Taxman to step aside for banks in bankruptcy waterfall

livemint.com:

New Delhi: The taxman will defer to secured creditors such as banks while sharing the proceeds of a bankruptcy rescue, two people aware of the government’s plans said. The Centre will amend the Insolvency and Bankruptcy Code (IBC) to unambiguously state that tax authorities will be below secured creditors having a charge on the assets of a corporate borrower in hierarchy while distributing the proceeds, the people cited above said on condition of anonymity. This is a key proposal in the amendments to the IBC that the ministry of corporate affairs has prepared in consultation with the sector’s rule maker Insolvency and Bankruptcy Board of India (IBBI).

The amendments will be presented in the Parliament after the national polls in the April-May period, one of the two persons quoted above said. Emails sent to the ministry of corporate affairs and IBBI on Monday seeking comments for the story remained unanswered at the time of publishing. The idea is to amend the definition of secured creditors in the IBC to specifically exclude dues to government including tax dues.

“The proposals are under inter-ministerial consultation," said the person. The IBC says workmen’s dues and secured debtors must be paid first in a bankruptcy rescue, followed by wages of other employees, unsecured debtors and government dues, in that order. However, conflicting judicial pronouncements have sowed confusion in the minds of stakeholders.