance, the appropriate standard is common people and not expert statisticians. Relying on these observations, the Supreme Court concluded that:

the Court was cognizant of the fact that while games of skill may be excluded from the term “gambling”, they would still be covered under the expression “betting” as betting is nothing but staking money on the outcome of a future uncertain outcome. (para 245)

 The Supreme Court’s conclusion does not follow from the observations made in RMDC-I case. The latter never expressed any opinion about the meaning of betting and only concerned itself with games of skill and games of chance distinction. Also, Supreme Court’s understanding of betting does not distinguish staking by players themselves or third parties. Instead, the Supreme Court – by misreading RMDC-I case – arrived at a generic and broadbrush meaning of betting. The Supreme Court added that: 

Both betting and gambling involve the aspect of staking money on an uncertainty. Merely because the risk element is commonly perceived as “taking a chance”, it cannot mean an expression would cover only games of chances. In both Rummy, a game of skill, and Teenpathi, a game of chance, the persons staking on the uncertain outcome, equally risk and “take a chance” on their unknown and uncertain victory. (para 273)

The Supreme Court repeatedly emphasised on two elements in betting: staking of money and the uncertain outcome of game, irrespective of the game involved. Thereby making a clear departure from the jurisprudence post RMDC-I case wherein the pre-dominant element test was crucial to determine the nature of a game and not whether players had placed monetary stakes in a game. Only side-betting by onlookers was prohibited in the Satyanarayana case. But what about the Lakshmanan case where betting on game of skill was also permitted? The Supreme Court distinguished it from the impugned case by underlining that the Lakshmanan case involved betting on horse racing which took place in controlled environments and the exception was narrow and specific to horse racing. For example, betting can only take place on the day or horse racing and in specified physical enclosures inside the horse racing club.   

Instead, the Supreme Court pointed that the nature of online games was different and hinted at their restrictive and predatory nature by observing that: 

If one examines the online gaming platforms, it is nothing but a systematic inducement technique to ensure a player bet more and more. This is provided in the form of discounts, incentives for repeated betting, incentives for a particular number of victories and of course, as stated above, retaining the winnings upto a particular amount before it could be withdrawn and a prohibition to withdraw the deposited amount before it is turned into winnings by staking the deposited amount repeatedly. (para 279)

The above observations of the Supreme Court would indicate that it viewed online gaming as a separate and independent category. And the nature of conditions and restrictions imposed by online gaming companies played a role in online money gaming being equated to gambling. However, the Supreme Court also added that placing monetary stakes on a game amounted to gambling irrespective of the medium. Thereby, contradicting itself and what was held in the RMDC-I case where monetary stakes were viewed as irrelevant to determine the nature of a game. 

The Supreme Court justified its views by stating that it was only clarifying the interpretation of RMDC-I case and RMDC-II case, even if the said interpretation had been followed for more than seven decades. Specifically, the Supreme Court noted that it was trying to correct a misleading argument by online gaming companies that RMDC-I case protected games of skill played with stakes. And as part of the ‘course correction’ the Supreme Court held that: 

Explicit gambling, though, while playing a game of skill, would remain gambling and taking protection under an assumed ratio of RMDC-I (supra) would be virtually undoing RMDC-I (supra). (para 286)

Thereby, a Division Bench of the Supreme Court in Junglee Games case found a cover in ‘misinterpretation’ to sidestep a decision of the Constitution Bench in RMDC-I case. An approach that is hard to justify. I would suggest that the Supreme Court’s understanding of gambling is at odds with RMDC-I case and misinterprets its ratio. The RMDC-I case was not being misinterpreted or misread by online gaming companies, but its ratio became inconvenient in wake of several States’ insistence to prohibit online money gaming. 

III. Entry Fee, Tournaments, and Stakes 

Even though the issue of entry fee in games was not categorised independently by the Supreme Court, it is worth a discussion. One of the claims by online gaming companies was that if money is the criteria to distinguish games of skill from games of chance/gambling then even a chess tournament played after payment of an entry fee would amount to gambling. In response, the Supreme Court permitted entry fee as an exception to the rule that monetary stakes per se convert any game into a game of chance/gambling.  But only if the entry fee in a competition does not form part of stakes. If the entry fee forms part of a pool or stakes then it would become gambling. If a pre-determined prize money is awarded to the winners, then the entry fee does not become part of a stake.  

Online gaming companies while offered a pre-determined prize money in some cases, a portion of the entry fee was retained by them as platform fees. Even though the online gaming companies did not enter into a contest between the players and only facilitated games by providing a platform, their deduction of money from the total pooled amount worked against them and the Supreme Court held that online gaming companies facilitated gambling. Also, the Supreme Court observed that online gaming companies cannot plausibly contend that they were organising a tournament. Online gaming companies had hundreds of virtual rooms with varying amounts of money and such a scenario is not akin to conducting a tournament. And, again, relying on RMDC-I case held that: 

If a promoter is floating a skill-based competition for an entry fee, that per se would not be gambling. If a promoter is floating a chance-based competition for an entry fee, that per se would constitute gambling. This alone is the inference that can be drawn from RMDC-I (supra). (para 279)

The above inference has no basis in RMDC-I case. At no point, in the RMDC-I case did the Supreme Court express any opinion about entry fee and gambling. In fact, one of the reasons Prize Competition Act, 1955 was enacted was that entry fee charged by publications for prize competitions was viewed as a monetary stake as the participants expected to win a huge monetary prize by guessing the correct answers. And their entry fee was viewed by some members of the Parliament as a monetary stake. But the Lok Sabha and Rajya Sabha debates on the Prize Competition Bill, 1955 – which clearly mention entry fee as a monetary stake – find no mention in Junglee Games case. Supreme Court’s observations about entry fee in Junglee Games case are based on its own flawed assumptions and understanding of entry fee. The RMDC-I case is merely used as a cover and observations on entry fee are attributed to it which are not to be found in the case.     

IV. State’s Competence under other Legislative Entries 

As mentioned in part-I, one of States argument was that even if it is not found competent to enact laws on betting under Entry 34, List II, it could enact such laws under alternate legislative entries. The Supreme Court held that law prohibiting online money gaming could be prohibited by States by relying on Entry 1, List II, i.e., public order. Citing a host of case laws the Supreme Court underlined how the term public order had been interpreted widely by courts. Public order included a state of tranquillity and if anything was detriment to the health and safety of public, States were competent to enact laws to regulate it. 

The Supreme Court thereafter made a few generic observations about the wide and easy access to online gaming, attractiveness of online gaming to young people, booming business of online gaming companies due to their reach in rural areas and indicated that a public order question was intricately tied to online money gaming. The aspect of financial health, mental health, and emotional well-being of players was cited to indicate that rampant presence of online gaming had a proximate connection to disrupting public order. And upheld State’s competence to prohibit online money gaming by concluding that:

there is a proximate relation between the said Acts and the mischief they seek to curb and therefore, public order can be invoked to satisfy the competence of the States to enact the impugned legislations. The States have merely taken an effort to enforce the vision of the Constituent Assembly by seeking to protect the future and livelihood of the Population. (para 375)

While Supreme Court’s understanding of public order, its reading of relevant judicial precedents is difficult to find fault with; especially, because addiction with online gaming is a genuine concern that motivated States to prohibit online money gaming. However, the entire issue seemed superfluous once the Supreme Court decided that States could legislate on betting on games of skill under Entry 34, List II. States’ argument about possessing competence under Entry 1, List II was an alternate argument. Yet, the Supreme Court spent considerable space in concluding that States were competent to enact laws on games of skill under Entry 1, List II AFTER it had decided that States could enact such laws under Entry 34, List II.      

V. Issues of Manifest Arbitrariness and Disproportionality 

The Supreme Court dismissed the argument that amendments suffered from the vice of arbitrariness by stating that once monetary stakes come into the picture, the distinction between games of skill and games of chance is irrelevant. And held that: 

… as far as betting and gambling are concerned, a differentiation cannot be made between games of chance and games of skill because the player staking the amount, in both cases, does it with a hope of winning more money than what is staked. (para 305)

The Supreme Court added that the medium, online or physical, is immaterial. If a game if played for stakes then it amounts to gambling. Thus, prohibiting betting on all games was not arbitrary and online money games were correctly classified as ‘res extra commercium’. And the occasion to consider the amendments as disproportionate did not arise since betting on games was also res extra commercium. Thereby refusing to grant online money games protection of Part III of the Constitution. 

Confusing Way Forward  

The Junglee Games case has decisively shifted the gambling jurisprudence. But cannot be faulted for introducing any significant clarity in gambling law concepts. Despite its obvious limitations and flaws, the Junglee Games case is likely to be a major pivot for two crucial reasons: 

Firstly, endorsing monetary stakes as the distinguishing factor between games of skill and games of chance. A proper interpretation of the judgment is that it has preserved the pre-dominant element test laid down in RMDC-I case. A Division Bench of the Supreme Court could not expressly overrule a Constitution Bench judgment. At the same time, the Junglee Games case has added another element to gambling law jurisprudence by interpreting betting to mean staking money on the uncertain outcome of a game. This interpretation allowed the Supreme Court to sidestep binding nature of pre-dominant element test laid down in RMDC-I case. Reconciliation of both judgments is going to be an onerous task and is for future judges and cases.  

Secondly, the Junglee Games case has, without expressly stating so, endorsed an intrusive regulatory regime for online gaming. States clearly admitted that online gaming is a complex area and designing a regulatory regime would be financial burden on States. In view of the potential for harm. At the same time, the Supreme Court has also suggested that once monetary stakes are involved it constitutes gambling. Medium – physical or online – is irrelevant. In view of the facts, the Supreme Court has certainly endorsed prohibition of online money gaming. But whether the same can extend to physical games remains to be seen. Though, given the wide canvas that Supreme Court has granted States to implement prohibition on gambling, it would not be surprising if physical games, involving monetary stakes, are next to face the axe of prohibition. 

Gambling, Skill, and Money: Supreme Court Upends Decades Old Jurisprudence – I

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I. Introduction 

On 27 May 2026, a Division Bench of the Supreme Court – comprising of Justice P.B. Pardiwala and Justice R. Mahadevan – pronounced two inter-related judgments: The State of Tamil Nadu v Junglee Games India Private Limited (‘Junglee Games case’) and Directorate General of Goods and Services Tax Intelligence (HQS) & Ors v Gameskraft Technologies Private Limited & Ors (‘Gameskraft case’). The former upheld prohibition of online money gaming by the States of Tamil Nadu and Karnataka. While the latter upheld constitutional validity of amendments to Central Goods and Services Tax Act, 2017 – introduced in 2023 – which significantly increased the Goods and Services Tax (‘GST’) burden of online gaming companies.

The issues involved are multi-fold and layered, traverse regulation and taxation of online gaming; but once we peel the onionesque layer the dispute narrows down to legal meaning of gambling and scope of State’s regulatory and taxation powers in relation to it. The Supreme Court, in both decisions, was deferential to the State and approved all the statutory and related amendments. Thus, concretizing a bleak future for online money gaming in India. Though most online gaming companies have already shifted base outside India, downsized or shut shop even before the decisions were pronounced. Writing on the wall is, sometimes, not difficult to read.   

In this two-part article, I will comment on the Junglee Games case. Part I contextualizes and summarizes the dispute and Part II comments on the Supreme Court’s response to the dispute. I will comment on the Gameskraft case separately with a sole focus on GST related issues.  

II. Brief Overview of the Indian Gambling Law Landscape: 1957-2021 

For more than seven decades, Indian gambling law landscape has been defined by Supreme Court’s ratio in State of Bombay v R.M.D. Chamarbaugwala (‘RMDC-I case’) with R.M.D. Chamarbaugwala v Union of India (‘RMDC—II case’). I will spare you the details and skip to the relevant part. In RMDC-I case, the Supreme Court endorsed the ‘pre-dominant element’ test to distinguish a game of skill from a game of chance/gambling. The pre-dominant element test means that to determine if a game is a game of skill or a game of chance, it is important to identify which of the two elements is pre-dominant in a game. If skill dominates chance, the game is a game of skill while if it is vice-versa it is a game of chance/gambling. A secondary observation of the Supreme Court in RMDC-I case was that in determining the nature of a game, the perspective of an ordinary common person is relevant and not an expert. If a game involves guessing a correct solution, its difficulty level, for a common person must not amount to taking ‘a shot at a hidden target’. If it is so, it is a game of chance/gambling. A game of skill must require application of skill by a common person, and such skill should pre-dominate the chance element. 

The pre-dominant element test stood was central to gambling law jurisprudence for more than seven decades. And it is worth mentioning two relevant judgments of the Supreme Court which endorsed the test. In State of Andhra Pradesh v K Satyanarayana & Ors (‘Satyanarayana case’), the Supreme Court held that rummy is a game of skill since it requires memorizing cards. Thus, rummy was ‘mainly and preponderantly’ a game of skill. However, an important caveat in the Satyanarayana case was that ‘if there is evidence of gambling in some other way’ or ‘the owner of the house or the club is making a profit or gain from the game of Rummy’ then it will constitute an offence. The above caveat was interpreted to mean that ‘side-betting’ is not permitted. If players staked money in a game of rummy to win prize money it was permissible since rummy was a game of skill. Presumably also because players were pre-dominantly using their skill to earn the money. But if the house/club or a third-party placed money on the outcome of such a game of rummy, it was not permitted since it was assumed to be mere speculation. A third party placing monetary stakes on a game of skill was referred to as ‘side-betting’ or betting simpliciter. Though there was no unanimous or specific definition of either term.  

Similarly, in  Dr. K.R. Lakshmanan v State of Tamil Nadu  (‘Lakshmanan case’), the Supreme Court held that horse racing was a game of skill. The Supreme Court also extended the protection of game of skill to wagering or betting on horse racing. The dictum of Lakshmanan case meant that any a third person/onlooker wagering on outcome of a horse race was also indulging in a game of skill and such wagering cannot be classified as a game of chance. While the Lakshmanan case’s observation, prime facie, diverged from the Satyanarayana case; the betting permitted in the former was only in the context of horse racing. But betting on horse racing only took place in specific horse racing clubs, at a specified time and as per the rules of the horse racing club. So, while the Lakshmanan case expanded the scope of game of skill, it was a limited and contextual expansion and did not permit third party betting on all games of skill. Though the Lakshmanan case was also liberally interpreted to mean that betting or placing monetary stakes on games of skill is also a game of skill.      

The above position of law was unchallenged until some States took a step to prohibit online money gaming, i.e., online gaming involving monetary stakes and/or a monetary prize. Let me mention two such prohibitions which were subject of the Junglee Games case.  

III. 2021 Onwards: The Prohibition of Online Money Gaming  

In 2021, Tamil Nadu amended the Tamil Nadu Gaming Act, 1930 while Karnataka amended the Karnataka Police Act, 1963. As per the amendments online gaming intermediaries could constitute ‘common gaming houses’. Relatedly, facilitating betting and wagering through collection or solicitation of bets for distribution of prizes through electronic funds was also made a punishable offence under the respective statutes. Another crucial amendment was that betting and wagering on online games was made a punishable offence. And the offence of betting or wagering was defined to include betting on uncertain events including online games of skill. Prohibiting betting on online games on skill was unprecedented as previously all games of skill – including betting on game of skill – were permissible activities and considered outside the purview of gambling laws. 

Prior to 2021, Tamil Nadu Gaming Act, 1930 and Karnataka Police Act, 1963 recognized two kinds of games: games of chance/gambling and games of skill. The former were punishable while the latter were permissible. The amendments of 2021 created a new category – online money games. Any online game which involved monetary stakes was defined as online money game. And all online money games were prohibited irrespective of whether they were a game of skill or a game of chance. Only online games of skill that did not involve monetary stakes remained outside the scope of gambling laws.   

To exemplify. In Satyanarayana case – physical rummy was held to be a game of skill. Thus, until 2021, both online and physical rummy if played for money or otherwise was not a punishable offence under the Tamil Nadu Gaming Act, 1930 and Karnataka Police Act, 1963. The amendments in 2021 stated that wagering or betting on online rummy was a punishable offence. Playing online rummy for money was equated to gambling and made punishable. Whether the monetary stakes were those of players or a third party was irrelevant. Equally, gaming intermediaries that facilitated the playing for monetary stakes could be labelled as common gaming houses and be made liable for penalties. 

In short: in 2021, States used money to distinguish between online games of chance and online games of skill. Any online game involving money was termed as gambling. But the High Courts held use of money as a distinguishing element was at odds with the pre-dominant element test laid down in RMDC-I case. 

IV. High Courts Question a Blanket Prohibition on Online Money Games 

The amendments to both the legislations were struck down in Junglee Games India Pvt Ltd v The State of Tamil Nadu and All India Gaming Federation v State of Karnataka by the Madras High Court and the Karnataka High Court respectively. While both the High Courts cited various reasons for not upholding the constitutional validity of both amendments, two reasons are worth mentioning. To begin with, the High Courts reasoned that a blanket prohibition on all forms of online money games including games of skill was disproportionate. A narrowly tailored prohibition was recommended. The legislatures of both States introduced amendments on the assumption that all online games involving monetary stakes amounted to gambling. While a more considered approach would have involved determining which physical games, when played online, partake the character of gambling. If physical poker played for money was a game of skill, then the same game played online for money does not amount to a game of chance/gambling. The High Courts suggested that an inquiry into the surrounding circumstances, identifying the terms and conditions of online games that transformed them into gambling was necessary. And the legislature must accordingly determine which online money games amounted to gambling instead of imposing a blanket prohibition on all online money games. 

The High Courts also questioned competence of the States to legislate on games of skill. Entry 34, List II, Seventh Schedule is ‘Betting and gambling’. The High Courts interpreted the two words conjunctively and held that States do not have legislative competence to enact laws on betting alone as betting is not a standalone category. Under Entry 34, List II, States can enact laws only on betting related to gambling. Thus, any laws that prohibited betting on games of skill were outside the purview of State’s legislative competence under Entry 34, List II. 

One implication of the above is that, if online games of skill or betting on games of skill are not included within the scope of Entry 34, List II then they cannot be termed as ‘res extra commercium’. In RMDC-I case, the Supreme Court had termed gambling as res extra commercium and undeserving of protection under Part III of the Constitution. But games of skill remained eligible for protection under Part III of the Constitution. Most notably Article 14 and Article 19(1)(g) read with Article 19(6). Thus, any restrictions on games of skill cannot be arbitrary, need to be reasonable and must satisfy the proportionality test. And the High Courts in their respective judgments – concluded that the blanket prohibitions on online money games were disproportionate and struck them down. 

States introduced money as the criteria to distinguish online games of chance from online games of skill, but the High Courts cited the pre-dominant element test and held that latter cannot be clubbed with the former only because they involve monetary stakes. The skill-chance parameter remains relevant for online games as well.   

Both the States resisted the High Court’s views and in Junglee Games case, filed an appeal and the Supreme Court decided the petitions together since they raised analogous issues. 

V. Appeal before the Supreme Court 

(a) Justification by States 

States justification for prohibiting wagering or betting on online games was multi-pronged. The State of Tamil Nadu relied on financial distress, predatory practices of online gaming companies, suicides, addiction among other similar reasons. And argued that even if States were found to not possess legislative competence under Entry 34, List II it was competent to prohibit the wagering or betting under other legislative entries. For example, public order (Entry 1, List II), public health (Entry 6, List II), or sports, entertainments and amusements (Entry 33, List II).  

Further, State’s argument – which proved crucial to fate of the case – was that the phrase ‘betting and gambling’ in Entry 34, List II should not be construed conjunctively. And both terms can be interpreted independently. Entry 34, List II should not be restricted to mean ‘betting on gambling’ denying States authority to regulate betting on games of skill. States argued that a third-person betting on a game of skill is merely guessing the outcome of game and not applying their skill in the game. States are competent to prohibit such betting even if the underlying game is a game of skill.  

States also resisted terming the prohibition on betting and wagering as a blanket ban by suggesting that some online games of skill are still permitted. For example, online games of skill which do not involve monetary stakes. Alternatively, a prohibition was justified on the ground that online gaming is a complex area and designing a regulatory landscape was a significant financial burden on States. Thus, States are entitled to impose a ban on betting and wagering on online games and cannot be questioned on the ground for not choosing the ‘least intrusive option’ and violating the doctrine of proportionality.    

(b) Online Gaming Companies Resist the Prohibition

Online gaming companies tried to resist the prohibition on wagering and betting by pointing to its wide scope, lack of States legislative competence under Entry 34, List II, and a misapplication of the well-founded distinction between games of chance/gambling and games of skill recognized by the Supreme Court in RMDC-I case.  

Online gaming companies’ argument was that betting and gambling (Entry 34, List II) only provides States legislative competence for betting on gambling. And State cannot treat betting as an independent category and legislate for betting on games of skill. The phrase ‘betting and gambling’ must be interpreted conjunctively. The implication, as suggested, above, was that betting on games of skill would not be ‘res extra commercium’ and any restrictions on it would be examined on the touchstone of reasonableness under Article 19(6) and whether they adhere to the doctrine of proportionality.

To support their argument, online gaming companies relied on relevant judicial precedents, especially the Lakshmanan case. Online gaming companies relied on the Lakshmanan case to reinforce the argument that wagering or betting on game of skill is also a game of skill and cannot be included within Entry 34, List II. 

Further, online gaming companies argued that it was the Parliament which had competence to regulate online games and fantasy sports. Entry 31, List I: ‘Posts and telegraphs; telephones, wireless, broadcasting and other like forms of communication’ covered online games that were solely dependent on the internet. Permitting States to regulate online games would lead to ‘regulatory chaos’ and regulation of online games also involved an inter-State trade element which should be exclusive preserve of the Parliament. Online gaming companies also underlined that they were online gaming intermediaries under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 and under regulatory purview of Ministry of Electronics and Information Technology of India.

Additionally, online gaming companies argued that the amendments disregarded well-established distinction between games of skill and games of chance as per the pre-dominant element test laid down in RMDC- I case. Merely because monetary stakes were involved in an online game of skill does not convert it into a game of chance. The pre-dominant element test needs to be applied to online games as well to distinguish an online game of chance from an online game of skill. To apply the pre-dominant element test, each game will have to be scrutinized on the skill-chance parameter. Instead, States had chosen to prohibit all online money games, i.e., all online games involving monetary stakes.  

VI. ‘Stakes’ Before the Supreme Court 

A perusal of the lengthy arguments – which also involved challenge by online gaming companies on grounds of Article 14 – reveals that the entire online gaming sector faced an existential threat. If all online money games were prohibited, the entire revenue model of online gaming companies would come to a halt. And that seemed to be intention of the States. Why? 

States of Tamil Nadu and Karanataka put forth allegations of predatory practices by online companies, fears of addiction among general population, mounting debts, and adverse impact on mental and emotional well-being of people. And while States’ concerns should have invited a nuanced regulatory response, a blanket prohibition was an easy and quick solution for States.   

Nonetheless, a distillation of arguments of both sides suggests that stakes before the Supreme Court were as follows: 

Firstly, relevance of the pre-dominant element test for online gaming. In RMDC-I case, the Supreme Court had laid down the test for a prize competition that invited entries from participants. Whether the test could be seamlessly applied to online gaming or do the latter constitute a separate category of games altogether?  The High Courts did not permit ‘medium-based regulation’ and dismissed the States’ argument that online games were a distinct category that can be regulated differently as compared to physical games. However, States insisted that the nature of online games – their pervasiveness, propensity for addictive behavior, constant availability – demanded a separate and customized regulation.

Secondly, understanding and applying dictum of the Lakshmanan case. Players staking money in a game of skill is different from a third-party staking money on the outcome of a game of skill. Former is permissible, but in the Lakshmanan case even the latter was interpreted to be within scope of game of skill in the context of horse racing. Though in the Satyanarayana case side betting or the club earning more money than its expenses was prohibited. These positions needed reconciliation in view of online games especially fantasy gaming. 

Thirdly, meaning of betting and whether betting constituted an independent category. Monetary stakes are an essential element of games of chance/gambling but optional in games of skill. Thus, meaning of betting assumes a more crucial role for games of skill. Playing poker without monetary stakes does not involve ‘betting’ by players, but third parties can still ‘bet’ by staking money on the outcome. If players themselves stake money does that count as betting, or does it remain protected under the umbrella of game of skill?  

The Supreme Court had a few things to say on all the above though it did not provide adequate or all the answers. Supreme Court’s response is elaborated here.   

A Small Note from Tax History: Entertainment Tax Dispute of Delhi Racing Club

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Introduction 

In 2012, the Delhi Racing Club (‘Racing Club’) lost a tax dispute. The Government of National Capital Territory demanded payment of entertainment tax which the Racing Club unsuccessfully resisted. At first glance, the Delhi High Court’s judgment in The Delhi Race Club Ltd v Government of NCT of Delhi & Ors (‘Delhi Racing Club case’) seems straightforward. It was a low stakes dispute involving a relatively small amount of entertainment tax. And the Delhi Racing Club case, cannot by any stretch of imagination, be called a ‘landmark’ case in Indian indirect tax jurisprudence. Nonetheless, the value of commenting on the Delhi Racing Club case can be underlined because of three observations of the Delhi High Court.   

Firstly, any payment which is related to the entertainment or is a pre-condition for entertainment can be understood be a ‘payment for admission to any entertainment’ and subjected to entertainment tax. Since local bodies are authorized to collect entertainment tax post introduction of Goods and Services Tax (‘GST’), interpretation of the above phrase has a continued relevance.  

Secondly, in Delhi Racing Club case the Delhi High Court reinforced the principle that if law requires that a certain tax shall be collected then any governmental assurance that it shall not be collected will not be binding on the state and its officers. An observation that leaves the taxpayer at the mercy of changes in the governmental attitude towards tax collection.  

Thirdly, the object of entertainment tax is human beings and not the inanimate object in reference to which the tax is levied. The latter’s presence, absence or use can trigger liability to pay an entertainment tax, but it does not mean that it is the object of entertainment tax. 

The judgment is an important reference point for understanding the taxable event for entertainment tax, and its wide scope that can extend to varied forms of payments/charges that are made in relation to an entertainment. A concept that continues to be relevant because laws under which entertainment tax is levied and collected by local bodies adopt similar expressions and phrases as used in relevant entertainment tax legislations in vogue before introduction of GST. 

Facts and Background 

The Racing Club charged entry fees from those who visited its premises to place bets on horse races or otherwise watch the races. The Racing Club became concerned with the nuisance value of mobile phones and introduced an additional entry charge for permitting carrying of mobile phones into its premises. While the Racing Club was collecting and remitting entertainment tax of 25% on the entry fees, the issue was if entertainment tax was also payable on charges levied for carrying mobile phones. 

In February 2002, the Entertainment and Betting Tax Officer under the Delhi Entertainment and Betting Tax Act, 1996 issued a notice to the Racing Club demanding payment of entertainment tax of 25% on charges collected for carrying mobile phones. The Racing Club resisted the demand of tax and argued that mobile phones were not entertainment or in any manner connected to entertainment. The Commissioner of Entertainment, Betting and Luxury Tax responded by banning the use of mobile phones in the Racing Club. Why? The argument was that use of mobile phones in the Racing Club had given birth to illegal betting and the Racing Club had not maintained proper records of mobile phones in the betting ring. The ban caused immediate concern to the Racing Club as it would prove bothersome to its members and visitors. After all, one of the core activities of visiting a horse racing club was to bet on the horse races, one of the rare legal betting activities in India.  

To circumvent that mobile phone ban, the Racing Club agreed to pay half of the entertainment tax demand on charges levied on mobile phones. And agreed to pay the remaining half in yearly instalments. The Commissioner agreed and thereafter rescinded the ban on mobile phones subject to the Racing Club paying entertainment tax on charges levied on mobile phones. 

In 2006, the Racing Club was issued another show cause notice alleging that it had been collecting charges on mobile phones usage from Financial Year 2002-03, without permission under the Delhi Entertainments and Betting Tax Act, 1996. And Racing Club was asked to reply to the notice. The Racing Club’s reply inter alia mentioned that it had already entered a settlement reading payment of entertainment tax on mobile phone charges. But the Racing Club’s reply was found unsatisfactory and a total tax demand of Rs 1,28,03,462/- was confirmed by the Commissioner. The Racing Club approached the Delhi High Court challenging the assessment orders. 

The Delhi High Court Judgment 

Section 6 of the Delhi Entertainment and Betting Tax Act, 1996 provided that there shall be levied and paid on all payments for admission to any entertainment an entertainment tax. Section 2(m)(iv), in turn, defined ‘payment for admission’ to mean:

any payment, by whatever name called, for any purpose whatsoever, connected with an entertainment, which a person is required to make in any form as a condition of attending, or continuing to attend the entertainment, either in addition to the payment, if any, for admission to the entertainment or without any such payment for admission;  

The Delhi High Court held that the above sub-clause covered payments to the Racing Club as mobile phone charges since they were connected to the entertainment of watching/betting on horse racing. The High Court added that the manner of collecting the payment, or its purpose is irrelevant if the payment is connected to the entertainment. The High Court clarified that while the taxable event was holding an entertainment, any payment connected with the entertainment attracted a levy under Section 6(1) of the Delhi Entertainment and Betting Tax Act, 1996. And concluded that: 

The only condition is that the payment should be connected with the entertainment, which is the horse races in the present case. The further condition is that the payment should be one which a person is required to make as a condition of attending the entertainment. This condition is satisfied in the case of persons who wish to carry their mobile phones inside the race club. If they want to attend the races carrying a mobile phone with them, they are obliged to make the payment for the entry of mobile phones. (para 19)    

The connection between mobile phones and horse racing – the main entertainment – was obvious and proximate. And on this point, the Delhi High Court was correct in including mobile phones charges within the scope of ‘payment for admission’. This is especially since mobile phones were vital to place and track bets on the horse races.  

The second crucial question the Delhi High Court had to address was if the entertainment tax was being levied on an inanimate object. In State of Karnataka v Driven Enterprises entertainment tax was levied on admission of cars into drive-in cinemas. Driven Enterprises had argued before the Supreme Court that a tax cannot be levied on inanimate objects. But the Supreme Court rejected the argument and held that entertainment tax was not levied on cars but on persons who were entertained, who took their cars inside the theatres, and enjoyed the movie while sitting in their cars. Drawing an analogy, the Delhi High Court in Delhi Racing Club case held that the entertainment tax was not on mobile phones but on persons who insisted on carrying their phones inside the Racing Club and were entertained from horse racing. 

Finally, Racing Club challenged the demand for payment of entertainment tax by arguing that it had previously settled the issue with the Commissioner. The Delhi High Court rejected the Racing Club’s argument by relying on M/S Mathra Prashad and Sons v State of Punjab and held that where a law requires that a certain tax is to be collected it cannot be given up. Any governmental assurance that it will not collect the tax is not binding on the government. Thus, the government retains the discretion to collect or not to collect the tax putting the taxpayer in jeopardy. The government can, as in the Delhi Racing Club case, settle the dispute or agree to collect a certain quantum of tax but later go back on its word and decide to collect a higher amount of tax. If the law permits the government to collect the tax, the government retains the authority to collect it as per its convenience. And any agreements to the contrary with the taxpayer do not bind it. While one can argue that promissory estoppel should apply to the government, but the jurisprudence is clearly in favor of the state and its ability to withdraw any tax concessions in public interest. Even if it prejudices the taxpayer in question.    

Betting, Taxes, and Present      

Delhi Racing Club case was not a rare instance where taxation, betting, and entertainment coalesced and resulted in a significant burden for the taxpayer, i.e., the Racing Club. And since entertainment tax is an indirect tax, by extension members and visitors to the Delhi Racing Club were also affected. The current taxation regime relating to betting and entertainment is bifurcated into two separate taxes – GST as well as entertainment tax. Betting is remit of the former and the entire betting sector has been effectively paralyzeddue to onerous tax rates under GST. 

Entertainment tax is now a de facto tax on admissions to events such as sporting events, broadcasting services, and for public exhibition of cinematographic films. And is collected by local bodies. Thus, the Delhi High Court’s interpretation of ‘payment for admission’ remains relevant even under the current entertainment tax regime. Since all entertainment tax laws still use the same phrase to delineate their scope and identify the taxable event. 

However, to conclude, and to place the tax controversy in the larger context: recreational clubs including racing clubs such as the Delhi Racing Club have other legal troubles to encounter for now, onerous taxes and high tax rates form only a small piece of their ongoing existential fights.   

Piercing Corporate Veil under the IBC: The Alpha Corp Case Reveals Little

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I. Introduction

The Supreme Court in Alpha Corp Development Private Limited v Greater Noida Industrial Development Authority (GNIDA) (‘Alpha Corp case’) permitted piercing of the corporate veil. And allowed assets of subsidiary companies to be included in corporate insolvency resolution process (‘CIRP’) of the parent company. The principle of separate legal personality is not absolute and exceptions to it are either prescribed in the relevant statutory provisions or created through judicial pronouncements. Alpha Corp case is an instance of judicially created exception and needs to be contextualized to determine its impact on future disputes of similar nature. 

This article examines Alpha Corp case and refers to existing jurisprudence for piercing the corporate veil under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Prior to  Alpha Corp case, most notable instance of the Supreme Court endorsing piercing of the corporate veil was in Arcelor Mittal Private Limited v Satish Kumar Gupta & Ors (‘Arcelor Mittal case’). I argue that in Alpha Corp case, Supreme Court’s reliance on Arcelor Mittal case ignores the context in which the latter was pronounced. Arcelor Mittal case was pronounced in reference to Section 29A. The language deployed in Section 29A led the Supreme Court to correctly hold that the provision itself permits piercing of the corporate veil. While in Alpha Corp case the Supreme Court permitted piercing of the corporate veil without anchoring it in any specific provision. Instead, in Alpha Corp case the Supreme Court permitted piercing of the corporate veil by almost exclusively relying on facts of the case. The exclusive reliance on facts and no exposition of any legal doctrine should limit precedential value of Alpha Corp case. In the end, I concur with a post elsewhere: Alpha Corp case leaves us with more questions than answers and reveals little about permissible grounds for piercing the corporate veil under the IBC.    

II. Brief Facts 

CIRP was initiated against Earth Infrastructures Limited (‘EIL’) by one of its financial creditors under Section 7 of the IBC. EIL was undertaking development on three plots of land which were leased to it by GNIDA. On one plot of land EIL was undertaking development through a Special Purpose Company – Earth Towne Infrastructures Private Limited (‘ETIPL’) – in which it held 78% shares and was a lead member. On the other two plots of land, EIL was undertaking development through its subsidiary companies.  

As regards piercing of the corporate veil, the resolution applicant’s argument before the National Company Law Appellate Tribunal (‘NCLAT’) was that GNIDA was fully aware that the projects were being executed by EIL. And that ETIPL was nothing but an alter ego of EIL making it a fit case for piercing of the corporate veil. Some of the factors that were underlined were common directors and promoters of EIL and ETIPL, ETIPL not indulging in a separate business of its own, and that under the lease deed it was EIL and not ETIPL that made the requisite payments to GNIDA. The resolution applicant’s interest was to include assets of ETIPL in CIRP because assets of EIL as a parent company, were negligible. The NCLAT refused to lift the corporate veil by relying on Vodafone International Holdings BV v Union of India as well as Jaypee Kensington Boulevard Apartments Welfare Association and others v NBCC (India) Limited and others. In both cases, the Supreme Court had underlined the principle of separate legal personality and held that piercing of corporate veil is permissible only in exceptional circumstances.  

Finally, as far GNIDA was concerned it challenged the National Company Law Tribunal’s (‘NCLT’) approval of the resolution plan. GNIDA argued that it had not been informed of CIRP by the resolution professional. The NCLAT refused to accept any of GNIDA’s arguments about lack of information about the resolution plan and non-payment of dues by EIL by remarking that it had not been diligent in seeking recovery of dues. And that GNIDA was mandated to oversee development of plots it had leased to EIL; implying it should have been diligent and demanded its lease payments in a timely manner. Instead GNIDA was negligent and was making delayed demands for pending dues.     

III. Relevance of Corporate Veil in Alpha Corp case 

GNIDA made the argument that assets of subsidiary companies cannot be made part of assets of the holding company. GNIDA’s arguments for respecting separate legal personalities of parent company and its subsidiaries were based on two pillars: 

Firstly, that subsidiary company is a separate legal entity, and its assets are separate under Section 18 of the IBC. Explanation to Section 18 clearly states that assets of the corporate debtor do not include assets of any Indian or foreign subsidiary of the corporate debtor.   

Secondly, GNIDA cited the Supreme Court’s observations in BRS Ventures Investments Limited v SREI Infrastructure Finance Limited (‘BRS Ventures case’) where the Supreme Court had clarified that:

A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary’s assets. (para 21)

In BRS Ventures cases the Supreme Court was categorical that assets of subsidiary company cannot be included in liquidation estate of the holding company. And this observation stems from a plain reading of Section 18 of the IBC.  

However, the Supreme Court in Alpha Corp was not convinced of the need to respect separate legal personality. The Supreme Court noted that while sanctity of independent legal entity must be maintained some circumstances can require piercing of the corporate veil. And it concluded that the facts of Alpha Corp case demanded piercing of the corporate veil because: 

… EIL was the main driving force in the development of the projects and in payment of GNIDA’s dues. The subsidiary companies were only a front. (para 56) 

Since facts of the case were fit for piercing the corporate veil, the Supreme Court ‘found it unnecessary to deal with’ scope of the term ‘assets’ under Section 18 of the IBC. In my view, this wasn’t an ideal approach. Instead of dismissing relevance of Section 18 of the IBC, the Supreme Court should have engaged with it and asserted that the statutory mandate – wherein assets of a holding and subsidiary companies are separate – is not absolute, and specific facts can permit reading exceptions into the provision. This would have grounded the exception of piercing the corporate veil to a specific provision. And could have informed future decisions where scope of the term ‘assets’ may be under scrutiny. Instead, the Supreme Court relied on a sweeping irrelevance of Section 18. 

The Supreme Court also relied on Life Insurance Corporation v Escorts Ltd (‘LIC case’) and Arcelor Mittal case to justify that Alpha Corp case was fit for piercing of the corporate veil. The former laid down a general proposition that piercing the corporate veil should only take place when contemplated by the statute itself, to prevent fraud, prevent tax evasion, and the object sought to be achieved. The Supreme Court in LIC case did not enumerate an exhaustive list of situations where the corporate veil can be pierced, it only laid down the general proposition that piercing of corporate veil should be in exceptional circumstances. And piercing of the corporate veil must ‘depend on the relevant statutory or other provisions.’ And, thus, it is necessary to examine if circumstances in Alpha Corp case justified piercing of the corporate veil in the context of various provisions of the IBC.     

IV. Piercing of Corporate Veil: Arcelor Mittal Case to Alpha Corp Case  

The Supreme Court, in Alpha Corp case, relied on Arcelor Mittal case for piercing the corporate veil. In Arcelor Mittal case, the Supreme Court held that where a company had been formed to evade legal obligations – to circumvent disqualifications imposed under Section 29A of the IBC – the courts can pierce the corporate veil. However, it is important to underline the factors that contextualize the Supreme Court’s observations.   

To begin with, Arcelor Mittal case was pronounced in the context of Section 29A of the IBC. Section 29A which provides for disqualifications for a resolution applicant and itself permits piercing of the corporate veil by disqualifying persons. This is because Section 29A disqualifies persons who act jointly or in concert with persons who suffers from disqualifications. Thus, to ensure that the objective of Section 29A is met, the Supreme Court held that piercing of corporate veil is necessary to determine persons who are acting as resolution applicants. And whether the disqualified persons are not using corporate form to circumvent the disqualifications.

Also, in Arcelor Mittal case the applicant itself had permitted the relevant authorities – the resolution professional and the Committee of Creditors (‘CoC’) – to pierce the corporate veil and determine its eligibility by including the net worth of its shareholders. Thus, when the resolution applicant was determined as ineligible based on its proximity to erstwhile promoter of the corporate debtor, the Supreme Court denied the applicant cover of a separate legal personality. The Supreme Court, in effect, denied the resolution applicant to conveniently support piercing of the corporate veil to become eligible to submit a resolution plan and then use separate legal personality to hide behind the corporate form to avoid disqualification. It was in this context that the Supreme Court pierced the corporate veil, by grounding it in purpose of Section 29A, its scope, and intent. And noted that the principle of piercing of corporate veil can be:

applied even to group companies, so that one is able to look at the economic entity of the group as a whole. (para 34)

Doctrinally, in Alpha Corp case, the Supreme Court’s reliance on Arcelor Mittal case to pierce a corporate veil can be defended by arguing that it is the only way to respect legislative intent. However, legislative intent is an elusive metric if the underlying provision is not examined. The most proximate provisions was Section 18 of the IBC which clearly states that assets of a subsidiary are not assets of the corporate debtor. Legislative intent of respecting separate legal personality is clear from a plain reading of the provision. In fact, one can claim that reading an exception to the rule laid down in Section 18 is deviating from the legislative intent and not adhering to it. All these questions and analyses are absent in Alpha Corp case.      

Nonetheless, if one argues that facts of the case necessitated piercing of the corporate veil – and provisions of the IBC are irrelevant – even then grounds for piercing are not sufficiently persuasive. 

Two land leases were awarded to subsidiaries of EIL is a matter of fact. And whether they were mere fronts for EIL to secure the said leases is a matter of factual determination and the Supreme Court was of the view that the subsidiaries were alter egos of EIL. Even if one concedes that the above conclusion is justified on facts. But the third lease in favor of ETIPL should have ideally attracted a differentiated approach from the Supreme Court. ETIPL was constituted as a special purpose company because it was one of the conditions of lessor/GNIDA’s scheme. To classify a special purpose company – incorporated to meet conditions of lessor/GNIDA – as a front of EIL and club it with subsidiaries of EIL was not ideal. Unless one can establish that creation of a special purpose company was a way to disguise EIL’s role. The Supreme Court referred to GNIDA’s letter to police authorities acknowledging EIL’s role in development. Even if one accepts that EIL, as a holding company, was the real developer even for land leased to ETIPL, is the GNIDA’s mandatory condition to incorporate ETIPL irrelevant? Yes, if we look at the Supreme Court’s approach but it results in pointing fingers at a corporate for adhering to the prescribed lease conditions. And doesn’t establish that the special purpose company was incorporated to evade any legal or statutory obligations.   

Further, if one also admits that, in view of the facts, a conclusion to pierce or not pierce the corporate veil of EIL could have gone either way. But lack of engagement with Section 18, oversight in assessing the context of Arcelor Mittal case resulted in Alpha Corp case being sensitive to facts of the case. Resultantly, the Supreme Court was unable to provide sound parameters or factors that can be invoked to pierce the corporate veil under the IBC. We do not know the grounds that can be invoked to pierce the corporate veil under in a CIRP or liquidation proceedings. Thus, it will be ideal if Alpha Corp case is treated as a decision that was solely based on facts of the case and is not used as a precedent to sidestep scope of assets as provided under Section 18. Not unless the requisite details relating to group insolvencies are included in the IBC and the secondary legislation.     

V. Way Forward 

One can argue that parent companies operate in an ‘asset-light’ fashion and tend to hold assets through their subsidiary companies. And thus, a CIRP against a holding company may not be fruitful if all its assets are owned by its closely held companies. Necessitating piercing of the corporate veil. There is credibility in the above line of argument. Except that any piercing of the corporate veil is an exception that should be based on interpretation of a statutory provision or carefully delineated judicial parameters. Permitting piercing of the corporate veil solely on facts, without interpreting the provisions in question, and using cryptic mention of judicial precedents does not augur well for a cohesive and coherent jurisprudence. Alpha Corp case does not articulate the parameters well enough for it to be used as a precedent for any subsequent cases. And, it may be ideal if its conclusion is restricted to facts of the specific case.   

No GST on Corporate Guarantees: The Bombay High Court Misses a Beat

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A Division Bench of the Bombay High Court (‘High Court’) in M/S. DP Jain & Co Infrastructure Private Limited v Union of India (‘DP Jain case’) ruled that corporate guarantee, not accompanied by consideration, cannot be subjected to GST. And set aside the Revenue’s show cause notice issued to M/S DP Jain. The High Court’s primary reason was that M/S DP Jain had not received any money for providing corporate guarantee and in the absence of a consideration there cannot be a valid case for levying GST. The High Court relied on Supreme Court’s decision in Commissioner of CGST & Central Excise v Edelweiss Financial Services Ltd (‘Edelweiss Financial Services case’) wherein the Supreme Court had ruled that issuance of corporate guarantees without consideration was not a taxable service. 

The High Court in relying on Edelweiss Financial Services case overlooked three crucial points: first, that the Edelweiss Financial Services case was decided in the context of service tax; second, that under the Central Goods and Services Act, 2017 (‘CGST Act, 2017’) certain supplies between related persons, even if without consideration, are taxable. Third, while the High Court – in its judgment – reproduces two of the Central Board of Indirect Taxes Circulars (‘CBIC Circulars’) relating to corporate guarantee, it does not examine them adequately. The Revenue invoked the CBIC Circulars to fortify its tax demand. However, the High Court did not give the CBIC Circulars or relevant provisions of the CGST Act, 2017 proper attention. I conclude that while the High Court’s judgment alleviates tax liability of M/S DP Jain, its reasoning does not withstand a considered scrutiny. And the judgment should be overturned in appeal.   

Brief Facts and Arguments  

M/S DP Jain was engaged in the business of construction of national and state highways through its various affiliated and subsidiary companies. Between 2020-2022, M/S DP Jain executed three corporate guarantees for the purpose of securing loans of its subsidiary companies. In each of the three deeds of corporate guarantees it was clearly stated that M/S DP Jain had not received and shall not receive any security, fee, commission or any other consideration from the borrower for providing a guarantee. Further, the legal charges incurred by M/S DP Jain for extending the corporate guarantees were shown in its account’s ledger.

The Revenue sent show cause notice to M/S DP Jain alleging that providing corporate guarantees was a taxable service under CGST Act, 2017. The Revenue inter alia relied on the CBIC Circular issued on 23 October 2023 which clearly mentioned that a holding company providing corporate guarantee to its subsidiary company for sanction of credit facilities to the latter – even if made without consideration – will be treated as supply of services. The value of such services was to be determined as per Rule 28(c) or Rule 28(2), CGST Rules, 2017 depending on the date on which the corporate guarantee was executed. While M/S DP Jain claimed that activity of providing corporate guarantee is not supply of goods and the Revenue has not examining relevant legal provisions of the CGST Act, 2017. M/S DP Jain alleged that the Revenue by ‘its own assumption’ has declared that providing corporate guarantee is a taxable supply of service. Also, M/S DP Jain argued that the notification of CBIC Circulars and Rule 28(2) be set aside for being ultra vires to the CGST Act, 2017.   

Bombay High Court Misses a Beat 

The High Court held that it is evident that M/S DP Jain is not in the business of providing corporate guarantee on a regular basis. And the three corporate guarantees were extended only to secure the loan of its subsidiary companies. The aim of corporate guarantees was to safeguard the financial health of its associate companies and provide them financial support. And M/S DP Jain does not extend corporate guarantees to its customers but only provides in-house support to its companies. The High Court though helpfully clarified that the Revenue is not making the case that the M/S DP Jain was in the business of extending corporate guarantees on a regular basis. However, the High Court did not agree with the Revenue’s contention that corporate guarantees extended without consideration can be subjected to GST. And the value of services can be determined as per Rule 28(c), CGST Rules, 2017.           

The High Court cited Edelweiss Financial Services case which involved a similar issue. But overlooked that the case was decided under Finance Act, 1994 and involved levy of service tax. The issue in Edelweiss Financial Services case was whether extension of corporate guarantee without consideration amounted to banking and other financial service and was a taxable service. The Supreme Court endorsed the Commissioner’s and the CESAT findings which held that the entity extending corporate guarantee must receive either a monetary or a non-monetary consideration. And that there must be real provider of service in question for a service to constitute a taxable service. The Supreme Court added that consideration is a ‘recompense’ for the contractual undertaking that authorizes levy of service tax and that: 

The above would suggest that this was a case where the assessee had not received any consideration while providing corporate guarantee to its group companies. No effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service. (para 7)     

The Supreme Court in Edelweiss Financial Services case was right in insisting on presence of consideration and a real provider of service. So how and why did the High Court miss a beat in adjudicating the DP Jain case? 

To begin with, the High Court did not even underline that the Edelweiss Financial Services case was adjudicated under the Finance Act, 1994 in relation to service tax. While the DP Jain case involved determining the levy of GST. And it is not a distinction without a difference as the relevant provisions of both legislations are different and scope of taxability is different. For example, Schedule I of the CGST Act, 2017 enlists activities that are to be treated as supply even if made without consideration. And Entry 2, Schedule I includes supply of goods or service made between related or distinct persons in the course or furtherance of business. Thus, Schedule I read with Section 7 certainly leads to the conclusion that providing corporate guarantees to subsidiary companies even without consideration amounts to supply. 

Equally, the CBIC Circular issued in October 2023 explicitly covers the exact situation of a holding company providing corporate guarantee to a related company and mentions that: 

Hence the activity of providing corporate guarantee by a holding company to the bank/financial institutions for securing credit facilities for its subsidiary company, even when made without any consideration, is also to be treated as a supply of service by holding company to the subsidiary company, being a related person, as per provisions of Schedule I of CGST Act. (para 2)

Prima facie the CBIC Circular is not ultra vires CGST Act, 2017. The High Court failed to properly scrutinize validity of the CBIC Circular or its contents. The para cited above clearly establishes that the corporate guarantees in question were subjected to GST. Only way to treat them beyond the scope of GST was to hold the Circular to be ultra vires. Instead, the High Court cited Edelweiss Financial Services case which did not apply provisions of the CGST Act, 2017.   

We can argue that if extending corporate guarantees should be subjected to GST since it is a commonplace intra-group transaction and not a provision for service. But that is a policy issue and subject of a separate debate. In so far the law as it currently exists, Section 7 of the CGST Act, 2017 with Schedule I is clear that supply includes transactions between related persons, even if without consideration. However, the High Court’s narrow focus on Section 7 and Edelweiss Financial Services case did not permit it to consider that some supplies, even if without consideration, can be subjected to GST. And in this respect the provisions of CGST Act, 2017 may differ from Finance Act, 1994.  

Finally, Rule 28(c) provided for valuation of all corporate guarantees and was applicable for all such transactions before 26 October 2023. CBIC Circular issued in July 2024 clarified that Rule 28(2) was applicable from 26 October 2023 onwards. The Revenue insisted on levying GST on 1% of the amount guaranteed as per Rule 28(c) while M/S DP Jain challenged the validity of Rule 28(2). Since the High Court held that providing a corporate guarantee was not a supply of service, the question of value of supply was rendered moot. But the High Court nonetheless refused accept M/S DP Jains’ plea that Rule 28(2) is ultra vires CGST Act, 2017. The High Court relied on the familiar doctrine of wide latitude to the legislature in taxation statutes and correctly rejected the challenge to Rule 28(2).        

Conclusion

The High Court’s verdict in DP Jain case is an example of the bench putting on blinders and focusing on only one aspect of the issue. The lack of consideration in the transaction and one Supreme Court decision was enough to seal the fate of Revenue’s tax demand. All other aspects were duly cited but there was no meaningful engagement. For example, the judgment cites the relevant CBIC Circulars, ingredients of supply under Section 7, and Schedule I without meaningfully analyzing their scope and impact. Given the paucity of analysis in DP Jain case, the High Court’s verdict is unlikely to be – and ideally should not be – the last word on the issue. Levy of GST on corporate guarantees have been the subject of uncertainty and discomfort amongst taxpayers. And the policy of subjecting them to GST is questionable. DP Jain case adds another layer of contestation by deciding in favor of the taxpayer but by using weak and inchoate reasoning. It is worth noting that the judgments pronounced in service tax regime are not alien to GST, and I’ve made an argument elsewhere that service law jurisprudence can usefully inform the GST jurisprudence. But it requires nuanced appreciation of the distinct legal provisions of both legal regimes and not a blind reliance on judicial precedents without examining the underlying provisions. 

Not Tolerating an ‘Absurd’ GST Demand

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On 30 April 2026, a Division Bench of the Bombay High Court (‘High Court’) in Tata Sons Private Ltd v Union of India through the Ministry of Finance (‘Tata Sons case’) set aside a ‘patently perverse’ Goods and Services Tax (‘GST’) demand. But, before we get to the perversity, basic facts of the case. 

Facts 

NTT Docomo Inc (‘Docomo’), a Japanese company, invested in the shares of Tata Teleservices Limited (‘TTSL’) along with Tata Sons Private Limited (‘Tata’). As per the Shareholder Agreement, if TTSL failed to satisfy the ‘Second Key Performance Indicators’ then Tata was obligated to find a buyer for Docomo’s shares at the ‘sale price’. Tata was unable to comply with its obligation leading to disputes with Docomo. The disputes were referred to arbitration proceedings and culminated in an arbitral award wherein Tata was liable to pay damages to Docomo. Initially, Tata resisted discharging its liability and Docomo filed enforcement proceedings before various courts in the US, UK, and India. In India, before the Delhi High Court the award was held to be enforceable as a deemed decree of the Delhi High Court.

During enforcement proceedings before the Delhi High Court, Tata expressed its willingness to pay amounts under the arbitral award. Tata and Docomo placed on record consent terms before the Delhi High Court and accordingly prayed for disposal of the enforcement petition filed by Docomo. The Delhi High Court accepted the consent terms as per the settled law wherein parties to execution proceedings can enter a settlement.

One para of the consent terms proved to be foundation of the Revenue’s case. Para 7 of the consent terms stated that Docomo shall keep in suspension all enforcement proceedings instituted by it against Tata and ultimately withdraw them subject to compliance by Tata of its obligations. Docomo also agreed to not initiate any further proceedings in relation to shareholder agreement or the arbitral award during the suspension period. 

The Revenue’s arguments can be divided into two sub-parts: 

Firstly, that Docomo by agreeing to suspend and later withdraw enforcement proceedings against Tata has agreed to an obligation of refraining from an act. What act was it refraining from? The act of continuing with proceedings initiated against Tata in relating to execution proceedings. 

Secondly, Docomo has tolerated breach of Shareholder Agreement by Tata as the latter failed to find buyers for its shareholding in TTSL. 

Relevant Legal Provision 

The Revenue first attempted to levy service tax and eventually after introduction of GST, made a demand under the Central Goods and Services Act, 2017(CGST Act, 2017). Section 7 of the CGST Act, 2017 read with Schedule II, Entry 5(e) states that supply of services shall include: 

agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; 

The above clause has been directly borrowed from Section 66E(e), Finance Act, 1994 wherein service tax was levied in similar situations.  

The Revenue demanded that Tata should pay Integrated Goods and Service Tax (‘IGST’) on a reverse charge basis. Tata had received services from Docomo, based outside India.  And the services were that Docomo refrained from continuing its enforcement proceedings against Tata and tolerated the breach of contract. Tata, of course, denied that it had received any service much less a taxable service. And challenged the Revenue’s demand via a writ petition before the High Court arguing lack of legal and jurisdictional basis and a perverse appreciation of facts. 

Before we get into the case. The premise of levying GST on toleration of an act or refraining from an act is that if a consideration is received by a person for not indulging in an act, then it should amount to supply of services. The obligation to tolerate or refrain must be in a separate contract where such toleration or restraint is the aim and purpose of the contract. In the absence of such an independent obligation it is tough, if not impossible to prove a supply and thus a supply of services.  

CBIC Circular 

In Tata Sons case, one of the hurdles in making the GST demand successfully was the Central Board of Indirect Taxes own circular dated 3rd August 2022. The CBIC, through this circular, clarified what amounted to ‘tolerating an act’ and whether GST can be levied on liquidated damages. Two relevant portions of the circular were germane to this dispute.  

The circular states that obligation to tolerate an act or refrain from an act is nothing but a contractual arrangement and:

A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. (para 6)

And, in respect of liquidated damages, the circular clarified that they are paid only to compensate for injury, loss or damage suffered by the aggrieved party. And:

… there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable. (para 7.1.4)

Thus, an independent contract for restraining from or tolerating an act is a necessity. And at least in so far as liquidated damages are concerned the CBIC’s position was clear and straightforward: it is a mere flow of money for compensating injury and cannot be equated to consideration. The High Court in Tata Sons case reasoned that a similar logic applies to unliquidated damages as well. The other question that the High Court had to engage with was: whether consent terms between Tata and Docomo wherein latter refrained from pursuing legal proceedings amounted to an independent contract? The High Court held that in the absence of any consideration ‘we are at a loss to understand’ how a settlement of an arbitral award amounts to import of services by Tata.         

Bombay High Court Dismisses the Revenue’s Claim       

To begin with, the High Court referred to Schedule II, Entry 5(e) and noted that for the provision to be applicable existence of an independent agreement is necessary. An agreement wherein parties bind themselves to refrain from an act, or to tolerate an act, or to do an act involving consideration. 

The High Court clarified that recovering amounts for breach of contract form part of a legal scheme integral to the arbitral process. And any settlement between parties during execution is ‘integral to’ or ‘intricately connected’ to the decree or the arbitral award itself. And cannot be construed to be an independent agreement de hors the decree. Proceedings for recovery of damages as per the arbitral award amount draw their color from the arbitral award itself. And thus, Docomo agreeing to not pursue collateral proceedings for full satisfaction of the amount due under arbitral award cannot be considered as supply of services. Since it was within the parameters of and an extension of the arbitral award itself. Why? 

The Bombay High Court relied on various overlapping parameters. Let me delineate them into four:  

Firstly, the High Court held that Section 7 defines ‘scope of supply’ and ‘consideration’ is an essential element of supply. Notably, the High Court added that Schedule II, Entry 5(e) cannot be interpreted in a manner that it extends beyond the principal provision, i.e., Section 7. The High Court correctly concluded that there is no independent agreement involving any consideration between Tata and Docomo. No consideration was promised by Tata. Para 7 of the consent terms cannot be construed to say that it brings into existence an independent agreement between Tata and Docomo. 

Secondly, the High Court said that Docomo did not agree to something different or an independent obligation which was beyond the arbitral award. And its obligation to suspend and withdraw enforcement proceedings cannot be categorized as an independent obligation amounting to supply of service under Section 7 read with Schedule II, Entry 5(e). Docomo agreeing not to proceed with enforcement proceedings was a logical consequence of the arbitral award itself and not an independent obligation.     

Thirdly, the High Court clarified that the position adopted by the Revenue regarding liquidated damages would necessarily apply to unliquidated damages. The only difference between the two kind of damages was that in case of former it is agreed on between the parties while in the latter it is awarded by the court. Irrespective, legal character of the payment of damages is nothing but flow of money from a party which causes breach of contract to the party which suffers loss or damage. And CBIC’s own circular of 2022 takes the same position that payment of liquidated damages is flow of money. 

Fourthly, the High Court clarified that when damages were awarded by an arbitral tribunal to Docomo it was not because of any different obligation on part of Tata. Docomo became entitled to such compensation, only on being determined and awarded by the arbitral tribunal. And until the arbitral tribunal’s determination no liability there was no liability on Tata to pay damages. There was no amount ipso facto due from Tata to Docomo. And the liability to pay damages only came into existence by the arbitral award. Thus, there was no scope for the Revenue to read any independent contract between parties where reciprocal obligations de hors the arbitral proceedings were created.      

In effect, the Revenue termed Docomo’s attempt to secure damages awarded to it under an arbitral award as a supply of services. Why? Because as per its settlement with Tata it agreed to halt and suspend enforcement proceedings if the damages were paid.  

Absurdity of Revenue’s Demand  

The Bombay High Court, at various points in the judgment, questioned rationale of the Revenue’s approach. The Revenue’s approach was termed as ‘absurd’, ‘wholly without jurisdiction’, ‘patently perverse’, having ‘no basis whatsoever in law, looked from any angle.’ (paras 67-70) 

The reason the Revenue’s demand seemed – and let me add another adjective – outlandish was because it misinterpreted three core aspects: (a) the consent terms were viewed as an independent agreement and not an extension of arbitral proceedings; (b) Docomo agreeing to suspend and withdraw enforcement proceedings was termed as refraining from an act even if there was no additional consideration agreed upon for such a restraint; (c) Docomo receiving damages was interpreted as if it was tolerating Tata’s breach of Shareholder Agreement. Docomo tolerating Tata’s breach of contract would make sense if Docomo did not initiate arbitration proceedings or did not receive damages. By initiating arbitration, receiving an arbitral award in its favor, and filing for enforcement proceedings Docomo was evidencing that it is not ready to tolerate breach of a contract. And should receive compensation for injury and loss caused by the breach of contract.

Also, as the High Court pointed out, if such settlement terms are accepted as a supply of services under GST, then settlement of every money decree where parties are before the Court and agree to a course of action purely under the decree would be regarded as a supply of service. If no independent obligation is agreed upon under the settlement, no additional consideration is agreed upon, then treating it as supply of service would to creating a situation not wholly recognized by the relevant provisions of the CGST Act, 2017.     

One core reason for the Revenue’s ‘absurd’ demand was summed up by the High Court in following terms: 

It appears to us that as merely the award amounts are large amounts, the impugned action without application of mind to the law and the facts, has been resorted. Such action has no basis whatsoever in law, looked from any angle. (para 69)

In more ways than one, the High Court’s above observations sum up the Revenue’s motivation and underlying reason for its tax demand. The arbitration resulted in damages more than 8,000 crores and the Revenue demanded more than Rs 1,500 crores in GST. Hunger for tax, especially a huge amount, can catalyze a need to test the limits of tax law provisions and their interpretation. The Revenue though came up against a division bench of the High Court that did not, and for good reason, agree to adopt an absurd interpretation of law.   

Bhushan Steel-II Case | Understanding the Supreme Court’s Change of Heart

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Preliminary (Quiz) Notes: 

This is a two-part series on the Bhushan Steel saga. In Part-I, I discuss the Supreme Court’s – now recalled – first judgment where it decided to liquidate Bhushan Power and Steel. In Part-II, I discuss the Supreme Court’s subsequent decision to rescue Bhushan Power and Steel.  

I’ve created two accompanying quizzes: 

Quiz-1 is aligned to Part-I – Bhushan Steel (Recalled) Judgment – Fill in form and,

Quiz-2, aligned to Part-II – Quiz-2: Bhushan Steel (Subsequent) Judgment  – Fill in form

Use these quizzes to self-assess your knowledge about these cases. Admittedly, some of the quiz questions go beyond what is discussed in the articles. Choose, whether you want to attempt the quizzes before or after reading the articles!  

Introduction

In September 2025, a three-judge bench of the Supreme Court in Kalyani Transco v M/S Bhushan Power and Steel Limited and Others (‘Bhushan Steel-II case’) dismissed appeals filed by ex-promoters and operational creditors against judgment of the National Company Law Tribunal (‘NCLT’). The NCLT had approved resolution plan, but validity of the resolution plan, and delay in implementation of the resolution plan were challenged in the appeals. As elaborated on Part-I, the Supreme Court had in the first instance found various irregularities in the Corporate Insolvency Resolution Process (‘CIRP’). The Supreme Court’s approach in Bhushan Steel-II case and its line of inquiry was significantly different and led to an opposite result: rescue of the corporate debtor, i.e., Bhushan Steel and not its liquidation.   

In this article, I proceed as follows: in Part A, I provide an overview of the judgment and summarize crucial factors that the Supreme Court relied on to rescue the corporate debtor; in Part B, I discuss I compare the different approaches of the Supreme Court in Bhushan Steel-I case and Bhushan Steel-II case; and what is reveals and does not reveal about the entire Bhushan Steel saga.  

Part A: An Overview of the Judgment 

I. Right of Appeal

The successful resolution applicant – JSW- and the Committee of Creditors (‘CoC’) argued that erstwhile promoters of Bhushan Steel did not have a right to file an appeal. While the erstwhile promoters argued that were personal guarantors of loans disbursed to Bhushan Steel and thus were within the ambit of ‘persons aggrieved’. The Supreme Court observed that under Section 62 of the IBC ‘any person aggrieved’ has a right to file an appeal against the National Company Law Appellate Tribunal’s (‘NCLAT’) decision. And the term ‘person aggrieved’ has not been limited or defined. Acknowledging that CIRP and a resolution plan may also impact rights of a guarantor and thereby the erstwhile promoters, the Supreme Court held that JSW and the CoC were not correct in submitting that the erstwhile promoters have no right of appeal. 

However, the Supreme Court highlighted conduct of the erstwhile promoters as well as the fact that they had filed various applications in the NCLT after it had heard the matter in detail. And the NCLT had held that the promoters were causing delays in CIRP and imposed a cost of Rs 1 lakhs for causing the delays. Thus, while the Supreme Court acknowledged the right of erstwhile promoters to file an appeal, it also highlighted that they had not played a constructive role in CIRP.  

Finally, the Supreme Court added that an appeal to the NCLAT was only available on the grounds mentioned in Section 61. And none of the grounds specified were met the criteria in the impugned case. Notably, this was the only point of convergence in the Supreme Court’s observations in Bhushan Steel-I case and Bhushan Steel-II case.  

Further, an appeal before the Supreme Court was not tenable on conjoint reading of Sections 61 and 62. The Supreme Court clarified that apart from the issue of EBITA, findings of the NCLT and the NCLAT were concurrent on all issues. Thus, the erstwhile promoters could have been ‘non-suited’ when concurrent findings by authorities – NCLT and NCLAT – are recorded under a special statute such as the IBC. And in such cases, an interference by the Supreme Court is not warranted unless the findings are ex-facie arbitrary or illegal.

While the Supreme Court could have non-suited the erstwhile promoters and only engaged with the issue of EBITDA, on which NCLT and NCLAT gave contradictory findings, it chose to engage with the contentions on merits.   

II. The CoC: Continues to Exist after NCLT’s Approval of the Resolution Plan 

A core finding of the Supreme Court in Bhushan Steel-II case was that the CoC does not cease to exist after the NCLT’s approval of the resolution plan. The argument of erstwhile promoters was that the CoC becomes functus officio after approval of the resolution plan by the NCLT. An argument that the Supreme Court accepted but did not provide accompanying reasons. In Bhushan Steel-II case, the Supreme Court though held that a conjoint reading of various provisions of the IBC made it clear that the CoC remains in existence until the resolution plan is implemented. The Supreme Court was of the view that under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) – Regulation 38 – it was mandatory for the CoC to setup a monitoring committee for supervising implementation of the resolution plan. And the CoC can nominate representatives to the committee. Based on this mandatory requirement, the Supreme Court held that:

It can thus be seen that the legislative intent is to empower the CoC to monitor and supervise the implementation of the resolution plan through the monitoring committee. (para 77) 

The Supreme Court then added that in certain cases the resolution plan may not be implemented. Thus, if the CoC ceases to exist after the NCLT’s approval of the resolution plan it may lead to an anomalous situation. The creditors will be left ‘high and dry’ and would not be able to take any steps that are found necessary for realizing its dues from the corporate debtor. And thus, since the CoC has a vital interest in implementation of the resolution plan:

… the CoC continues to exist till the Resolution Plan is implemented or an order of liquidation is passed under Section 33 of the IBC. It will not be out of place to mention that the cloud of uncertainty exists till a finality is given by this Court in the proceedings under Section 62 of the IBC. (para 85)     

On a related note, the Supreme Court also addressed the CoC’s power to extend implementation of the resolution plan. The Supreme Court held that the fact that the CoC could extend time for implementation did not mean that the resolution plan was open-ended and contrary to law. Thus, underlining that the CoC had a role to play in implementation of the resolution plan and does not cease to exist and function after the NCLT’s approval.  

III. Delay in Implementation of the Resolution Plan 

The contentious issue of delay in implementation of the resolution plan was viewed differently by the Supreme Court in Bhushan Steel-II case. In Bhushan Steel-I case, the Supreme Court’s view was that the delay was attributable to the conduct of JSW. While in Bhushan Steel-II case the Supreme Court held that the delay of one and a half years- between the NCLT’s approval of the resolution plan and its implementation was not entirely attributable to JSW. The NCLT’s directions on distribution of EBITDA, and attachment of property by Directorate of Enforcement (‘ED’) under PMLA, 2002, and introduction of Section 32A contributed to the delay. I’ve elaborated on the EBIDTA issue in sub-section IV below, let me address the other issues in this section.

The ED’s order for attachment of property was issued after the NCLT’s approval of the resolution plan. The NCLAT in appeal first stayed and eventually vacated the attachment order. And appeal had been filed in the Supreme Court against the NCLAT’s order. However, the ED continued with PMLA proceedings and argued that the proceedings were for offences committed by erstwhile management of the corporate debtor. Meanwhile JSW insisted on handover of unencumbered assets. The CoC passed a resolution and approved a delayed implementation of the resolution plan. While on account of pendency of proceedings the CoC was not able to handover unencumbered assets to JSW as required under the resolution plan.          

In the interim an ordinance was promulgated to introduce Section 32A in the IBC. One of its purposes was to provide immunity against prosecution of the corporate debtor and to prevent action against property of such corporate debtor. But the ED insisted on continuing proceedings against the corporate debtor by insisting that Section 32A did not have a retrospective effect. Scope of the ED’s jurisdiction and effect of Section 32A was clarified by a previous order of the Supreme Court only in December 2024 where it directed the ED to handover unencumbered assets of the corporate debtor. Based on the above assessment of facts, the Supreme Court held that: 

It can thus be seen that the delay is neither attributable to the CoC nor to the SRA – JSW. As a matter of fact, both the SRA-JSW and the CoC were making consistent efforts to get the matter sorted out before this Court so as to ensure the expeditious implementation of the Resolution Plan. (para 126)  

Thus, the Supreme Court refused to set aside the resolution plan on ground of delay by JSW. The Supreme Court distinguished Bhushan Steel-II case from Jet Airways case where the delay in implementation of the resolution plan was caused by the applicant itself. While JSW was not responsible for delay in implementation of the resolution plan, the surrounding factors, and lack of clarity in the law contributed to the delays.  

IV. The EBITDA Question 

The Supreme Court had to address the question of who was entitled to EBITDA: creditors or the corporate debtor? The NCLT while approving the resolution plan had held that creditors were entitled to EBITDA. However, NCLAT directed the monitoring committee and resolution professional to make distribution of EBITDA based on Supreme Court’s judgment in CoC of Essar Steel Ltd v Satish Kumar Gupta & Ors (‘Essar Steel case’). The Essar Steel case was pronounced after the NCLT’s but before the NCLAT’s judgment. In the Essar Steel case, the Supreme Court had clarified that EBITDA should be distributed as per terms of the resolution plan. 

The Supreme Court noted that the CoC filed an affidavit that EBIDTA should be distributed among the creditors. However, the CoC had taken a contrary stand before the NCLAT. The Supreme Court rejected the CoC’s plea for giving EBITDA to creditors. Firstly, the Supreme Court noted that accepting the CoC’s argument would amount to contravention of Section 31(1) wherein once a resolution plan is approved by the NCLT all claims stand frozen and are binding on all stakeholders. Secondly, the Supreme Court – relying on the Essar Steel case – observed that: 

We are of the considered view that unless there is specific provision with regard to distribution of EBIDTA in the RfRP, permitting the CoC to raise a new stand at this stage will be totally inconsistent with the avowed object for which the IBC was incorporated. (para 168)     

Due to conflicting decisions of the NCLT and NCLAT on EBITDA, and the CoC’s own contradictory stances there was no clarity on who was entitled to retain EBIDTA. And this the Supreme Court correctly accepted as one of the reasons for delay in implementation of the resolution plan.  The question of entitlement over EBIDTA was a crucial one as it affected rights of the resolution applicant, creditors, and, to some extent the validity of resolution plan itself. Clarity on who has a rightful claim over profits generated by the corporate debtor during CIRP could financially impact all the stakeholders. As the Supreme Court concluded: 

If we permit the claim not be part of the Resolution Plan which has been approved by the CoC and the NCLT to be raised at such a belated stage, it could open a Pandora’s Box and the very purpose of the IBC providing sanctity to the finality of the Resolution Plan duly approved would stand vitiated. (para 187)   

Part B: A Brief Comparison of Two Judgments 

On a standalone basis, Bhushan Steel-II case is a more considered judgment. And this is not because it resulted in rescue of Bhushan Steel and avoided its liquidation. This is because in Bhushan Steel-II case the Supreme Court applied the law to facts more precisely. In Bhushan Steel-II case, the Supreme Court engaged with the issue of making priority payments to operational creditors under a resolution plan. As per applicable CIRP Regulations, the amount due to operational creditors was nil due to claims of financial creditors. And ex-gratia payments were being made by JSW to operational creditors. In Bhushan Steel case-I, the Supreme Court accepted the contention on face value, held that no priority payment to operational creditors violated the IBC. There was no determination of amounts due to the operational creditors and applicability of CIRP Regulations. But in Bhushan Steel-II case the Supreme Court examined the issue closely and correctly held that operational creditors were being paid ex-gratia.  

Equally, JSW was required to infuse upfront equity of Rs 8,550 crores. While in Bhushan Steel-I case the Supreme Court held that JSW did not fulfil its commitment, and no record was brought to its notice. In Bhushan Steel-II case the Supreme Court acknowledged JSW’s argument that commitment was fulfilled by way of Compulsorily Convertible Debentures (‘CCDs’) which are equity instruments. The Supreme Court cited relevant precedents that have held that CCDs are equity instruments. While in Bhushan Steel-I case this entire issue was dismissed in a curt fashion on grounds of evidence. 

However, a comparison of both judgments prompts some obvious questions that should be asked. Even if they remain unanswered. For example, in Bhushan Steel-II case the Supreme Court does not even refer to Section 29A. But based on the limited enumeration of facts in Bhushan Steel-I case, prima facie JSW was ineligible to be a resolution applicant, and the resolution professional failed in its duty to ascertain the eligibility. Equally, in Bhushan Steel-I case the Supreme Court took exception to the breach of timelines by the resolution professional and the CoC. The Supreme Court noted that the NCLT should not have entertained the application for approval of the resolution plan once time prescribed under the IBC was breached. In Bhushan Steel-II case, there was no mention of legal implications of breach of time prescribed under the IBC. 

In Bhushan Steel-II case, the Supreme Court casts the CoC in a positive light. And underlines its role as an entity that was working to implement the resolution plan by negotiating with JSW. While in Bhushan Steel-I case, the Supreme Court held that the CoC and JSW were colluding, and they timed the implementation of resolution plan to benefit the latter. The delay in Bhushan Steel-II case was attributed to ED’s attachment order, uncertainty about EBITDA, and introduction of Section 32A. How did the CoC’s role transform from colluding with JSW to making bona fide attempts to implement resolution plan is not fully understandable on reading both judgments. Nor did the Supreme Court in Bhushan Steel-II case mention NCLAT’s scope of jurisdiction and interface of IBC with public law. Specifically, if NCLAT had power to vacate an attachment order issued by the ED. This was especially since the ED’s attachment order was a crucial cause of delay in implementation of the resolution plan.  

All the above issues, that were central to Bhushan Steel-I case are missing from Bhushan Steel-II case. Reason for such different approaches? It cannot be solely attributable to differing styles of judges involved. Or a different interpretive approach. Especially when issues that were central in the previous judgment do not even find mention in the subsequent judgment. While deciding the review petition, the Supreme Court had mentioned that in Bhushan Steel-I case, arguments which were not advanced were considered. And incorrect factual aspects were also considered. Perhaps, we can attribute the diametrically opposite approaches to differing facts and arguments. But it still does not answer some crucial questions. One of them being: Was JSW eligible to submit a resolution plan?      

Conclusion

The Bhushan Steel saga – consisting of multiple judgments, delays, an imminent liquidation that eventually did not materialize provides ample room and grounds to consider and evaluate the IBC’s working. I’ve highlighted some of the learnings in Part-I of this series. Additionally, we also witnessed how elimination of certain facts changed the complexion and nature of issues and the eventual decision. Facts that were central in Bhushan Steel-I case, did not even find mention in Bhushan Steel-II case. The accurate truth as to what transpired is difficult to ascertain due to the hide and seek nature of facts themselves. Clearly, the emphasis and ignorance of same facts cannot be merely about arguments advanced in the Supreme Court. And if the divergent results were influenced by taking the wrong facts into consideration, it speaks a lot about the caliber of not only the judges involved but also the lawyers. Nonetheless, searching for the accurate truth of Bhushan Steel saga may prove to be an unending chase.        

Bhushan Steel – I Case | Understanding the Supreme Court’s Liquidation Order

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Preliminary (Quiz) Notes: 

This is a two-part series on the Bhushan Steel saga. In Part-I, I discuss the Supreme Court’s – now recalled – first judgment where it decided to liquidate Bhushan Steel. In Part-II, I discuss the Supreme Court’s subsequent decision to rescue Bhushan Steel.   

I’ve created two accompanying quizzes: 

Quiz-1, aligned to Part-I – Bhushan Steel (Recalled) Judgment – Fill in form and,

Quiz-2, aligned to Part-II – Quiz-2: Bhushan Steel (Subsequent) Judgment  – Fill in form

Use these quizzes to self-assess your knowledge about these cases. Admittedly, some of the quiz questions go beyond what is discussed in the articles. Choose, whether you want to attempt the quizzes before or after reading the articles!  

Introduction

On 2nd May 2025, the Supreme Court in Kalyani Transco v M/S Bhushan Power and Steel Ltd & Ors (‘Bhushan Steel-I case’) directed the National Company Law Tribunal (‘NCLT’) to initiate liquidation proceedings against the corporate debtor, i.e., Bhushan Steel. Supreme Court’s decision was based on multiple factors that had a common theme: disrespect and violation of the procedures and timelines prescribed under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). And almost all entities involved in the Corporate Insolvency Resolution Process (‘CIRP’) were, as per the Supreme Court, guilty of disregarding their statutory duties: the resolution professional, the Committee of Creditors (‘CoC’), successful resolution applicant, the NCLT and the National Company Law Appellate Tribunal (‘NCLAT’). 

In this article, I proceed as follows: in Part A, I provide an overview of the judgment and summarize five parameters that the Supreme Court relied on to liquidate the corporate debtor; in Part B, I discuss a few implications of the judgment and the lessons it offers us even if it has been recalled; and, finally in Part C, I mention the Supreme Court’s reason to accept the review petition and recall the judgment.   

Part A: An Overview of the Judgment 

I. Suppression of Facts about Disqualification under Section 29A

To begin with, the Supreme Court pointed out that the resolution professional – and thereafter the CoC and the NCLAT – did not discharge their duty of verifying that JSW, the successful resolution applicant, was eligible to submit a resolution plan under Section 29A. Regulation 39(1), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) requires a resolution applicant to submit a resolution plan along with an affidavit stating that it is eligible to submit a resolution plan under Section 29A. The resolution professional is required to certify that the resolution applicant has filed such an affidavit and submit a compliance certificate in ‘Form H’. The Supreme Court noted that the resolution professional did not complete this obligation. Also, the resolution professional did not submit the certificate or produce any statement about eligibility of the resolution applicant. The omission of compliance certificate, as per the Supreme Court, raised serious doubts about eligibility of JSW to submit a resolution plan. What added to the Supreme Court’s doubt was that the NCLAT ‘encouraged suppression of facts’ about JSW’s ineligibility to submit a resolution plan under Section 29A. The ineligibility had apparently arisen due to a prior joint venture agreement between JSW, Bhushan Steel, and Jai Balaji. Which evidently made JSW a ‘related party’ to Bhushan Steel and ineligible to submit a resolution plan under Section 29A. But the Supreme Court said that the NCLAT sought to justify suppression of facts by JSW about its ineligibility thereby contravening the IBC. But the Supreme Court did not specify how exactly the NCLAT encouraged suppression of facts about the ineligibility.      

II. Right of Appeal Only on Limited Grounds 

Section 61 of the IBC grants a right to ‘any person aggrieved’ by the NCLT’s order to file an appeal to the NCLAT. And Section 62 uses the same expression for an appeal to the Supreme Court against an order of the NCLAT. Thus, there is no rigid locus requirement to institute an appeal to the NCLAT or to the Supreme Court. The Supreme Court in Bhushan Steel-I case held that CIRP proceedings are in rem and all stakeholders are permitted to file an appeal before the NCLAT or the Supreme Court. And erstwhile promoters and successful resolution applicants are stakeholders in a CIRP. To this effect, the Supreme Court relied on a similar interpretation adopted in GLAS Trust Company LLC v BYJU Raveendran & Ors.  However, the Supreme Court pointed out that an appeal can be filed only on the grounds specified in Section 61 or Section 62, whichever is applicable.  

In the impugned case, the NCLT had approved the resolution plan of JSW, but subject to certain conditions. JSW, despite its plan being approved, filed an appeal in the NCLAT against the NCLT’s decision. This was unusual and the Supreme Court disapproved the NCLAT hearing this appeal for three reasons. 

Firstly, the Supreme Court noted that since the NCLT approved JSW’s resolution plan:

‘Hence, JSW as such, could not be said to be the “person aggrieved” by the order of NCLT approving the Resolution Plan of JSW itself.’ (para 14)       

But JSW was aggrieved by some conditions imposed by the NCLT while approving the resolution plan. Thus, we can make an argument that JSW could legitimately claim status of an aggrieved person despite being the successful resolution applicant. 

Secondly, the Supreme Court noted that none of the grounds for appeal enlisted in Section 61(3) existed. Thus, JSW could not have filed an appeal before the NCLAT. 

Thirdly, the Supreme Court added that the NCLAT erred in admitting JSW’s appeal which was not legally maintainable. And the NCLAT then compounded this error by modifying conditions in the resolution plan as requested by JSW. The Supreme Court particularly failed to understand the NCLAT’s directions where it declassified Bhushan Steel as a promoter of another company – Nova Iron Steel. The NCLAT noted whether Bhushan Steel has 25.6% shareholding in Nova Iron Steel is a question of fact. But ‘if there is any such share’ Bhushan Steel on approval of the resolution plan declassified as a promoter. The NCLAT’s power to issue such an order declassifying promoter and the rationale for the order were correctly questioned by the Supreme Court. 

III. Vacation of Attachment Order Nullified  

Five days after the NCLT approved the resolution plan of JSW, Directorate of Enforcement provisionally attached assets of Bhushan Steel under Section 5 of The Prevention of Money-Laundering Act, 2002 (‘PMLA’). The NCLAT declared the attachment as illegal and without jurisdiction. The Supreme Court held that it was the NCLAT instead that did not have jurisdiction to vacate an attachment imposed under a public law such as the PMLA. 

The Supreme Court observed that the NCLT and the NCLAT were creatures of the statute, i.e. Companies Act, 2013. And jurisdiction of both bodies is circumscribed under Section 31 and Section 60 of the IBC. And neither of the two entities have powers of judicial review over decision taken by a statutory authority in the realm of public law. In this respect the Supreme Court relied on M/S Embassy Property Developments Private Limited v State of Karnataka & Ors (‘Embassy Property case’). In Embassy Property case, the Supreme Court had interpreted scope of Section 60(5) which provides jurisdiction to the NCLT on any question of law or facts ‘arising out of or in relation to the insolvency resolution …’. The Supreme Court held that a decision by a statutory authority in the realm of public law cannot be brought within the fold of ‘arising out of or in relation to the insolvency resolution’. And, if the corporate debtor must exercise a right that falls outside the purview of IBC, they cannot go to the NCLT for enforcement of such a right. Only the relevant public law framework must determine the rights and not the IBC. 

Based on ratio of the Embassy Property case and scope of Section 60(5), the Supreme Court held that: 

The PMLA being a Public Law, the NCLAT did not have any power or jurisdiction to review the decision of the Statutory Authority under the PMLA. (para 30)

The Supreme Court thus declared the NCLAT’s order of vacating the attachment as without any authority of law and without jurisdiction. Also, the attachment order issued under the PMLA was subject matter of challenge before the Supreme Court in the Special Leave Petitions filed by the CoC. The Supreme Court had stayed the attachment order. But, despite that the NCLAT went ahead and reviewed orders of attachment and recorded findings on Section 32A. The Supreme Court frowned upon the NCLAT’s approach where it did not defer to the Supreme Court and did not wait for it to pass its final decision on the issue.     

IV. The CoC’s Role and Conduct 

The CoC, as per the Supreme Court performed a questionable role in CIRP on three counts: approving a resolution plan that did not incorporate mandatory conditions prescribed by the IBC, a handful of financial creditors granting extensions to JSW during implementation of the resolution plan, and a change in its stance about the resolution applicant’s conduct especially delays in implementing the resolution plan.  

The Supreme Court examined the resolution plan and held that it contravened a mandatory condition under Section 30(2)(b) of the IBC, i.e., the operational creditors must be paid on priority. And despite the resolution plan not providing for priority payments to operational creditors the resolution professional and the CoC approved it. Equally, the Supreme Court emphasized other mandatory requirements: completing CIRP within the time prescribed under Section 12, ensuring compliance of Section 29A, ensuring that the resolution plan is feasible and viable, and that the resolution applicant had capability to implement the resolution plan within the time limit are mandatory requirements under the IBC read with relevant CIRP Regulations. But the Supreme Court questioned if the CoC had exercised its commercial wisdom in approving the resolution plan which was in violation of various mandatory conditions and held that: 

If the Resolution Plan does not comply with such mandatory requirements and such plan is approved by the CoC, it could not be said that the CoC had exercised its commercial wisdom while approving such Resolution Plan. (para 73)  

While commercial wisdom of the CoC is non-justiciable but if the CoC’s decisions are in contravention of the IBC, courts can and should intervene. And the Supreme Court in Bhushan Steel-I case justified its review of the CoC’s decision by pointing at various violations of the IBC. 

The Supreme Court also questioned the CoC’s role during the implementation phase of the resolution plan. The CoC its affidavit had levied multiple allegations against the JSW and its conduct including but not limited to delay in upfront payments, willful breach of the resolution plan, misuse of the legal process, and CIRP taking more than 35 months in a high-stake corporate insolvency case. However, when JSW, at a belated stage – after almost two and a half years – offered the upfront amount, the CoC accepted it without any demurrer. Even though the effective date for implementation of the resolution plan had expired. The Supreme Court taking note of the CoC’s change in stance concluded that it lacked bona fide, had played foul and not exercised its commercial wisdom in the interest of creditors. And the Supreme Court concluded that JSW also delayed implementation of the resolution plan, unjustly enriched itself and thereafter when the market conditions were suitable, it complied with the resolution plan by colluding with the CoC and the resolution professional.  

Finally, under the resolution plan, JSW had agreed to infuse equity for an amount of Rs 8550 crores in the corporate debtor on the effective date. However, the Supreme Court noted that apart from averments of the advocates, there was no material to show that the resolution applicant had fulfilled the condition of infusing equity. And, if the effective date for equity infusion was extended, the Supreme Court questioned as to who approved the extension. The reason for this question was that as per the Supreme Court the CoC had become functus officio on the NCLT’s approval of resolution plan. Thus, some financial creditors claiming to be part of the CoC had no authority to grant an extension after the NCLT’s approval. This was despite there being clarity that the resolution plan permitted the CoC to grant time extension to the successful resolution applicant. But the Supreme Court was convinced that the CoC becomes functus officio on the NCLT’s approval of the resolution plan. But it did not elaborate as to why and as per which provisions of the IBC did the CoC become functus officio.  

V. Failure of Resolution Professional and Breach of Timelines

The resolution professional’s various omissions are mentioned in significant detail in the judgment. I’ve referred to the oversight in ensuring eligibility of the resolution applicant in sub-section I above. But fatal omission of the resolution professional, as per the Supreme Court, was not obeying timelines prescribed in the IBC and not following the prescribed procedures. For example, the resolution professional did not seek an extension from the NCLT when CIRP was not completed within the time prescribed under Section 12. Further, the resolution professional provided no justification as to why once the CoC had approved the resolution plan; it waited for four months to seek the NCLT’s approval. Especially since the maximum period for completing CIRP had expired when application for the NCLT’s approval was filed. Taking the view that completion of CIRP within the prescribed time is mandatory, the Supreme Court held that: 

In that view of the matter, we have no hesitation in holding that the Application submitted by the Resolution Professional seeking approval of the Resolution Plan of JSW under Section 31 being hit by Section 12 of IBC, the NCLT had committed grave error of law in approving the said plan … (para 57)   

Based on all the aforementioned factors, the Supreme Court rejected the resolution plan submitted by JSW. And directed the NCLT to initiate liquidation proceedings against the corporate debtor under Section 33 of the IBC. 

Part B: Implications of Bhushan Steel-I Case 

I. Entire IBC Ecosystem under the Scanner 

The Supreme Court in Bhushan Steel-I case revealed various flaws in the IBC’s ecosystem. The CoC and the resolution professional seemed to have acted in contravention of or at least were casual in fulfilling their statutory duties. One reason for this was lack of any meaningful oversight from the judicial authorities. The NCLT and the NCLAT did not properly scrutinize their actions on the touchstone of legality. The judgment also revealed the lack of clear duties and roles during implementation of the resolution plan. The CoC, as per the Supreme Court ceased to exist once the NCLT approved a resolution plan. Thus, leaving no meaningful entity to oversee implementation and compliance with the resolution plan. In several paragraphs of the judgment there are various grains of truth that should have and still should be fruit of contemplation for the policy makers and the Insolvency and Bankruptcy Board of India (‘IBBI’). Though there have been some changes in regards to implementation of the resolution plan.    

II. Timelines Overpower the IBC 

Breach of the IBC’s prescribed timelines is stale news and reasons for delay may not have an immediate cure. But it is worth contemplating to what extent should the breach of timelines be judicially tolerated and what should be consequence of the breach. Which is better: timely liquidation or a prolonged attempt at rescuing the corporate debtor? The Supreme Court in Bhushan Steel-I case preferred liquidation. The IBC’s design has been recently altered to restore CIRP and delay liquidation if rescue of the corporate debtor is possible. But it may not be ideal as I’ve previously argued elsewhere. While the Supreme Court in various judgments has exhorted importance of time in the IBC, what should be the ideal judicial approach if timelines are breached is still a big unknown. In Bhushan Steel-I case, the Supreme Court preferred liquidation due misconduct of all entities involved and because it took the view that timelines under the IBC are mandatory and not directory. Also, because JSW tried to present a fait accompli by delaying implementation of the resolution plan.     

III. Conduct of the CoC and the Resolution Professional Needs Guardrails 

The Supreme Court in Bhushan Steel-I case also revealed that while the resolution professional and the CoC have crucial roles in the IBC, the guardrails for ensuring that they perform their duties adequately are missing. Ideally, the NCLT and the NCLAT should act as a check on any tendency to derelict duty, but that did not happen in this case. The IBBI can initiate disciplinary proceedings against the resolution professional, but it may prove to be ineffective unless it takes place in a timely fashion and has a deterrent effect.  Equally, while there has been some attempt to bring more transparency in working of the CoC by mandating it to record reasons for its approval. But there has been a simultaneous expansion of its responsibilities that inter alia involve overseeing liquidation. Encouraging transparency though is likely to infuse more confidence in the integrity of CIRP. But it comes with the danger of more challenges and judicial authorities slipping into the territory of reviewing commercial wisdom of the CoC. 

IV. Checking Bona Fides of the Resolution Applicant 

Finally, the challenge of holding the successful resolution applicant accountable was also revealed by the Bhushan Steel-I case. While the IBC has been recently amended to allow for a more structured supervision of the resolution plan. And by extension conduct of the successful resolution applicant. However, it is undeniable that delays in implementation of the resolution plan due to a recalcitrant resolution applicant can upturn the entire CIRP. Thus, ensuring bona fides of the resolution applicant and their capacity to implement the resolution plan ex ante is crucial instead of sacrificing the corporate debtor at the altar of liquidation due to failure in implementing the resolution plan. It was partly due to oversight in ex ante verification of the resolution applicant’s bona fide that the implementation of resolution plan was delayed which prompted the Supreme Court to order liquidation. While there are adequate safeguards in the IBC in this respect – especially Section 29A – ensuring compliance with its mandate needs to be insisted without fault.          

Caveat: The caveat for the entire set of comments above is, of course, that the judgment was recalled. Though, in my view, an academic purpose is still served by commenting on a recalled judgment. 

Part C: Recall of the Judgment   

Approximately three months after the judgment in Bhushan Steel-I case, the Supreme Court accepted the review petitionwhich challenged correctness of the judgment. The Supreme Court found that it was a ‘fit case for recalling the judgment under review and reconsidering the matter afresh.’ The Supreme Court, in its brief order, mentioned that in Bhushan Steel-I case: (a) various incorrect factual aspects were taken into consideration; and (b) arguments which were not advanced were considered while delivering the judgment.  

The judgment in Bhushan Steel-I case had already been stayed, but acceptance of the review petition was a final nail in the coffin. And recall of the judgment ensured that all questions of law remained open for both parties to argue at the stage of final hearing.

Which brings us to Part-II and the Supreme Court’s judgment where it rescued Bhushan Steel instead of liquidating it.  

IBC (Amendment), 2026 Series – VI | An Overview of the CoC’s Evolving (and Expanding) Role

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The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (‘IBC Act, 2026’) – inter alia – expands role of the Committee of Creditors (‘CoC’) in the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The most notable expansion is that the CoC will oversee liquidation of the corporate debtor. This is in addition to the CoC’s existing responsibility to oversee the Corporate Insolvency Resolution Process (CIRP). Further, while the IBC Act, 2026 does not add a specific provision to this effect, it also does not detract from the Supreme Court’s observations in Kalyani Transco v M/S Bhushan Power and Steel Ltd and Others (‘Bhushan Steel case’) where it was held that the CoC will continue to exist until the resolution plan is implemented. Thus, the CoC will play a role even at the stage of implementation of a resolution plan.  

The IBC Act, 2026 apart from introducing additional responsibilities for the CoC also introduces one notable obligation. Hereon, the CoC is mandated to record reasons for its approval of the resolution plan under the amended Section 30(4). But curiously, while the CoC has power to recommend liquidation before confirmation of a resolution plan under Section 33(2). This decision to liquidate need not be accompanied by recording of reasons. Parity in both provisions would have been ideal. While recording reasons of approval is not, per se, an onerous obligation it is a step in the right direction. Recorded reasons will ensure transparency in decision making by the CoC. In my view, it will enhance trust in CIRP especially of the unsuccessful resolution applicants. Though courts will have to be careful to not use the recorded reasons to – directly or indirectly – judicially review commercial wisdom of the CoC. Judicial remit must remain limited to examining the CoC’s decisions on the touchstone of legality. 

The CoC – since inception – was envisaged as a central actor in CIRP. The IBC Act, 2026 preserves original design of the IBC, but underlines the CoC’s pre-eminent role by assigning it additional responsibilities. This article examines the CoC’s expanded role after the IBC Act, 2026 and various implications that arise from its expanded role. Given the CoC’s multi-faceted role, there are various strands of its working that can be elaborated on, but in the interest of brevity and coherence I’ve chosen only two strands in this article: firstly, the CoC’s obligation to provide reasons for approval of a resolution plan; secondly, the CoC’s power to oversee liquidation of the corporate debtor. 

Admittedly, the CoC will also decide if CIRP should be restored and will also have a role – though not clearly delineated – in implementation of the resolution plan. But I’ve examined both these aspects separately in my previous post here and here. So, I will steer clear of both these aspects in this article.   

The CoC Must Provide Reasons for Approval of a Resolution Plan 

The IBC Act, 2026 amends Section 30(4) which now states that:

The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent of voting share of the financial creditors, and record reasons for its approval, after considering its feasibility and viability …. (emphasis added)

As emphasized, the IBC Act, 2026 has added the phrase ‘and record reasons for its approval’. This amendment was not proposed in the IBC (Amendment) Bill, 2025 and neither does it find place in Report of the Select Committee on the IBC (Amendment) Bill, 2025 (‘Select Committee Report’). Thus, there are no reasons on record as to why the CoC has been mandated to record reasons for its approval of a resolution plan. One possible deduction is that Section 30(4) was amended to improve transparency in the CoC’s decision making. A normative reason is that the IBC’s design is premised on commercial wisdom of the CoC. The CoC is expected to utilize its commercial expertise and take decisions that secure the collective interest of all stakeholders. Thus, mandating the CoC to record reasons for its decisions ensures that the IBC’s premise and expectations of all stakeholders are met and the CoC does not use commercial wisdom as an opaque curtain to prevent accountability of its decisions.      

The more proximate reason for the above amendment could be some judicial precedents where the CoC has been specifically mandated to record reasons for its decisions. The most notable case in this respect is Elegna Co-op Housing and Commercial Society Ltd v Edelweiss Asset Reconstruction Company (‘Elegna Co-op Housing case’) where the Supreme Court approved the NCLAT’s order directing the CoC to record reasons. The NCLAT had observed that while commercial wisdom of the CoC is not amenable to judicial review, it carries a ‘corresponding duty of responsibility.’ And mandated the CoC to record cogent reasons when it took a non-routine or an extraordinary decision. The NCLAT’s observations were approved by the Supreme Court without any change. While the NCLAT waded into regulatory domain by mandating the CoC to record reasons despite no statutory mandate. However, the NCLAT kept its intrusion limited by mandating recording of reasons only for ‘non-routine’ or ‘extraordinary’ decisions. Amendment to Section 30(4) has created a broader obligation for the CoC to record reasons for its approval and is not limited to only extraordinary decisions.     

The statutory mandate to record reasons under Section 30(4) is certainly reconcilable with the doctrine of commercial wisdom of the CoC. The doctrine of commercial wisdom and non-justiciability of the CoC’s decisions apart from attributing business expertise to the CoC also presumes that it will act in a bona fide manner and not take arbitrary decisions. Mandating the CoC to state the reasons for its decisions is a welcome step especially in wake of some recent developments where unsuccessful resolution applicants have challenged rejection of their resolution plans and cast aspersions on the CoC’s intent and decision making. And without recorded reasons it is difficult to know or hold the CoC accountable lending its entire decision making process an unnecessary mystical quality. Finally, though amendment to Section 30(4) is a welcome step, a note of caution is needed. Courts in scrutinizing reasons for the CoC’s decisions, should be careful to not wade into territory of commercial wisdom of the CoC. While the lines between commercial wisdom of the CoC and legality of its decisions are clear in abstract, wherein only latter are subject to judicial review. However, overlaps between commercial and legal aspects can blur in certain situations. Respecting the distinction while facilitating transparency in CIRP is crucial.   

Supervising Liquidation: Streamlining Process and Ensuring Continuity from CIRP 

The IBC Act, 2026 amends Section 35(2), which now states that:

The committee of creditors shall supervise the conduct of the liquidation process by the liquidator under Chapter III in such manner as may be specified.

The CoC constituted during CIRP will thus now have an extended role in the liquidation process. The CoC will supervise conduct of the liquidator and guide it on all commercial matters. Broadly, the CoC’s role in liquidation is akin to its role vis-à-vis the resolution professional during CIRP but a direct comparison maybe pre-mature as various details about roles of both entities in liquidation are unknown. For now, to strengthen the CoC’s role in the liquidation process and its supervision of the liquidator two crucial changes are worth highlighting: 

Firstly, Section 34(4) states that an insolvency resolution professional appointed as resolution professional for CIRP ‘shall not be appointed’ or replaced as the liquidator for liquidation process of the corporate debtor. Section 34, in its previous draft in the IBC (Amendment) Bill, 2025 envisaged that the resolution professional’s appointment as a liquidator shall not be automatic and needs to be approved by the CoC. However, Section 34(4) as finally amended by the IBC Act, 2026 disqualifies a resolution professional from being appointed as a liquidator altogether. The Select Committee Report suggests that various stakeholders had a valid concern that a resolution professional has a ‘perverse incentive’ to favor liquidation over resolution. Since the liquidator gets a percentage of liquidation estate as the liquidator fee. Thus, the Select Committee recommended amendment of Section 34 to state that a resolution professional will be disqualified from being appointed as a liquidator.    

Secondly, Section 34A empowers the CoC to replace the liquidator by a vote of not less than sixty-six per cent of the voting share. The CoC must believe the liquidator appointed under Section 34 ‘is required to be replaced.’ The CoC need not provide any specific grounds for removal and replacement of the liquidator. It is unclear if the CoC’s decision to replace a liquidator can be challenged in the NCLT or not. Or will it be swept under the doctrine of commercial wisdom. 

Nonetheless, Section 34(4) read with Section 34A ensures that liquidator will be someone who was not involved in CIRP of the corporate debtor. And the liquidator so appointed can be replaced by the CoC if it deems fit. The above changes are to ensure that the liquidator’s incentives are not improperly aligned to secure a higher remuneration. And since the liquidator will be a person not involved in CIRP, it will presumably provide the CoC immense scope and greater leverage to guide the liquidator. And, perhaps, retain the balance of power in its favor.        

The IBC Act, 2026 simultaneously favors continuity and disjuncture in liquidation of the corporate debtor. It favors continuity by empowering the CoC to supervise liquidation, which will allow it to apply the learnings from CIRP to liquidation and hopefully maximize value of the corporate debtor’s assets in the entire process. The IBC Act, 2026 favors disjuncture by requiring that a liquidator shall not be a resolution professional involved in CIRP. And to maintain balance between continuity and disjuncture from CIRP, the IBC Act, 2026 has made some additional changes. For example, the IBC Act, 2026 amends Section 35(1)(a) to state that the liquidator shall maintain an updated list of creditors. While previously, the liquidator was required to ‘verify claims of all the creditors’ which would have involved the liquidator initiating the process of verifying claims; a process already undertaken and completed by the resolution professional during CIRP. As the Select Committee noted, this change:

… involves streamlining the claims process and formally extending the role of the Committee of Creditors (CoC) to supervise the liquidation. This streamlined approach is intended to avoid repetition of activities conducted during CIRP and expedite the liquidation process. (para 23.6)

Thus, amendments to provisions relating to liquidation are a mix of ensuring continuity and mandating the need for fresh personnel. But overall objective seems to be to streamline the entire process and ensure that liquidation and CIRP are not treated completely independent processes. And some work completed during CIRP can be utilized to expedite liquidation with the larger objective of maximizing the corporate debtor’s assets.  

Some stakeholders expressed valid concerns to the Select Committee about the CoC’s powers vis-à-vis the liquidator and that there was uncertainty as to the role of each entity. While Chapter II – dealing with CIRP – delineates the powers and role of the resolution professional in detail especially which decisions require prior approval of the CoC and which can be undertaken by the resolution professional independently. A similar detailed statutory prescription for roles of the liquidator and the CoC is amiss in Chapter III relating to liquidation process despite amendments to Section 34 and insertion of Section 34A. The Select Committee has relied on the assurance of the Ministry of Corporate Affairs that concerns of the stakeholders about the CoC’s powers in relation to liquidator will be addressed, but details – for now – are sparse.  

Finally, Section 33(2) has also been amended. A proviso has been added to provide statutory basis for the CoC’s powers to directly dissolve a corporate debtor without confirmation of a resolution plan. Previously, even though Section 33(2) did not expressly empower the CoC to directly dissolve the corporate debtor, the NCLT in the matter of Synew Steel Private Limited permitted the CoC to take such a decision. The NCLT’s rationale was that since all assets of the corporate debtor had been realized, liquidation will serve no useful purpose, and it is deemed to have been completed. The Proviso though states that the CoC’s decision to dissolve a corporate debtor will have to comply with specified conditions. Presumably, the intent is to include some safeguards to consider the corporate debtor’s interests, and the relevant conditions may be included in the CIRP Regulations. While dissolution typically follows liquidation as per Section 54. However, where there are no meaningful or recoverable assets, empowering the CoC to directly dissolve the corporate debtor is practical as it may prevent a cumbersome CIRP and liquidation process.   

Notably, there is no other change in Section 33(2) wherein the CoC can directly decide to liquidate a corporate debtor before confirmation of a resolution plan. Implying that the CoC is not bound to record reasons for such a decision. While the CoC is – under the amended Section 30(4) – required to record reasons for approval of a resolution plan no similar obligation has been introduced in Section 33(2). This asymmetry is hard to understand. The Supreme Court in Elegna Co-op Housing case approved the NCLAT’s observations which had mandated the CoC to:

Any recommendation for liquidation by the Committee of Creditors shall be accompanied by a reasoned justification recorded in writing, evidencing proper application of mind and due consideration of all viable alternatives, in consonance with the objective of the Code.

While the directions were specific to facts of the case which involved stakes of real estate allottees, need for the CoC to record reasons for liquidation is hard to dispute. Under Section 33(2) where the CoC has been empowered to decide directly in favor of liquidation, recording reasons for it may go a long way in ensuring transparency. And for stakeholders to understand the reasons for not completing CIRP. In fact, a decision to liquidate is at odds with the IBC’s objectives which aims to rescue the corporate debtor. In such a scenario, recorded reasons should reflect as to why the IBC’s stated aims are being sacrificed in favor of liquidation.      

The CoC’s power to directly liquidate a corporate debtor instead of completing CIRP is drastic as it may lead to death of the corporate debtor. And, yet the CoC need not provide reasons for such a decision. It is likely, that the CoC’s decision to liquidate a corporate debtor will be based – almost exclusively – on commercial considerations and will be outside the purview of judicial review. However, mandating the CoC to record its reasons would have been ideal and would have ensured parity in its role in CIRP as well as liquidation.  

CoC – An Independent Entity with Immense Responsibility

NCLAT in CoC of Think and Learn Pvt Ltd v Riju Ravindran held that the CoC possesses legal character of a juristic person. And it can sue and be sued in its own name. NCLAT observed that while the financial creditors in the CoC have a common objective, they do not have an identical interest since each one of them pursues their interest as per the independent contract they signed with the corporate debtor. NCLAT defined the CoC’s role in following words: 

Under the scheme of the IBC, the CoC is conceived as a statutory contrivance, an engine, that runs the entire insolvency resolution process. In another sense CoC is also required to be a statutory conscience keeper, as the responsibility it is enjoined with travels far beyond its preference to protect the financial interest of the members constituting it, since it is also required to secure the interest of every creditor of the corporate debtor besides the corporate debtor itself. (para 8.1) (emphasis added) 

In upholding right of the CoC to litigate in its own name, NCLAT underlined that it was a statutory body assigned to take business decisions founded on ground realities which bind all stakeholders. The IBC Act, 2026 has further highlighted and enhanced centrality of the CoC’s role and wide-ranging impact of its business decisions. And the IBC Act, 2026, contemporaneously, has attempted to enhance transparency in the CoC’s decision-making by mandating it to provide reasons for its decision to approve a resolution plan. It may not be an overstatement to conclude that the CoC’s conduct, and decisions will determine the fate and trajectory of CIRP, and in some cases, a timely liquidation of the corporate debtor. An immense responsibility. Thus, once CIRP is triggered, the CoC will expedite or delay the corporate debtor’s journey to the grave, metaphorically or literally.  

IBC (Amendment), 2026 Series – V | Ghost of the Rainbow Paper Case: The Parliament Buries an Unnatural Interpretation 

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Introduction

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (‘IBC Act, 2026’) – inter alia – amends Section 53 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The amendment is, largely, in response to the Supreme Court’s decision in State Tax Officer v Rainbow Papers Limited (‘Rainbow Papers case’). The Supreme Court in the Rainbow Papers case held that government or a governmental authority could be considered a secured creditor under the IBC. Immediate effect of the Rainbow Papers case was that the government could claim a higher rank as a secured creditor under Section 53(1)(b)(ii) instead of claiming amounts alongside unsecured creditors under Section 53(1)(e). The Rainbow Papers case detracted from the legislative intent to place government at par with unsecured creditors.   

The legal position got further entangled when subsequently in Paschimanchal Vidyut Vitran Nigam Ltd v Raman Ispat Private Limited & Ors (‘Raman Ispat case’) the Supreme Court confined decision in the Rainbow Papers case to facts of that case alone. And, also commented that the Supreme Court in the Rainbow Papers case did not adequately examine Section 53 and the waterfall mechanism. This was followed by a review petition where the Supreme Court refused to consider its observations in the Rainbow Papers case. And instead took exception to comments made in the Raman Ispat case. The Supreme Court questioned propriety of a co-ordinate bench commenting on judgment of another bench instead of referring the case to a larger bench and observed:

If a Bench does not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions. (para 20)

Unsurprisingly, the law was ‘thrown’ into uncertainty after the above set of events.  

The Rainbow Papers case, the Raman Ispat case, and the Supreme Court’s observations in the review petitions meant that position of government as secured creditor was both valid and under scrutiny. And certainty was an enemy. The Rainbow Papers case could be relied on as a binding precedent or plausibly be confined only to facts of the particular case depending on proclivities of the stakeholders involved. It is to rectify this unwelcome legal position that the IBC Act, 2026 inserted an Explanation to Section 53(1)(e) to clarify that amounts due to the Central Government and the State Government shall be distributed under that sub-clause. Thereby, placing the government at par with unsecured creditors and undoing ratio of the Rainbow Papers case. However, I conclude that the amendment to Section 53 may not completely eliminate effect of the Rainbow Papers case. I suggest that one of the Supreme Court’s observations in the Rainbow Papers case: tax claims should be necessarily part of the resolution plan, still survives the IBC Act, 2026. 

In this article, I provide a descriptive context and background that necessitated the amendment to Section 53 effectuated by the IBC Act, 2026. I begin by elaborating on the rationale that underpinned the Rainbow Papers case, the discomforts it caused, and limits of the amendment made to Section 53 by the IBC Act, 2026.        

The Rainbow Papers Case and its Aftermath 

In the Rainbow Papers case, the Supreme Court had to answer the question that whether Section 53 of the IBC overrides Section 48 of the Gujarat Value Added Tax Act, 2003 (‘GVAT Act, 2003’). The latter stated that: 

48. Tax to be first charge on property.— 

Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.

Similarly, Section 53 of the IBC begins with a non-obstante clause and provides for distribution of assets ‘Notwithstanding anything to the contrary contained in any law …’.

To begin with, the Supreme Court condoned delay by the tax department in filing its claim by reasoning that timelines under the IBC are directory. And even if the claim was not filed before the deadline announced by the resolution professional, it was incumbent on the resolution professional to revise the admitted claims once he came across additional information – relating to outstanding tax claims – warranting such revision. 

The second issue was about the States’ status as a secured creditor. The State’s argument was that definition of secured creditor under Section 3(30) read with definition of security interest under Section 3(31) was wide enough to include a statutory charge such as under Section 48 of the GVAT Act, 2003. The Supreme Court accepted the State’s argument and held that the latter was not contrary to the IBC and:

Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority. (para 57) 

And thus, the Supreme Court concluded that debts owed to the State under the GVAT Act, 2003 were to rank equally with other debts owed to a secured creditor under Section 53(1)(b)(ii). The Supreme Court’s conclusion was based on the definition of security under Section 3(31) which does not exclude a statutory charge as well as the definition of secured creditor which does not exclude the State. The Supreme Court was also influenced by the fact that the impugned resolution plan completely ignored tax dues owed by the corporate debtor to the State and it questioned the validity of a resolution plan that did not incorporate tax dues.     

In some of the subsequent decisions, the Rainbow Papers case was sought to be limited to its facts. For example, in Department of State Tax v Ashish Chhawchharia Resolution Professional for Jet Airways (India) Ltd & Anr (October 2022), the National Company Law Appellate Tribunal (‘NCLAT) had to engage with the question if Department of State Tax was a secured creditor. The NCLAT examined Section 82 of the Maharashtra GST Act, 2017 which provided that the tax payable shall be first charge on the property of taxpayer, except as provided in the IBC. Thus, in view of the specific exception wherein the IBC triumphed the Maharashtra GST Act, 2017 the NCLAT found the Rainbow Papers case to be inapplicable in the impugned case.      

The most notable example of limiting effect of the Rainbow Papers case only to facts of that case was in the Raman Ispat case. In this case, Paschimanchal Vidyut Vitran Nigam Limited (‘PVVNL’) relied on non-obstante clause in the Electricity Act, 2003, relevant clauses of agreement entered to between PVVNL and the corporate debtor, and the Rainbow Papers case to claim priority in liquidation proceedings. PVVNL claimed that it was a statutory corporation and dues owed to it amounted to dues owed to the State. The Supreme Court disallowed its claim and  also expressed its disagreement with the Rainbow Papers case by observing that: 

The careful design of Section 53 locates amounts payable to secured creditors and workmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. (para 49)

The Supreme Court in the Raman Ispat case further held that observations in the Rainbow Paper case must be confined to facts of that case. Thus, creating an uncertain legal position wherein two benches of the Supreme Court – of equal strength – took diametrically opposite positions in so far priority to be accorded to government dues under Section 53. In the absence of a reference to a larger bench, the only plausible way of reconciling the two judgments was to deduce that the Rainbow Papers case was be applicable only in cases where provisions like Section 48, GVAT Act, 2003 were applicable. While in other cases the Raman Ispat case had a more persuasive value. Irrespective of this reconciliation, the legal situation was far from satisfactory.     

Limitations of the Rainbow Papers Case

The dissatisfactory legal situation was rooted in the Supreme Court’s reasoning in the Rainbow Papers case which suffered from a few obvious limitations. To begin with, one can argue that since Section 53(1)(e) was a separate category for the amounts due to the Central Government and the State Government, the legislative intent was straightforward: all dues owed to the government were to be classified in that category. And while the definition of security interest and secured creditor did not explicitly exclude the government, reliance on definitions was not conclusive that the government can be a secured creditor. The relevant definitions should have ideally been read with Section 53, which would have pointed towards the government not being a secured creditor. A harmonious interpretation of the relevant statutory definitions with the design of waterfall mechanism under Section 53 was missing from the Rainbow Papers case. 

Another aspect that the Supreme Court overlooked in the Rainbow Papers case was the distinction between a voluntary charge and a statutory charge. Generally, a secured creditor acquires its status because of a voluntary commercial transaction with the corporate debtor. However, the government – especially in the Rainbow Papers case – was claiming status of a secured creditor based on a statutory provision. Equating the government to a secured creditor based on a statutory provision removes element of voluntariness of the corporate debtor and provides the government an easy way to claim status of a secured creditor by adopting similar provisions in existing and future laws. Equating an involuntary charge on property with a charge created by voluntary transaction –disrupted one of the IBC’s aims. The aim, in this context, was to give priority to private secured creditors who undertook the risk of lending capital to the corporate debtor. The waterfall mechanism under Section 53 recognizes the risk undertaken to incentivize similar transactions in the future and help development of the credit market.   

Also, another one of the IBC’s aims, as mentioned in the Preamble is to alter ‘priority of payment of Government dues.’ The lowering of priority of the government’s dues is justifiable on various counts with the primary one being that the government has other avenues to recover money including levy of taxes from financial robust corporates among other taxpayers. Relevance of the IBC’s aim of lowering ranking of the government dues was missing in the Rainbow Papers judgment. And a purposive interpretation of Section 53 would have led the Supreme Court to the conclusion that the government cannot rank high as a secured creditor under Section 53(1)(b)(ii) but should remain confined to Section 53(1)(e) as an unsecured creditor.  

Overall, the Rainbow Papers had weak legs to stand on. The Supreme Court by focusing only on the definition of security interest and secured creditor did not do ample justice to other relevant provisions of the IBC. And, resultantly upset important aims of the IBC, created disharmony amongst the various provisions including between the various categories enumerated for waterfall mechanism under Section 53.  

The IBC Act, 2026 Amends Section 53 

To rectify the above legal position, the IBC Act, 2026 inserts an Explanation to Section 53(1)(e)(i) which states that: 

For the removal of doubts, it is hereby clarified that any amount, whether or not a security interest is created to secure such amount by an act of two or more parties or merely by operation of law, due to the Central Government and the State Government, in respect of the whole or any part of the period of two years preceding the liquidation commencement date, shall be distributed under this sub-clause and any remaining amount, whether or not such security interest is created to secure the amount, due to the Central Government and the State Government, shall be distributed under clause (f);”; (emphasis added)

The Explanation intends to clarify that a security interest created through a voluntary contractual arrangement or by a statutory provision stands on the same footing in so far as the government is concerned. Irrespective of the mode, dues to the Central Government and the State Government are to be paid under Section 53(1)(e)(i) or Section 53(f). But, not under Section 53(1)(b)(ii) as interpreted in the Rainbow Papers case. 

The Rainbow Papers case unleased a flurry of opinions if the ‘crown debt’ should be given priority over private creditors. There are circumstances where the government’s claims can be accorded priority, but my view is that it should flow from the statutory provisions and not judicial innovation. Amendment via the IBC Act, 2026 clearly re-establishes that the Parliament does not wish to accord priority to the government’s claims. The IBC Act, 2026 clarifies that even if relevant statutory provisions provide that the government shall have first charge and thereby status of a secured creditor vis-à-vis unpaid debts, the ranking of Section 53 shall determine the order of payment. And not any other relevant statutory provision. Thus, irrespective if the provision of tax law or otherwise results in the government being a secured operational creditor, it cannot be placed alongside other private secured creditors under Section 53(1)(b)(ii). The government’s dues are to be paid under Section 53(1)(e).    

Sliver of the Rainbow Papers Case May Survive  

If we confine ourselves to one aspect of the Rainbow Papers case discussed above, then the Explanation added by the IBC Act, 2026 undoubtedly negates its ratio. However, in the Rainbow Papers case, the Supreme Court also made another crucial observation: legality of an approved resolution plan. The Supreme Court observed that the NCLT should not approve a resolution plan under Section 31(2) that did not conform to requirements mentioned in Section 31(1). And, concluded that: 

If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan. (para 52)

The Supreme Court clarified that under Section 31 onus is on the NCLT to examine if a resolution plan meets the requirements enlisted in Section 30(2). The relevant parameter under Section 30(2)(b) – in respect of government’s dues – is that a resolution plan must provide for payment of debts of operational creditors. However, if an operational creditor fails to submit their claim to the resolution professional, it stands to reason that their claim is extinguished on approval of the resolution plan. However, implication of the Supreme Court’s above observations in the Rainbow Papers case, in my view, is that unless statutory demands such as tax dues are necessarily incorporated in the resolution plan the NCLT must decline to approve it. Irrespective of whether such claims were submitted within the deadline to the resolution professional. However, amendments to Section 30 and Section 53 via the IBC Act, 2026 do not address this aspect of the Rainbow Papers case. However, one could argue that the contemporaneous amendments made to Section 31 – to underline scope of the clean slate doctrine – do negate the above observation. But, given the history of uncertainty about scope of the clean slate doctrine, one can never be sure. In my view, amendment to Section 53 read with amendment to Section 31 do effectively dilute the above observation made in the Rainbow Papers case. But, there is still possibility of a sliver of ratio to survive by making a case that a resolution plan that does not contain pending tax claims cannot be legally approved by the NCLT under Section 31.  

To conclude, amendments to the IBC via the IBC Act, 2026 convincingly negate ratio of the Rainbow Papers case in so far as it relates to the interpretation of waterfall mechanism under Section 53. And ensures that the government claims it tax dues only under Section 53(1)(e)(i). It is a welcome amendment and ensures that the chaos and uncertainty unleased by the Rainbow Papers case is tamed. However, a statutory amendment is always subject to another judicial ‘innovation’ that frequently erupts in the IBC landscape. Though the scope for such an innovation has been sufficiently narrowed by the IBC Act, 2026.      

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