Overruling Vidarbha and Rainbow Papers: What the IBC Amendment Act 2026 Fixes

By Candour Legal Team | 8 August 2026

A decade after the Insolvency and Bankruptcy Code took effect, the average Corporate Insolvency Resolution Process took 744 days to close against a statutory outer limit of 270. Much of that drift traced back to two Supreme Court rulings that had pulled the Code away from its own design. Vidarbha Industries Power Ltd. v. Axis Bank Ltd. gave the NCLT discretion to decline admission even after default was proven, arming corporate debtors with a genuine delay tool. State Tax Officer v. Rainbow Papers Ltd. elevated government statutory dues to secured-creditor status in the liquidation waterfall, disrupting the priority Parliament had deliberately built. The Insolvency and Bankruptcy Code (Amendment) Act, 2026, assented to on 6 April 2026, legislatively overrules both. A tighter change to Section 12A closes the settlement-exit route that had let promoters buy time after admission.

Key Takeaways

• The IBC Amendment Act, 2026 (Act No. 6 of 2026), assented to on 6 April 2026, makes admission of a complete Section 7 or 9 application mandatory once default, completeness, and RP-eligibility are shown, reversing the discretionary approach the Supreme Court adopted in Vidarbha Industries Power Ltd. v. Axis Bank Ltd.
• The Adjudicating Authority must decide within 14 days of a complete application, recording reasons in writing for any delay.
• The Amendment also legislatively overrules State Tax Officer v. Rainbow Papers Ltd., clarifying that government statutory dues do not constitute “security interests” for the Section 53 liquidation waterfall, restoring the priority Parliament originally intended.
• Section 12A withdrawal is now permitted only after the CoC is constituted and before the first resolution-plan invitation, still subject to 90% CoC approval, narrowing the “settlement exit” window that accounted for roughly 14% of all admitted CIRPs.
• Corporate debtors lose their principal admission-stage defence; the CIIRP framework under the new Chapter IV-A becomes the more realistic route for a debtor seeking a negotiated, board-retained outcome instead of contested Section 7 admission.

A Code That Had Drifted From Its Own Design

The Insolvency and Bankruptcy Code, 2016 was built around a 180-day resolution timeline, extendable once by 90 days, on the premise that speed itself preserves enterprise value. A decade on, IBBI’s own data put the average time to close a CIRP at 744 days, nearly three times the statutory outer limit. Two Supreme Court rulings, each well-intentioned on its own terms, had contributed materially to that drift. Vidarbha Industries Power Ltd. v. Axis Bank Ltd. read discretion into the admission stage that Parliament’s original twin test of debt and default had not contemplated. State Tax Officer v. Rainbow Papers Ltd. read government tax dues into a secured-creditor priority that the Code’s Section 53 waterfall had been deliberately designed to exclude. The Insolvency and Bankruptcy Code (Amendment) Act, 2026, assented to on 6 April 2026 as Act No. 6 of 2026, is Parliament’s direct legislative response to both.

Mandatory Admission: Overturning the Vidarbha Line

The most consequential procedural change in the 2026 Amendment is to Section 7(5)(a). Before the amendment, the provision said the Adjudicating Authority “may” admit a Section 7 application once satisfied that a default has occurred; the amendment replaces “may” with “shall.” Read together with the accompanying changes, the National Company Law Tribunal must now admit a complete application once three conditions are met: default has occurred, the application is complete, and no disciplinary proceeding is pending against the proposed resolution professional. Nothing else may be weighed against admission. An information utility record filed by a financial institution is now treated as sufficient to establish default, narrowing the evidentiary contest at the threshold stage considerably. Where the Adjudicating Authority does not pass an order within 14 days of a complete application, it must record its reasons for the delay in writing.

Why Vidarbha Was Controversial From the Day It Was Decided

The reform directly reverses Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352, in which a two-judge bench held that the word “may” in Section 7(5)(a) gave the NCLT discretion to decline admission even where debt and default were established, for instance where the corporate debtor’s realisable dues exceeded its payables, or where the Tribunal considered the debtor commercially viable under its existing management. The ruling was a marked departure from the Court’s own earlier position in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, which had confined the NCLT’s inquiry strictly to the existence of debt and default, and it left the boundaries of that new discretion largely undefined beyond a general instruction that it must not be exercised arbitrarily. In practice, NCLT benches split on how broadly to read it, and the Supreme Court itself began narrowing the ruling within a year, distinguishing it on facts in M Suresh Kumar Reddy v. Canara Bank, (2023) 8 SCC 387, decided 11 May 2023. The 2026 Amendment ends the uncertainty definitively rather than leaving it to further case-by-case litigation, and does so by legislative text rather than judicial interpretation.

Rainbow Papers and the Government-Dues Problem

The second precedent the Amendment addresses arose out of tax rather than banking litigation. In State Tax Officer v. Rainbow Papers Ltd., decided 6 September 2022, the Supreme Court held that a statutory first charge created under the Gujarat Value Added Tax Act, 2003 amounted to a “security interest” under Section 3(31) of the IBC, meaning the state tax department qualified as a secured creditor in the Section 53 liquidation waterfall, standing ahead of unsecured financial and operational creditors. State tax departments across the country began asserting the same status in ongoing and even already-approved resolution and liquidation proceedings, unsettling recoveries that lenders and resolution applicants had priced in on the assumption that government dues ranked behind them. A differently constituted bench tried to contain the damage in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., decided 17 July 2023, observing that Rainbow Papers had not fully engaged with the Section 53 hierarchy, but a coordinate bench cannot overrule another, and the two rulings sat in unresolved tension for nearly three years.

Restoring the Section 53 Hierarchy

The 2026 Amendment resolves that tension legislatively. It clarifies that a security interest created by operation of law, including statutory charges of the kind at issue in Rainbow Papers, does not fall within the definition of “security interest” under Section 3(31) of the Code for Section 53 purposes. Government dues accordingly rank where the Code’s original drafters intended: below secured creditors, and below unsecured financial and operational creditors, in both resolution and liquidation. The change is consistent with the Code’s own Preamble, which records Parliament’s intent to alter the priority of government dues in insolvency, and it removes a source of last-minute claim revivals that had complicated the closing stages of resolution plans since 2022. For lenders and resolution applicants, the amendment restores the predictability the waterfall is supposed to provide; for tax authorities, it forecloses an avenue of recovery the department had relied on for three years, and government dues will now need to be priced and pursued through ordinary tax-recovery channels rather than IBC priority claims.

A Narrower Exit: The Tightened Section 12A Regime

A third, related change narrows Section 12A, the withdrawal provision that lets an applicant exit a CIRP with 90% Committee of Creditors approval after settling with the debtor. By 30 June 2025, roughly 1,191 CIRPs, about 14% of all admitted cases, had been withdrawn under Section 12A, the majority initiated by operational creditors, and the mechanism had increasingly been used as a settlement-and-exit route that let promoters buy time through post-filing negotiation rather than face a full resolution process. The 2026 Amendment confines the withdrawal window: an application can now be withdrawn only after the Committee of Creditors has been constituted and before the first invitation for resolution plans is issued, still subject to 90% CoC approval. Combined with mandatory admission, the amendment removes both the pre-admission and late-stage exit routes that debtors had relied on, leaving a narrower, earlier window for a negotiated settlement to actually work.

What This Means for Creditors, Debtors, and Insolvency Professionals

For financial and operational creditors, the practical effect is straightforward: a properly documented information utility record of default now does most of the work at the admission stage, and the debtor’s financial-health or viability arguments that Vidarbha had opened the door to no longer have anywhere to land. For corporate debtors, the change is close to uniformly adverse: the main defensive tool at admission is gone, and the settlement window that Section 12A offered after filing is narrower than before. The realistic alternative for a debtor that wants a negotiated, board-retained outcome is to get there before a Section 7 or 9 application is filed at all, which is precisely the gap the Amendment Act’s Creditor-Initiated Insolvency Resolution Process under the new Chapter IV-A is designed to fill: a 51%-financial-creditor-triggered, debtor-in-possession track that keeps the existing board in place under Resolution Professional oversight rather than displacing it outright. For insolvency professionals and resolution applicants, the Rainbow Papers correction is the more durable change: it removes the risk that a government department revives a secured-creditor claim late in a process that had already priced government dues as subordinate, and it should reduce the frequency of last-minute claim disputes that had been delaying plan approvals.

Looking Ahead: What the Amendment Leaves Untested

Three questions are likely to surface as the amended provisions are tested in practice. The first is constitutional: debtors have already signalled they may challenge mandatory admission before the High Courts on natural justice grounds, arguing that removing all NCLT discretion at the threshold stage denies a genuine dispute any hearing before the moratorium and loss of management control take effect; creditors and their counsel should be prepared to meet that argument quickly rather than let it stall filings. The second is procedural: it remains to be seen how strictly NCLT benches will police the 14-day timeline and the narrowed Section 12A window in practice, given the Tribunals’ existing case-load pressures. The third is sequencing: with mandatory admission now the default and CIIRP the negotiated alternative, distressed companies and their lenders will need to decide far earlier than before which track they are heading down, since the option to negotiate informally after a Section 7 filing has landed is now considerably narrower than it used to be.

Frequently Asked Questions

What does “mandatory admission” mean under the IBC Amendment Act, 2026?
The Amendment Act changes Section 7(5)(a) of the IBC so the Adjudicating Authority “shall”, rather than “may”, admit a complete insolvency application once default has occurred, the application is complete, and no disciplinary proceeding is pending against the proposed resolution professional. No other factor, including the corporate debtor’s financial health or viability, can be weighed against admission.

How does the IBC Amendment Act, 2026 reverse the Vidarbha Industries judgment?
In Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352, the Supreme Court held that Section 7(5)(a) gave the NCLT discretion to decline admission even after default was proven. The 2026 Amendment removes that discretion by replacing “may” with “shall” in the same provision, restoring the twin-test approach the Supreme Court itself had applied before Vidarbha.

What did the Supreme Court hold in State Tax Officer v. Rainbow Papers Ltd., and how does the Amendment change it?
Rainbow Papers held that a statutory first charge under state tax law amounted to a “security interest” under the IBC, giving government tax dues secured-creditor priority in the Section 53 liquidation waterfall. The 2026 Amendment clarifies that charges created by operation of law do not qualify as security interests for this purpose, restoring the original priority under which government dues rank below secured, unsecured financial, and operational creditors.

How has Section 12A withdrawal changed under the 2026 Amendment?
Withdrawal of an admitted insolvency application is now permitted only after the Committee of Creditors has been constituted and before the first invitation for resolution plans is issued, still subject to approval by 90% of the CoC’s voting share, a narrower window than the earlier regime, introduced after roughly 14% of all admitted CIRPs were withdrawn under the previous rules.

What alternative does a corporate debtor have now that admission is mandatory?
The Amendment Act’s Chapter IV-A introduces the Creditor-Initiated Insolvency Resolution Process (CIIRP), a pre-insolvency, out-of-court track available when financial creditors holding at least 51% of the debt agree to it, under which the debtor’s existing board retains operational control under Resolution Professional oversight rather than being displaced as in a standard CIRP.

This analysis was prepared by the Candour Legal team. Candour Legal is a full-service Indian law firm with offices in Ahmedabad, Mumbai, and New Delhi, with practice depth in insolvency and bankruptcy, banking and financial regulation, and corporate restructuring. The firm publishes analytical commentary on developments in Indian law at candourlegal.com.

About the author

Manasvi Thapar, Advocate at Candour Legal, handles insolvency, banking, and corporate restructuring disputes.

Further reading on Candour Legal

• IBBI’s CIIRP Framework: An Out-of-Court Insolvency Track for India — the debtor-in-possession alternative discussed in this piece, in full procedural detail.
• IBC Amendment Act 2026 and Real Estate: Project-Wise CIRP, Section 53 Reform, and the Action Items for Developers, Lenders, and Homebuyers — a sector-specific deep dive on the same Amendment Act’s Section 53 and Section 28A changes.
• Lifting the Corporate Veil under the IBC: The Supreme Court’s Verdict in Alpha Corp Development v. GNIDA — on how Indian courts are treating group-company structures in IBC resolution.