Author: Ashwarya Sharma, Advocate, Co-Founder & Legal Head, RB LawCorp
Published on: 01/07/2026
Introduction: Can a Statutory Attachment Survive Insolvency?
One of the most contentious questions in insolvency jurisprudence has been whether a statutory authority, having failed to participate effectively in insolvency proceedings, can later assert a prior attachment or statutory charge against assets sold through the insolvency process.
The Division Bench of the Madras High Court has now answered this question in emphatic terms: it cannot.
The judgment assumes particular significance because it arrives alongside the Insolvency and Bankruptcy Code (Amendment) Act, 2026, which expressly clarifies that statutory charges created merely by operation of law do not constitute “security interests” under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Together, the judicial pronouncement and the legislative amendment effectively resolve the uncertainty created by the Supreme Court’s decision in State Tax Officer v. Rainbow Papers Ltd., restoring clarity to the treatment of statutory creditors under insolvency law.
Background of the Dispute
The dispute arose from a property that had been purchased by the petitioner through a public auction conducted by the Liquidator under the IBC.
Prior to the commencement of insolvency proceedings, the Tamil Nadu VAT authorities had issued an attachment order over the same property in 2016 under the provisions of the Tamil Nadu Value Added Tax Act, 2006 (“TNVAT Act”).
Following the completion of the auction sale, the purchaser sought removal of the attachment in order to obtain a clear and marketable title.
The learned Single Judge dismissed the writ petition, relying principally upon the Supreme Court’s decision in State Tax Officer v. Rainbow Papers Ltd., holding that statutory tax dues secured by a statutory first charge confer upon the tax authorities the status of a secured creditor under the IBC.
The auction purchaser challenged this finding before the Division Bench.
Arguments on Behalf of the Auction Purchaser
Before the Division Bench, the auction purchaser advanced three principal submissions.
First, it was argued that the Single Judge had incorrectly applied Rainbow Papers, without appreciating that subsequent Supreme Court decisions had substantially limited its applicability and confined it to its own factual context.
Second, reliance was placed upon the IBC (Amendment) Act, 2026, which inserts an Explanation to Section 3(31) clarifying that a security interest created solely by operation of law does not qualify as a “security interest” under the Code.
Since the amendment was introduced “for the removal of doubts”, it was submitted that the amendment is declaratory and therefore retrospective in operation.
Third, it was contended that once the statutory authority had failed to submit its claim within the prescribed period under the insolvency process, recovery outside the mechanism prescribed under Section 53 of the IBC was impermissible, particularly in view of the overriding effect of Section 238.
Arguments of the VAT Department
The State tax authorities defended the attachment primarily on two grounds.
First, reliance was placed upon Section 42 of the TNVAT Act, which creates a statutory charge over the assets of the defaulting dealer.
Second, it was argued that the Supreme Court’s decision in Rainbow Papers had already recognized that statutory first charges elevate tax authorities to the position of secured creditors under the IBC.
Accordingly, the department argued that the auction purchaser acquired the property subject to the pre-existing statutory attachment.
Failure to File Claims Under the IBC Proved Fatal
At the outset, the Division Bench noted that the VAT authorities had admittedly failed to file their claim before the Liquidator within the prescribed timeline.
Their belated claim had been rejected and their subsequent proceedings before the NCLT had also been dismissed for non-prosecution.
The Court relied upon the Supreme Court’s decision in RPS Infrastructure Ltd. v. Mukul Kumar, which had categorically held that belated claims cannot ordinarily be entertained under the insolvency framework.
The failure to participate in the insolvency process therefore effectively extinguished the department’s opportunity to recover its dues within the statutory mechanism established under the IBC.
Statutory Dues Stand Extinguished Under the IBC Framework
The Court then referred to the Supreme Court’s landmark judgment in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., wherein it was held that all claims, including statutory dues not forming part of the approved insolvency process, stand extinguished.
The Division Bench observed that the same principle necessarily applies in liquidation proceedings through the operation of Section 53 of the IBC.
The Court further emphasized that Section 238 contains a broad non-obstante clause, giving the IBC overriding effect over all inconsistent statutory provisions.
Consequently, statutory authorities cannot bypass the insolvency waterfall mechanism by relying upon independent recovery proceedings.
Why Rainbow Papers Did Not Apply
Perhaps the most important aspect of the judgment is the Court’s careful treatment of Rainbow Papers.
Rather than overruling or disregarding the decision, the Division Bench explained why the judgment must remain confined to its own facts.
First Distinction: Different Regulatory Framework
The Court noted that Rainbow Papers was decided under the unamended Regulation 12 of the CIRP Regulations.
Prior to the 2018 amendment, creditors were only required to submit proof of claim. After the amendment, creditors were required to submit a formal claim supported by proof.
Since the present case arose after the amendment, the obligation to file claims was unequivocal and the VAT department’s failure could not be excused.
Second Distinction: CIRP versus Liquidation
The Court further observed that Rainbow Papers arose during the Corporate Insolvency Resolution Process (CIRP), whereas the present dispute concerned liquidation proceedings.
The statutory priorities applicable during CIRP differ materially from the waterfall distribution mechanism under Section 53 applicable during liquidation.
Third Distinction: Failure to Consider Section 53
Most significantly, the Division Bench relied upon the Supreme Court’s observations in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd., where it was expressly noted that Rainbow Papers did not consider or even discuss Section 53 of the IBC.
Accordingly, Rainbow Papers could not be treated as a comprehensive authority governing all insolvency situations involving statutory dues.
Can Statutory Authorities Be Treated as Secured Creditors?
The Division Bench then addressed the fundamental question underlying the entire controversy.
Under Section 3(30) of the IBC, a secured creditor is one in whose favour a “security interest” exists.
The Court examined Section 3(31) and concluded that the concept of security interest under the IBC is fundamentally contractual in nature.
A security interest must arise through an agreement or arrangement between parties and cannot arise merely by operation of statute.
Accordingly, the statutory first charge created under Section 42 of the TNVAT Act did not elevate the VAT authorities to the status of secured creditors under the IBC.
The IBC (Amendment) Act, 2026 Resolves the Controversy
The Division Bench’s interpretation received decisive legislative support through the IBC (Amendment) Act, 2026.
The amendment inserts an Explanation to Section 3(31), clarifying that:
“Security interest shall exist only if it creates a right, title or interest pursuant to an agreement or arrangement by the act of two or more parties and shall not include a security interest created merely by operation of law.”
The Court observed that the amendment is clearly declaratory in nature.
It does not create a new legal principle but merely clarifies what Parliament always intended the law to mean.
Consequently, the amendment operates retrospectively and conclusively resolves any uncertainty created by Rainbow Papers.
Why This Judgment Matters
The decision carries significance on multiple levels.
It establishes that:
- Statutory authorities cannot revive extinguished claims through pre-insolvency attachment orders.
- Failure to participate in insolvency proceedings is fatal to subsequent recovery efforts.
- Rainbow Papers must be confined to its own factual context.
- Statutory first charges do not automatically create “security interests” under the IBC.
- The Section 53 waterfall mechanism remains the exclusive framework governing distribution during liquidation.
- The IBC (Amendment) Act, 2026 operates retrospectively and restores certainty to insolvency jurisprudence.
Conclusion
The Division Bench’s judgment represents an important jurisprudential correction in insolvency law.
At the practical level, it ensures that auction purchasers under the IBC receive what the insolvency framework promises: a clean and marketable title.
At the doctrinal level, it confines Rainbow Papers to its proper factual boundaries and restores coherence to the relationship between statutory charges and insolvency priorities.
Most importantly, the judgment—read together with the IBC (Amendment) Act, 2026—reaffirms a foundational principle of insolvency law:
Statutory creditors may be secured under their own enactments, but unless their rights satisfy the definition of “security interest” under the IBC itself, they remain unsecured within the insolvency framework.
The rainbow of uncertainty created by Rainbow Papers has now, at least legislatively and judicially, finally disappeared.
📎 Attached PDF for detailed reading 👉
📎 Full Published Version: https://www.taxmann.com/research/ibc/top-story/105010000000028589/secured-under-tax-law-unsecured-under-ibc-redefining-secured-interest-and-the-consequences-for-statutory-creditors-opinion
(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)
