Lenders prioritized over government’s dues in IBC Amendment Bill, guarantors can't disrupt insolvency

IBC 2.0

The proposed changes in the Insolvency and Bankruptcy Code (Amendment) Bill, 2025, introduced in the Parliament this week, has infused vibrancy to India’s insolvency process, which experts say will make the resolution smoother, faster, fairer and more transparent.

Beyond the cross border and group insolvency frameworks along with the creditor-led resolution, Moneycontrol reviewed the key changes proposed in the bill that has been referred to a select committee for further deliberations.

According to experts, the changes can be classified into three categories - (a) clarificatory changes that Insolvency and Bankruptcy Board of India (IBBI) has brought through regulations and are now being put in the Code, (b) changes that are purely aimed at efficiency and cutting delays; (c) and those that may impact the rights of stakeholders.

Rainbow Papers Ruling Reversed

The most significant amendment is the proposed 'Explanation' to Section 3(31), aimed at reversing the 2022 Rainbow papers ruling of the Supreme Court. Officially known as the State Tax Officer vs Rainbow Papers Limited (2022), the judgement ruled that government authorities can be considered ‘secured creditors’ under the IBC.

Secured creditors - mainly banks - are those that have a security interest created in their favour over the assets of a debtor company, implying their debt is backed by collateral, thus giving them a legal claim on a specific asset or assets. Secured creditors are placed higher in order of priority (also called ‘liquidation waterfall’ mechanism of IBC) for distributing the proceeds from the sale of a company's assets during liquidation.

As per the order of priority, government dues are placed lower than dues of banks. If a statutory law places any government authority’s claims on par with that of secured creditors, then both will be given the same priority during liquidation. This was upheld by the Supreme Court in 2022 and has been reversed by the Amendment Bill.

The Bill clarifies that government dues, even if they become secured, shall ‘not be given any priority’ and neither will it be considered as secured for the purposes of IBC.

Preventing Guarantor from Disrupting CIRP

The Bill has also proposed an amendment to Section 14 of the IBC, which deals with the moratorium -- a ‘cool-down’ period declared once the company or the corporate debtor enters into corporate insolvency resolution process (CIRP). During moratorium, no one can sue the company, sell its assets, or take any legal action against it.

The amendment to the Section aims to prevent a 'surety' (a guarantor) from disrupting the insolvency process of a company (the corporate debtor). A surety is a person or company that promises to pay the debt if the primary entity defaults. As per current rules, if the surety has to pay, they gain a legal right called 'subrogation', allowing them to sue the company to get their money back.

The amendment to Section 14 prevents a situation where a surety, after paying the debt, immediately files a lawsuit against the company that is already trying to resolve its financial problems. It says if a surety has a claim against the corporate debtor because they paid the debt, they must follow the same process as all other creditors. They have to submit their claim to the insolvency professional, which will be considered as part of the overall resolution plan, experts said.

CoC Role Strengthened

The amendment to Section 12A is also significant since it makes it clear that withdrawal of IBC proceedings requires 90 percent Committee of Creditors (CoC) consent in all cases, and cannot be undertaken before their constitution and after invitation for resolution plans. “This will encourage pre-admission settlement and reduce litigations around withdrawals,” said Pooja Mahajan, Managing Partner, Chandhiok & Mahajan.

The role of the CoC has also been extended to liquidation process as well, which was earlier restricted to resolution alone. The CoC will now supervise the conduct of the liquidation process by the liquidator, as per the new Bill.

Additionally, the Bill proposes to add Section 28A which would enable a transfer of an asset of a guarantor (personal or corporate) of the corporate debtor as part of the CIRP. This provision allows for a more integrated and comprehensive approach to resolving a company's debt. Instead of having separate legal battles against the company and its guarantors, creditors can deal with all relevant assets within a single, unified process, experts said.

"This will result in value maximisation as such assets may be integral to the operations of a corporate debtor," said Madhav Kanoria, Partner, Cyril Amarchand Mangaldas.

Sumant Nayak, Senior Partner at Desai & Diwanji says overall, the proposed amendments will foster a faster, fairer, and more transparent IBC regime by enforcing strict governance standards, enhancing creditor and stakeholder participation, ensuring procedural clarity, and strengthening oversight mechanisms across the insolvency lifecycle.