After Rainbow Papers: Juristic Property, Federal Autonomy, and the Unresolved Constitutional Costs of the IBC (Amendment) Act, 2026
This article is written by Anant Tiwari, pursuing B.A. LL.B. (Hons.) programme from National Law Institute University, Bhopal.
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 represents Parliament’s response to a self-inflicted judicial crisis. By inserting an Explanation to Section 3(31), it reverses State Tax Officer v. Rainbow Papers Ltd. (2022), which had elevated State statutory first charges to secured creditor status within the Section 53 waterfall, disrupting commercial credit markets and fracturing the Clean Slate doctrine. While the Amendment successfully restores transactional predictability, this article argues that it exacts an impermissible constitutional toll. Three distinct vulnerabilities are identified and examined.
First, the retrospective extinguishment of a court-recognised proprietary interest of a juristic person, without any compensatory mechanism, fails the substantive standard that K.T. Plantation Pvt. Ltd. v. State of Karnataka (2011) and Kolkata Municipal Corporation v. Bimal Kumar Shah (2024) jointly impose under Article 300A.
Second, the Explanation may, in pith and substance, constitute legislation on State taxation rather than insolvency, placing it beyond Parliament’s Entry 9, List III competence and outside the Article 254 repugnancy framework.
Third, total sovereign subordination generates structural moral hazard, converting the public exchequer into an involuntary insurer of private corporate failure. The article concludes by proposing a Capped Priority Model, drawing on UK and German frameworks, to reconcile federal fiscal equity with credit market efficiency.
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