A legal amendment can clarify the concept but the message must reach everyone

However, the key question is whether legislative reform is sufficient, given the tenacity of tax authorities and investigative agencies.

Insolvency law has different policy priorities from tax and criminal law. On one hand, the goal is to resolve insolvent companies and maximize value for creditors (a significant part of which are public sector banks or PSBs), repurpose productive assets and free up bank capital.

On the other, the state has a duty to investigate economic crimes and recover tax revenue for public spending. While insolvency, tax and criminal law are often viewed as hermetically sealed silos, they are intricately connected.

When investors lack confidence that the assets they purchase will be insulated from old claims, they discount valuations. This limits recoveries for lenders, traps bank capital and prevents credit outflow for productive uses. This in turn has fiscal consequences (including the need to recapitalize PSBs) and therefore requires policy trade-offs at the time of framing insolvency and tax laws.

Courts and legislators may treat insolvency, tax and criminal laws as silos, but reform requires a cohesive, whole-of-government approach. The proposed amendments prioritize insolvency claims over the government’s tax dues and criminal attachments. However, what is required is a change in government behaviour through incentives and standard operating procedures (SOPs).

Currently, an IBC resolution plan binds all third parties, including central and state governments, which must give up claims that are not protected by the resolution plan. In the liquidation waterfall, financial creditors rank above statutory dues.

In practice, however, tax authorities continue litigation even after a resolution plan is approved. They cite the Supreme Court’s 2022 judgement in State Tax Officer vs Rainbow Papers Ltd, which held that if a statute protects a tax liability as a “first charge” on an assessee’s property, the tax debt cannot be wiped clean by a resolution plan.

In the criminal law context, Section 32A of the IBC, introduced in 2019, extinguishes the insolvent company’s criminal liability while leaving promoters and directors liable for prosecution. Courts have upheld Section 32A. Yet, the risk persists of resistance from investigating agencies, which often seize assets despite pending insolvency proceedings.

In the Kalyani Transco vs Bhushan Power and Steel Ltd case last year, the Supreme Court noted that the Committee of Creditors was unable to execute the resolution plan on time partly because the Enforcement Directorate kept up its pursuit of attachments for money-laundering.

The Parliamentary Select Committee on IBC amendments noted that the code already incorporates the ‘clean slate’ principle. However, stakeholders recommended explicit amendments to prevent government agencies from acting against the company after a plan’s approval.

The IBC Amendment Bill addresses these issues by recommending a few changes to the law.

One, it limits the definition of “security interest” to specifically exclude statutory liens—the mechanism relied upon by tax authorities to seek priority over financial creditors.

Two, Section 31 has been expanded to cover civil liabilities, including tax penalties and dues incurred before insolvency proceedings began. This effectively extinguishes the company’s debts and liabilities unless expressly retained in the resolution plan.

Three, the bill proposes that the insolvent company retain government licences and permits, preventing the state from terminating licences or benefits granted to the company even if its past debts are unpaid.

The response of the ministry of corporate affairs to these proposals is telling. Rather than blanket provisions to extinguish liability, it favoured retaining the existing law and assessing issues on a case-by-case basis.

This approach belies the reality of government litigation. The ministry of law and justice’s April directive on litigation management noted that “a narrow interpretation of a statutory provision often serves as the primary catalyst for escalating grievances into litigation.”

The Economic Survey of India 2020-21 also highlighted the scale of this “wasteful litigation.” The government loses 73% of its tax cases in the Supreme Court and 87% in high courts. Yet, authorities tend to favour appeals. This approach persists against insolvent companies, contradicting the IBC’s principles. It is this aggressive stance of government authorities that necessitates explicit clarity in the proposed amendments.

India’s approach marks a significant departure from jurisdictions such as the US, UK and Canada. There, bankruptcy and criminal forfeiture operate in parallel; proceeds of crime are generally excluded from the bankruptcy estate (US) or confiscated even after ownership changes (UK, Canada). In India, investigative agencies tend to assert control over such significant portions of an asset that little value remains for the resolution applicant or lenders. And tax claims, if resurrected years later, can be debilitating for a company.

Ultimately, these are competing policy goals—recovering tax revenues, prosecuting economic offences and maximizing value in insolvency. While legislative clarity in the bill is an important step, change will also require executive directions and SOPs.

The Economic Survey emphasized the need for coordinated and phased reforms and also inter-agency alignment in the context of financial regulation, but this equally applies to provisions of the IBC and the behaviour of tax and enforcement authorities.

These are the authors’ personal views.

The authors are, respectively, a senior advocate at the Supreme Court; and partner, Cyril Amarchand Mangaldas, and a member of the drafting team for the IBC of 2016.