State taxman wins: Supreme Court refuses to review Rainbow Papers ruling

The Supreme Court had ruled that the state is a 'secured creditor' in insolvency. Then another bench called that ruling into question. What happened next?

The stack of five review petitions sat before Justices A.S. Bopanna and Bela M. Trivedi — each file bound in blue legal thread, thin, each one carrying the same burden. Every petitioner asked the same thing: reverse the September 2022 judgment that declared the Gujarat state tax department a secured creditor (a lender with a legal claim on assets before other creditors) in the insolvency of Rainbow Papers Limited. Each one pointed to a later Supreme Court bench that had criticised that very judgment. And each one failed.

The question at the heart of these petitions was deceptively simple: can a company's resolution plan — the final deal that decides who gets paid and how much — ignore tax dues owed to the state government?

When the taxman came knocking

Rainbow Papers Limited was deep inside the insolvency process under the Insolvency and Bankruptcy Code (IBC), 2016. The company's assets were being divided among creditors according to a strict priority list called the "waterfall mechanism" under Section 53 of the IBC (the legal order in which different types of creditors get paid from a company's remaining assets).

The State Tax Officer of Gujarat stepped in with a claim. Under Section 48 of the Gujarat Value Added Tax (GVAT) Act, 2003, the state argued that its tax dues had a "first charge" on the company's property — meaning the government's claim should be paid before almost everyone else. The state said it was a secured creditor under the IBC, entitled to priority.

The lower tribunals — the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) — rejected this argument. The NCLT, Ahmedabad, on February 27, 2019, turned away the State Tax Officer's application; the NCLAT, on December 19, 2019, dismissed the state's appeal. Both held that the IBC's waterfall mechanism overrode the state's priority under the GVAT Act. The state's claim, they said, would have to wait its turn behind other secured creditors.

The State Tax Officer appealed to the Supreme Court.

The September 2022 judgment that changed the game

On September 6, 2022, the Supreme Court allowed the state's appeal. The bench held that the state government qualifies as a secured creditor under Section 3(30) of the IBC (the definition section that lists who counts as a secured creditor). Critically, the court found that Section 48 of the GVAT Act — which creates a first charge in favour of the state — was not inconsistent with Section 53 of the IBC. The resolution plan that had been approved by the NCLT, which ignored the state's tax dues, was set aside.

The judgment sent a shockwave through the insolvency ecosystem. Resolution professionals, lenders, and corporate debtors suddenly had to account for state tax demands that many had assumed were subordinate to bank loans and other financial debt. The courtroom, when the judgment was read, had the heavy silence of a rule being rewritten — the judge's voice steady, the only sound the turning of pages.

Five petitioners, one argument

Five review petitions followed. The liquidator of another company, the resolution professional of Rainbow Papers, State Bank of India, the original respondents, and Indian Overseas Bank — all claimed to be aggrieved by the September 2022 ruling. The petitions were filed under Article 137 of the Constitution read with Order XLVII of the Supreme Court Rules, 2013 — the procedural vehicle for asking a court to re-examine its own final judgment.

Their central argument was procedural but powerful. They pointed to a later judgment by a coordinate bench (a bench of equal authority) in the case Paschim Anchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., decided on July 17, 2023. In that judgment, the coordinate bench had made observations that appeared to criticise and cast doubt on the Rainbow Papers ruling. The review petitioners argued that this subsequent development showed an error in the original judgment — specifically, that the September 2022 bench had failed to properly consider the waterfall mechanism under Section 53 of the IBC. The physical document of the Paschim Anchal judgment was cited heavily in the review petitions, its paragraphs marked and underlined in ink, the ink bleeding through the paper — as if the later bench's words could undo the earlier one's holding.

Why the review failed

The Supreme Court dismissed all five petitions in a single order on October 31, 2023. The reasoning was crisp and drew a bright line around the limits of review jurisdiction.

First, the court examined the original judgment and found that it had, in fact, expressly considered Section 53 of the IBC and the related provisions. The judgment under review had reproduced the statutory language and analysed the precedents that the review petitioners now claimed had been ignored. "No error apparent on the face of the record was shown," the court held — the high bar required for a review (a request to re-examine a final judgment based on a clear mistake visible from the judgment itself, not a re-argument of the case).

Second, and more significantly, the court addressed the reliance on the Paschim Anchal judgment. The court held that "observations of a coordinate bench cannot constitute a ground for review" — a direct quote from the ratio that anchored the court's reasoning. The proper course, the court said, is not to file a review petition but to refer the matter to a larger bench — a bench of three or more judges — which alone has the authority to resolve conflicts between coordinate bench decisions.

The court cited its own precedents on this point. Union of India v. Nareshkumar Badrikumar Jagad (2019) 18 SCC 586 and Parsion Devi v. Sumitri Devi (1997) 8 SCC 715 both hold that a review is not an appeal in disguise and that a subsequent contrary view by another bench does not create a ground for review.

The court also drew on Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (1980) 2 SCC 167, which reinforced the limited scope of review jurisdiction. Sajjan Singh v. State of Rajasthan AIR 1965 SC 845 added weight on the principle that a review cannot be used to re-argue a case.

Shanti Conductors Pvt. Ltd. v. Assam State Electricity Board (2020) 2 SCC 677 and Shri Ram Sahu (Dead) Through LRs v. Vinod Kumar Rawat (2021) 13 SCC 1 further established that a coordinate bench's later observations do not unsettle an earlier judgment. Beghar Foundation v. Justice K.S. Puttaswamy (Retired) (2021) 3 SCC 1 completed the wall of precedent — leaving no room for the review petitioners to squeeze through.

The court's ratio was clear: where the judgment under review has expressly considered and reproduced the statutory provisions and related precedents that the review petitioners allege were not considered, no error apparent on the face of record exists to warrant review. Observations or comments made by a coordinate bench of equal strength criticising or doubting an earlier judgment of another coordinate bench cannot constitute a ground for review of the earlier judgment. The proper course is to refer the matter to a larger bench. And critically, the definition of secured creditor under Section 3(30) of the IBC does not exclude any Government or Governmental Authority; a resolution plan ignoring statutory demands payable to the state would be liable to rejection.

What the judgment means for insolvency practice

For practitioners, the message is twofold. First, the Rainbow Papers ruling on the state's status as a secured creditor remains good law — at least until a larger bench says otherwise. Resolution plans that ignore statutory demands payable to the state remain vulnerable to rejection. Second, the procedural lesson is equally important: a coordinate bench's criticism of an earlier judgment is not a shortcut to reopening that judgment. The remedy is a reference to a larger bench, not a review petition.

THE PLAY: When drafting or evaluating a resolution plan, treat state tax authorities as secured creditors with priority claims — and if a later bench casts doubt on this position, seek a reference to a larger bench rather than filing a review.

The state taxman won. The review petitions were dismissed. And the insolvency bar was left with a clear rule: a coordinate bench's second thoughts are not grounds for a do-over. The operative order was brief — "All the Review Petitions are dismissed" — and with those words, the stack of files on the bench was closed, the silence in the courtroom broken only by the shuffle of paper and the courtroom fan whirring overhead.