Madras High Court
M/S.Avenue Realty (A Partnership Firm) vs The Assistant Commissioner on 17 April, 2026
Author: N.Sathish Kumar
Bench: N.Sathish Kumar
W.A.(MD)No.2662 of 2025
BEFORE THE MADURAI BENCH OF MADRAS HIGH COURT
RESERVED ON: 09.04.2026
DELIVERED ON : 17.04.2026
CORAM:
THE HONOURABLE MR.JUSTICE N.SATHISH KUMAR
AND
THE HONOURABLE MR.JUSTICE M.JOTHIRAMAN
W.A.(MD)No.2662 of 2025
and
C.M.P.(MD)No.15106 of 2025
M/s.Avenue Realty (A Partnership Firm)
Rep. By its Managing Partner Mr.T.M.Elayaraja,
Reg. Office No.39/19 Second Floor, 1st Cross Street,
West CIT Nagar, Nandanam, Chennai – 600 035. ... Appellant
Vs.
1.The Assistant Commissioner,
Srirangam (GST Circle),
Moolathoppu Melur Road,
Srirangam, Tiruchirapalli – 620 006.
2.Sub-Registrar, Keezhasathanur,
Palani Nagar, K.K.Nagar,
Tiruchirappalli,
Tamil Nadu – 620 021.
3.RLS Alloys Private Limited (Under Liquidation)
Rep. By its Liquidator, Mr.S.R.Shiraam Shekher,
CIN:U27108TN2006PTC058862
Rep. By its Managing Director/Authorized
Representative,
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W.A.(MD)No.2662 of 2025
S.F.No.:118/1,2,3, Sethurapatti Road,
Fathima Nagar, Tiruchirappalli,
Tamil Nadu, India – 620 012. ... Respondents
PRAYER:- Writ Appeal filed under Clause 15 of Letters Patent Act, to
set aside the order dated 14.08.2025 passed in W.P.(MD)No.8260 of
2025.
For Appellant : Mr.T.Mohan, Senior Counsel,
for Mr.V.G.Suresh Kumar
For Respondents : Mr.R.Suresh Kumar,
Addl. Govt. Pleader for R1
Mr.F.Deepak,
Spl. Govt. Pleader for R2
Mr.Ramasamy Meyyappan for R3
JUDGMENT
(Judgment of the Court was delivered by N.SATHISH KUMAR, J.)
Aggrieved over the order of the learned Single Judge,
dismissing the Writ Petition, by holding that the petitioner is to recover
the amount from the person to whom amounts were paid by the liquidator
through the liquidation process, the present Writ Appeal has been filed.
2. The Writ Petition has been originally filed by the appellant
to quash the attachment over the properties purchased under public
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auction conducted under the provisions of the ‘Insolvency Bankruptcy
Code, 2016’ (hereinafter referred to as ‘the IBC’).
3. The following of the brief facts, which are necessary for the
disposal of the Writ Appeal, are as follows:
3.1. The subject property originally held by the third
respondent viz., RLS Alloys Private Limited. On the basis of the
application filed by one M/s.Foseco India Limited, an operational
creditor, the third respondent company was ordered to be liquidated by
the ‘National Company Law Tribunal’ (hereinafter referred to as ‘NCLT’),
vide order dated 14.06.2019. As there was no successful resolution
application, the NCLT ordered the company into liquidation. In a public
auction conducted by the liquidator, the Writ Petitioner become
successful bidder and has purchased the property on 24.10.2024. It is
relevant to note that for tax arrears under the Tamil Nadu Value Added
Tax, the order of attachment was passed by the first respondent as early
as on 03.02.2016. The same has been reflected in the Encumbrance
Certificate. The Writ Petitioner being successful auction purchaser under
the IBC proceedings, sought for quashing of the attachment order.
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4. The learned Single Judge, after considering the facts of the
case, while dismissing the Writ Petition, has held that tax due is also
secured and the first respondent also comes under the purview of the
secured creditor and hence, secured interest is created. Therefore, the
liquidator could not have ignored the rights of the 1st respondent, as the
1st respondent is a secured creditor within the meaning of Section 3(30)
of the IBC. Challenging the said order, the present Writ Appeal has been
filed.
5. The learned Senior Counsel appearing for the appellant
would submit that the learned Single Judge has simply followed the
judgments of the Hon’ble Supreme Court in State Tax Officer Vs.
Rainbow Papers Ltd., reported in (2023) 9 SCC 545 and came to the
conclusion, whereas other judgments of the Hon’ble Supreme Court have
taken a different view and have clearly held that Rainbow Papers‘s case
will apply on the facts of a particular case.
5.1. Further, it is also submitted by the learned Senior Counsel
appearing for the Appellant that now the amendment has been brought
for removing the doubts. Section 2 of the Amendment Act, amending
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W.A.(MD)No.2662 of 2025
Section 3(31) of the IBC, clarifies the nature of security interest. That
amendment also received the assent of the President on 06.04.2026.
Therefore, once the clarificatory amendment was brought, it has to be
held that it applies only retrospectively and therefore, the interpretation
of the learned Single Judge that the first respondent has also come within
the purview of the secured creditor was not correct.
5.2. It is further submitted that once the claim application has
not been filed in the liquidation process and a sale has been held under
the IBC under Section 3(30) of the IBC, the assets of the corporate
debtor have to be dealt with only under Section 53 of the IBC, which is
commonly known as “waterfall mechanism”. Therefore, the learned
Single Judge has not considered this aspect.
6. The learned Additional Government Pleader appearing for
the first respondent, the learned Special Government Pleader appearing
for the second respondent and the learned counsel appearing for the third
respondent would submit that admittedly, there was an attachment order
passed by the first respondent as early as on 03.02.2016. Section 42 of
the Tamil Nadu Value Added Tax Act, 2006, makes it clear that arrears of
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tax could operate as a charge on the properties of the person liable to pay
such tax, penalty or interest. This aspect has already been decided in the
Rainbow Papers‘s case.
6.1. Hence, it is their submission that as long as there is a
statutory right created, the attachment cannot be raised. Therefore, their
submission is that the learned Single Judge is right. They also placed
reliance on the judgment of the Division Bench of this Court in W.P.No.
26362 of 2024, dated 01.09.2025, to buttress their submissions. Further,
it is their contention that there is no provision to remove the attachment
in the Registration Act. In support of their contention, they relied on a
judgment of the Hon’ble Supreme Court in Tamil Nadu Mercantile Bank
Ltd., Vs. Sub Registrar and another reported in 2024 SCC OnLine Mad
5692.
7. We have heard the submissions made on either side and
perused the materials available on record.
8. The admitted fact is that the first respondent has sent a letter
dated 10.08.2020, bearing reference Rc.No.169/2020/A5, to the
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Resolution Professional, indicating that the amount payable to the first
respondent may be taken into consideration and requested the liquidator
to settle the sales tax dues to the Government, when the sale proceeds on
the property is made. It is also an admitted case that the first respondent
made a claim with the Official Liquidator and the same has been rejected
by the Official Liquidator as a time-barred claim and in fact, the
liquidator requested the first respondent to move the NCLT to get
approval to add the first respondent’s claim list. This communication has
been sent by the Official Liquidator on 24.08.2020.
8.1. In the meanwhile, the Liquidator has also filed an
application before the NCLT for removal of attachment in the property.
The said application in I.A.No.932/2020 was also dismissed by the
NCLT by order dated 15.07.2022. An application filed by the first
respondent, after being rejected by the Official Liquidator, was also
dismissed for non-prosecution by the NCLT in Ia/372(CHE)/2022 in
MA559/2019, vide order dated 08.01.2024. Now it is stated during the
submission that an application has been filed to restore the same. Be that
as it may, the claim of the first respondent is not admitted and according
to the petitioner, the same is still pending, but the documents indicate that
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appeal filed by the first respondent is dismissed for non-prosecution as
early as on 08.01.2024.
9. In this background, now the issue arise in this Writ Appeal is
whether an auction purchaser, who has purchased an asset in liquidation
proceedings under the IBC, can seek removal of attachment made by the
authority under the TNVAT Act, 2006, vide order dated 03.02.2016, for
arrears payable by the corporate debtor for the assessment years 2007-08
to 2014-15.
10. It is admitted case that the claim has not been filed in time
by the first respondent before the Liquidator. The claim application filed
before the liquidator has been rejected and the application filed before
the NCLT was also dismissed for non-prosecution. Though it is stated
that the appellant has filed an application for restoration, the fact remains
that the claim has not been admitted. In this background, we have to see
whether the charge created under Section 42 of the TNVAT Act, 2006 has
come within the ambit of Section 3(30) of the IBC.
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11. Section 42 of the TNVAT Act, 2006 provides that tax which
has become due under Section 21 shall become payable without notice of
demand, and arrears of such tax would operate as a charge on the
properties of the person liable to pay such tax, penalty or interest.
12. Section 3(30) of the IBC defines “secured creditor” as
follows:
“secured creditor” means a creditor in favour of
whom security interest is created”
13. Section 3(31) defines “security interest” as follows:
“security interest” means right, title or interest or a
claim to property, created in favour of, or provided for a
secured creditor by a transaction which secures payment or
performance of an obligation and includes mortgage, charge,
hypothecation, assignment and encumbrance or any other
agreement or arrangement securing payment or performance
of any obligation of any person:
Provided that security interest shall not include a
performance guarantee.”9/36
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14. The question as to whether a statutory dues of Central and
State Governments would stand extinguished upon the approval of the
resolution plan under Section 31 of the IBC, came up for consideration
before the Supreme Court in Ghanashyam Mishra & Sons (P) Ltd. v.
Edelweiss Asset Reconstruction Co. Ltd., reported in (2021) 9 SCC 657,
wherein it was held as follows:
“All the dues including the statutory dues owed to the
Central Government, any State Government or any local
authority, if not part of the resolution plan, shall stand
extinguished and no proceedings in respect of such dues for the
period prior to the date on which the adjudicating authority
grants its approval under Section 31 could be continued.”
15. In the context of dues payable by the corporate debtor to
the Income Tax Department, in the aforementioned judgment, it was held
as follows:
“146. It is further to be noted that the Income
Tax Authorities had approached this Court with respect to
income tax dues concerning the present petitioner by way of
Special Leave Petition (Civil) No. 6483 of 2018. This Court
passed the following order in the said special leave petition
on 10-8-2018:
“1. Heard. Delay, if any, is condoned.
2. Given Section 238 of the Insolvency and
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W.A.(MD)No.2662 of 2025Bankruptcy Code, 2016, it is obvious that the Code
will override anything inconsistent contained in any
other enactment, including the Income Tax Act.
3. We may also refer in this connection to
Dena Bank v. BhikhabhaiPrabhudas Parekh & Co.
reported in (2000) 5 SCC 694 and its progeny,
making it clear that income tax dues, being in the
nature of Crown debts, do not take precedence even
over secured creditors, who are private persons.
4. We are of the view that the High Court
[CIT v. Monnet Ispat& Energy Ltd., 2017 SCC
OnLine Del 12759] of Delhi, is, therefore, correct in
law.
5. Accordingly, the special leave petitions
are dismissed. Pending applications, if any, stand
disposed of.”
16. The decision in Ghanashyam Mishra & Sons (P) Ltd. v.
Edelweiss Asset Reconstruction Co. Ltd., reported in (2021) 9 SCC 657,
concerned a stage where a resolution plan had been approved under
Section 31 of the IBC. The present case, however, pertains to a situation
where there is no successful resolution applicant, and the NCLT has
consequently ordered the company into liquidation under Section 33 of
the IBC. Once an order of liquidation is passed and a statutory liquidator
is appointed, the assets of the corporate debtor are required to be dealt
with in accordance with Section 53 of the IBC, which is commonly
known as the “waterfall mechanism”. The dues are to be paid in the order
of priority set out in Section 53 of the IBC. It is pertinent to note that
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Section 238 of the IBC contains a non-obstante clause giving primacy to
the mechanism for distribution of the assets of the corporate debtor in
the manner prescribed under the IBC.
17. The learned Single Judge, in the impugned judgment, has
held that the authorities under the TNVAT Act are secured creditors and
that the VAT dues could, therefore, be recovered as if they were dues
payable to a secured creditor.
18. In STO v. Rainbow Papers Ltd., reported in (2023) 9 SCC
545, the question before the Hon’ble Supreme Court was whether the
provisions of Section 53 of the IBC would override the provisions of
Section 48 of the Gujarat VAT Act. Section 48 of the said Act reads as
follows:
“48. Tax to be first charge on property.—
Notwithstanding anything to the contrary contained in any
law for the time being in force, any amount payable by a
dealer or any other person on account of tax, interest or
penalty for which he is liable to pay to the Government shall
be a first charge on the property of such dealer, or as the case
may be, such person.”12/36
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19. The Department had challenged the resolution plan
approved by the Resolution Professional, whereby the statutory dues
payable under the GVAT Act were waived, before the Ahmedabad Bench
of the NCLT, contending that the Sales Tax Officer is a secured creditor
under the IBC. The NCLT rejected the application, and the said order was
affirmed by the NCLAT. The matter was thereafter carried to the Hon’ble
Supreme Court. It is to be noted that the case arose under the unamended
provisions of Regulation 12 of the Insolvency and Bankruptcy Board of
India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016. Regulation 12 was subsequently amended in 2018,
which has been discussed in paragraph 22 of the decision in Rainbow
Papers Ltd. (cited supra), as under:
“22. Prior to amendment by Notification
No.IBBI/2018-19/GN/REG013dated 3rd July 2018, with effect
from 4th July, 2018, Sub-Regulation (1) ofRegulation 12 read
with Sub-Regulation (2) provided that a creditor shall submit
proof of claim on or before the last date mentioned in the
public announcement. Sub-Regulation (2) was amended with
effect from 4thJuly, 2018 and now reads “a creditor shall
submit claim with proof on or before the last date mentioned in
the public announcement.”
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W.A.(MD)No.2662 of 2025
20. It is pertinent to note that, prior to the amendment, it was
sufficient to submit “proof of claim”, whereas, subsequent to the
amendment, a creditor is required to submit a “claim with proof”. In
Rainbow Papers‘s case (cited supra), the proceedings had taken place
prior to the amendment to Regulation 12. In the aforesaid factual context,
it was held as follows
“In this case, claims were invited well before
5-10-2017 which was the last date for submission of claims.
Under the unamended provisions of Regulation 12(1), the
appellant was not required to file any claim. Read with
Regulation 10, the appellant would only be required to
substantiate the claim by production of such materials as might
be called for. The time stipulations are not mandatory as is
obvious from sub-regulation (2) of Regulation 14 which
enables the interim resolution professional or the resolution
professional, as the case may be, to revise the amounts of
claims admitted, including the estimates of claims made under
sub-regulation (1) of the said Regulation as soon as might be
practicable, when he came across additional information
warranting such revision.”
21. Thus, the Hon’ble Supreme Court found fault with the
rejection of the claim of the STO, since the unamended Regulation did
not required the STO to file a claim, but only required to substantiate the
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W.A.(MD)No.2662 of 2025
claim with such material as may be called for. However, the present case
arises after the amendment to Regulation 12, under which there can be no
manner of doubt that “a creditor shall submit a claim with proof on or
before the last date mentioned in the public announcement”. In the case
on hand, the Department had, in fact, preferred its claim belatedly, which
came to be rejected by the NCLT. In the context of submission of claims,
the Hon’ble Supreme Court in RPS Infrastructure Ltd. v. Mukul Kumar,
reported in (2023) 10 SCC 718, has held that belated claims cannot be
entertained under the scheme of the IBC.
22. As a matter of fact, STO v. Rainbow Papers Ltd., reported
in (2023) 9 SCC 545, arose at the stage of the Corporate Insolvency
Resolution Process (CIRP) and not at the stage of liquidation, as in the
present case. In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman
Ispat (P) Ltd., reported in (2023) 10 SCC 60, PVVL had attached the
properties of the secured creditor for non-payment of electricity dues
amounting to Rs. 4,32,33,883/-. Subsequently, the company was ordered
to be liquidated under the provisions of the IBC. The liquidator moved
the NCLT seeking to set aside the attachment on the ground that, unless
the same was lifted, it would not be possible to secure buyers for the
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W.A.(MD)No.2662 of 2025
property. Considering the scheme of the IBC, the NCLT allowed the
application, and the said order was affirmed by the NCLAT. Before the
Hon’ble Supreme Court, reliance was placed on the decision in STO v.
Rainbow Papers Ltd. (cited supra). However, it was held as follows:
“53. Rainbow Papers‘s case did not notice the
“waterfall mechanism” under Section 53—the provision had not
been adverted to or extracted in the judgment. Furthermore,
Rainbow Papers‘s case was in the context of a resolution
process and not during liquidation. Section 53, as held earlier,
enacts the waterfall mechanism providing for the hierarchy or
priority of claims of various classes of creditors.”
23. More importantly, in the context of tax dues, as arose in
Rainbow Papers‘s case (cited supra), it was held as follows:
“The Gujarat Value Added Tax Act, 2003 no doubt
creates a charge in respect of amounts due and payable or
arrears. It would be possible to hold [in the absence of a
specific enumeration of government dues as in the present case,
in Section 53(1)(e)] that the State is to be treated as a “secured
creditor”. However, the separate and distinct treatment of
amounts payable to secured creditor on the one hand, and dues
payable to the government on the other clearly signifies
Parliament’s intention to treat the latter differently — and in16/36
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W.A.(MD)No.2662 of 2025the present case, having lower priority. As noticed earlier, this
intention is also evident from a reading of the Preamble to the
Act itself.”
24. In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman
Ispat (P) Ltd., reported in (2023) 10 SCC 60 , it was, thereafter, held as
follows:
“In view of the above discussion, it is held that the
reliance on Rainbow Papers [STO v. Rainbow Papers Ltd.,
(2023) 9 SCC 545] is of no avail to the appellant. In this
Court’s view, that judgment has to be confined to the facts of
that case alone.”
25. After the said decision, a review application was filed
against the judgment in Rainbow Papers‘s case, which came to be
decided in Sanjay Kumar Agarwal v. State Tax Officer, reported in
(2024) 2 SCC 362, wherein the decision in Rainbow Papers‘s case was
affirmed on merits. However, subsequent to the aforesaid decision, the
ratio laid down in the said case was once again distinguished in JSW
Steel Ltd. v. Pratishtha Thakur Haritwal, reported in (2025) 9 SCC 673,
wherein it was held as follows:
“44. In Rainbow Papers‘s case the State Tax
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W.A.(MD)No.2662 of 2025Officer had raised the claim before the CoC, which was not
taken into consideration by the CoC. As such, this Court
came to a finding that the satisfaction arrived at by the
adjudicating authority under Section 31 of the Code was
vitiated.
45. Undoubtedly, in the present case, in spite of
public notice, neither the State of Chhattisgarh nor its
authorities raised any claim before the CoC. In that view of
the matter, we are of the considered view that the case of the
present petitioner is specifically covered by the judgment of
this Court in Ghanashyam Mishra, which judgment was
brought to the notice of the respondents/authorities, the
respondents/authorities could not have proceeded with the
recovery proceedings.”
26. It is to be noted that in Rainbow Papers‘s case, the VAT
authorities had specifically challenged the rejection of their claims by the
Resolution Professional, which was subsequently affirmed by the
NCLAT, and it was the correctness of the said orders that was under
challenge before the Hon’ble Supreme Court. Whereas, in the present
case, the claims have been rejected by the NCLT. Thus, owing to their
own default, the doors stand closed on the VAT authorities, and the
orders rejecting their claims cannot be collaterally revived in the present
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W.A.(MD)No.2662 of 2025proceedings, as has been done by the learned Single Judge. In view of
the overriding effect of Section 238 of the Insolvency and Bankruptcy
Code, the order of attachment must necessarily be set aside.
27. In the impugned judgment, the learned single judge has
framed the following question for consideration in paragraph 47:
“Thus the point for consideration is whether, as a
“secured creditor” within the meaning of Section 3(30) of the
IBC, 2016, the Commercial Taxes Department, represented by
1st Respondent, was required to file a claim petition within the
time stipulated in the order passed on 03.12.2018 under
Section 13 of the Code, and within the period stipulated in the
public announcement regarding the last date for submission of
claims under Section 15(1)(c) of the Code or whether the 1 st
Respondent was required to file a claim petition at all?
28. The said question has been answered in the judgment as
follows:
“112. As far as the question of delay in the filing of
claim, the Court in RPS Infrastructure Ltd. Vs. Mukul Kumar
and others, (2023) 10 SCC 718, the Hon’ble Supreme Court
held that NCLAT’s impugned judgment [Mukul Kumar v. RPS
Infrastructure Ltd., 2021 SCC OnLine NCLAT 648] cannot be
faulted to reopen the chapter at the behest of the appellant. It19/36
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W.A.(MD)No.2662 of 2025further observed that the Court is not inclined to unleash the
hydra-headed monster of undecided claims on the resolution
applicant.”
……….
Therefore, it has to be held that the view of the
Hon’ble Supreme Court in Rainbow Papers case (cited supra)
has been affirmed by the Hon’ble Supreme Court in Sanjay
Kumar Agarwal vs. State Tax Officer (1) and another (cited
supra) and lays the correct position of law to be followed.
CONCLUSION:
117. I am of the view that even if the 1st Respondent
had failed to file a claim statement within the time stipulated
in the passed under Section 13 of the Code on 03.12.2018
when Mr.Ramasamy Shanmugam was appointed as an
Insolvency Resolution Professional (IRP), the claims of the 1st
Respondent as a secured creditor cannot be defeated……”
29. The learned Single Judge has overlooked the fact that the
decision in Rainbow Papers Ltd. arose under the unamended Regulation
12, which did not require a statutory authority to file a separate claim,
which is not the position after the amendment to Regulation 12. As a
matter of fact, in the entire judgment, there is no reference to Regulation
12 at all. At the risk of repetition, the relevant paragraphs in Rainbow
Papers‘s case Ltd. are once again extracted hereunder:
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W.A.(MD)No.2662 of 2025“22. Prior to amendment by Notification
No.IBBI/2018-19/GN/REG013 dated 3rd July 2018, with
effect from 4th July, 2018, Sub-Regulation (1) of
Regulation 12 read with Sub-Regulation (2) provided
that a creditor shall submit proof of claim on or before
the last date mentioned in the public announcement.
Sub-Regulation (2) was amended with effect from 4th
July, 2018 and now reads “a creditor shall submit
claim with proof on or before the last date mentioned in
the public announcement.
…….
In this case, claims were invited well before
5-10-2017 which was the last date for submission of
claims. Under the unamended provisions of Regulation
12(1), the appellant was not required to file any claim.
Read with Regulation 10, the appellant would only be
required to substantiate the claim by production of such
materials as might be called for. The time stipulations
are not mandatory as is obvious from sub-regulation (2)
of Regulation 14 which enables the interim resolution
professional or the resolution professional, as the case
may be, to revise the amounts of claims admitted,
including the estimates of claims made under sub-
regulation (1) of the said Regulation as soon as might
be practicable, when he came across additional
information warranting such revision.”21/36
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30. The learned Single Judge has overlooked the fact that,
under the unamended Regulation 12, a creditor was required to
separately file a claim and was only required to submit proof in support
of such claim. On that basis, it was held that there was no requirement to
file a claim in a particular manner. However, after the amendment to
Regulation 12, a creditor is now required to submit a claim with proof.
The learned Single Judge, unfortunately, did not notice either the
Regulation or its amendment, whereby sub-regulation (2) of Regulation
12 was amended from “submit proof of claim” to “shall submit claim
with proof”.
31. As was held in Paschimanchal Vidyut Vitran Nigam Ltd.
v. Raman Ispat (P) Ltd., reported in (2023) 10 SCC 60, the decision in
Rainbow Papers‘s case is required to be confined to the facts of that case
alone. The learned Single Judge was, therefore, not right in holding that
the claims of the VAT authorities cannot be ignored even if no claims
have been made by them before the liquidator, by erroneously placing
reliance on Rainbow Papers‘s case which has no application to the facts
of the present case.
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VAT AUTHORITES AS SECURED CREDITORS
32. Under Section 42 of the TNVAT Act, 2006, a charge is
created over the properties of the assessee by operation of law in respect
of unpaid/outstanding tax dues. It is a settled position of law that neither
a charge nor the resultant order of attachment confers any title over the
property of the assessee. In Moti Lal v. Karrabuldin (1897) I.L.R. 25
Cal. 179, the Privy Council observed that “Attachment, however, only
prevents alienation; it does not confer title.” A charge is only a security
for the payment of money due (see Dattatreya Shanker Mote v. Anand
Chintaman Datar, reported in (1974) 2 SCC 799). In the context of
Section 48 of the Gujarat Value Added Tax Act, in Shree Radhekrushna
Ginning and Pressing Pvt. Ltd. v. State of Gujarat [SCA No. 5413 of
2022], decided on 29.03.2022, it was held as follows:
“16. The concept of charge emanates from Section
100 of the Transfer of Property Act, 1882. Section 100 of the
Transfer of Property Act, 1882 defines “charge” as follows:
“100. Charges.- Where immoveable
property of one person is by act of parties or
operation of law made security for the payment of
money to another, and the transaction does not23/36
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W.A.(MD)No.2662 of 2025amount to a mortgage, the latter person is said to have
a charge on the property; and all the provisions
hereinbefore contained which apply to a simple
mortgage shall, so far as may be, apply to such
charge. Nothing in this section applies to the charge
of a trustee on the trust- property for expenses
properly incurred in the execution of his trust, and,
save as otherwise expressly provided by any law for
the time being in force, no charge shall be enforced
against any property in the hands of a person to whom
such property has been transferred for consideration
and without notice of the charge.”
17. The above-mentioned Section clearly indicates
the following types of charges :
1) Charges created by act of parties; and
2) Charges arising by operation of law.
18. The words “by operation of law” are more
extensive than the words “by law” and a charge created by
operation of law includes a charge directly created by the
provisions of an Act (like Section 48 of the GVAT Act) as well
as other charges created indirectly as a legal consequence of
certain conditions. The expression “operation of law”only
means working of the law.”
33. Thus, a first charge under Section 48 of the GVAT Act like
a charge under Section 42 of the TNVAT Act, is created by operation of
law.
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W.A.(MD)No.2662 of 2025
34. It is now to be considered whether the creation of a charge
in favour of the Department by operation of law would elevate it to the
status of a secured creditor. Section 3(30) of the Insolvency and
Bankruptcy Code defines a “secured creditor” to mean a creditor in
whose favour a security interest is created. Thus, it is first required to be
examined whether any security interest has been created in favour of the
VAT authority.
35. Section 3(31) of the IBC defines “security interest” as
follows:
“security interest” means right, title or interest or a
claim to property, created in favour of, or provided for a
secured creditor by a transaction which secures payment or
performance of an obligation and includes mortgage, charge,
hypothecation, assignment and encumbrance or any other
agreement or arrangement securing payment or performance
of any obligation of any person:
Provided that security interest shall not include a
performance guarantee.”
36. On a plain reading, it is clear that the aforesaid definition
does not cover cases where a charge is created by operation of law and is
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W.A.(MD)No.2662 of 2025
restricted to cases where a security interest is created by act of parties.
However, in Rainbow Papers‘s case, it was held as follows:
“As argued by the learned Solicitor General, the
term “secured creditor” as defined under IBC is
comprehensive and wide enough to cover all types of security
interests, namely, the right, title, interest or a claim to
property, created in favour of, or provided for a secured
creditor by a transaction, which secures payment or
performance of an obligation and includes mortgage, charge,
hypothecation, assignment and encumbrance or any other
agreement or arrangement securing payment or performance
of any obligation of any person.”
37. This interpretation has given rise to certain issues. The
Insolvency and Bankruptcy Code (Amendment) Bill, 2025 clarifies that
security interests, including statutory charges in respect of government
dues, shall be treated as “secured” only where such interest is created by
way of contract. This marks a departure from the position laid down by
the Hon’ble Supreme Court in State Tax Officer v. Rainbow Papers Ltd.
(2022 SCC OnLine SC 1162), wherein statutory dues were accorded the
status of secured debts. The said Amendment Bill was introduced in the
Lok Sabha on 12.08.2025, has since received the assent of the President
on 06.04.2026, and has been published in the Official Gazette.
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W.A.(MD)No.2662 of 2025
38. Section 2 of the Amendment Act amends Section 3(31) of
the Insolvency and Bankruptcy Code, thereby clarifying the nature of
“security interest”, which reads as follows:
“Explanation. For the removal of doubts, it is
hereby clarified that the security interest shall exist only if
it creates a right, title or interest or a claim to a property
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 any law for the time being in
force.”
39. The Statement of Objects and Reasons for the aforesaid
amendment is as follows:
“Clause 2 of the Bill seeks to amend section 3 of
the Insolvency and Bankruptcy Code, 2016 (‘Code’). It seeks
to insert an explanation in clause (31) of section 3 of the
Code to clarify that security interest shall exist only when it
creates a right, title or interest or a claim to a property
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 any law for the time being in force.
Hence, a provision in central or state legislation or a
subordinate law that states that a charge will be made on the
property of the corporate debtor for non-payment of tax or a27/36
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W.A.(MD)No.2662 of 2025penalty shall not be considered a security interest. A security
interest shall only exist where the parties to an agreement or
arrangement agree to create a right, title or interest or a
claim to a property, whether or not it is in writing. For
instance, a charge created over the property of the corporate
debtor to secure the financial debt under an agreement, or an
arrangement where a mortgage is created by deposit of title
deeds of its property between two or more persons.”
40. Thus, the amendment explicitly seeks to undo the
consequences of the decision in Rainbow Papers. Being a clarificatory
amendment, there is no doubt that it will have retrospective application.
41. In this regard, the judgment of the Hon’ble Supreme Court
in R. Rajagopal Reddy vs Padmini Chandrasekharan reported in AIR
1996 SC 238, is extracted below:
“17. As regards, reason No. 3, we are of the
considered view that the Act cannot be treated to be
declaratory in nature. Declaratory enactment declares and
clarifies the real intention of the legislature in connection with
an earlier existing transaction or enactment, it does not create
new rights or obligations. On the express language of Section
3, the Act cannot be said to be declaratory but in substance it28/36
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W.A.(MD)No.2662 of 2025is prohibitory in nature and seeks to destroy the rights of the
real owner qua properties held benami and in this connection
it has taken away the right of the real owner both for filing a
suit or for taking such a defence in a suit by benamidar. Such
an Act which prohibits benami transactions and destroys
rights flowing from such transactions as existing earlier is
really not a declaratory enactment. With respect, we disagree
with the line of reasoning which commanded to the Division
Bench. In this connection, we may refer to the following
observations in ‘Principles of Statutory Interpretation’, 5th
Edition 1992, by Shri G.P. Singh, at page 315 under the
caption ‘Declaratory statutes’ :-
The presumption against retrospective operation is
not applicable to declaratory statutes. As states in CRAIES
and approved by the Supreme Court : “For modern purposes
a declaratory Act may be defined as an Act to remove doubts
existing as to the common law, or the meaning or effect of any
statute. Such Acts are usually held to be retrospective. The
usual reason for passing a declaratory Act is to set aside what
Parliament deems to have been a judicial error whether in the
statement of the common law or in the interpretation of
statutes. Usually, if not invariably, such an Act contains a
preamble, and also the word ‘declared’ as well as the word
‘enacted’. But the use of the words ‘it is declared’ is not
conclusive that the Act is declaratory for these words may, at
times be used to introduce new rules of law and the Act in the
latter case will only be amending the law and will not29/36
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W.A.(MD)No.2662 of 2025necessarily be retrospective. In determining, therefore, the
nature of the Act, regard must be had to the substance rather
than to the form. If a new Act is to explain an earlier Act, it
would be without object unless construed retrospective. An
explanatory Act is generally passed to supply an obvious
omission or to clear up doubts as to the meaning of the
previous Act. It is well settled that if a statute is curative or
merely declaratory of the previous law retrospective operation
is generally intended. The language ‘shall be deemed always
to have meant’ is declaratory, and is in plain terms
retrospective. In the absence of clear words indicating that the
amending Act is declaratory, it would not be so construed
when the pre-amended provision was clear and unambiguous.
An amending Act may be purely clarificatory to clear a
meaning of a provision of the principal Act which was already
implicit. A clarificatory amendment of this nature will have
retrospective effect and, therefore, if the principal Act was
existing law when the constitution came into force the
amending Act also will be part of the existing law.
In Mithilesh Kumari v. Prem Bihari Khare, Section
4 of the Benami Transactions (Prohibition) Act, 1988 was, it is
submitted, wrongly held to be an Act declaratory in nature for
it was not passed to clear any doubt existing as to the common
law or the meaning or effect of any statute. The conclusion
however, that Section 4 applied also to past benami
transactions may be supportable on the language used in the
section.”30/36
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W.A.(MD)No.2662 of 2025
42. The Bill was later referred to a Standing Committee, which
examined the aforesaid amendment and made the following observations:
“Section 3 (30) of the Code defines a ‘secured
creditor’ as a creditor in favour of whom security interest is
created. In State Tax Officer v. Rainbow Papers Limited
(Civil Appeal No. 1661 of 2020), the Supreme Court
interpreted the definition of ‘secured creditor’ to hold that
any government or governmental authority shall be a
secured creditor as the charge created by a statutory law can
be considered as a ‘security interest’. The definition of
‘security interest’ under the Code means that a right, title or
interest or a claim to property, created in favour of, or
provided for a secured creditor by a transaction, which
secures payment of performance of an obligation. It is
intended to be restricted to ‘transactions’, which means that
the security interest should be created pursuant to an
agreement on the part of the asset holder while giving rights
to the other party. Further, ‘transaction’, as defined under
section 3 (33), includes an agreement or arrangement in
writing to transfer assets, funds, goods, or services from or
to the CD. Thus, it is clear that the concept of security
interest was intended to cover a consensual transaction
between parties (and not any similar interest created through
mere operation of a statute) Clause 2 of the Bill seeks to
insert an explanation in clause (31) of section 3 of the Code
to clarify that security interest shall exist only when it31/36
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W.A.(MD)No.2662 of 2025creates a right, title or interest or a claim to a property
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 any law for the time being in
force. Hence, a provision in central or state legislation or a
subordinate law that states that a charge will be made on the
property of the corporate debtor for nonpayment of tax or a
penalty shall not be considered a security interest. A
security interest shall only exist where the parties to an
agreement or arrangement agree to create a right, title or
interest or a claim to a property, whether or not it is in 14
writing. For instance, a charge created over the property of
the corporate debtor to secure the financial debt under an
agreement, or an arrangement where a mortgage is created
by deposit of title deeds of its property between two or more
persons.”
43. Later, the aforesaid amendment has also received the
assent of the President on 06.04.2026 and published in the official
gazette. The above clarificatory amendment also supports the
interpretation given in in Paschimanchal Vidyut Vitran Nigam Ltd. v.
Raman Ispat (P) Ltd., reported in (2023) 10 SCC that tax dues cannot be
equated as being akin to the dues payable to a secured creditor.
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W.A.(MD)No.2662 of 2025
44. In view of the above, we are of the view that when the
claim application has not been decided, the property has been brought to
public auction, and even the first respondent has also given no-objection
for the sale of the property, the validity of the sale cannot be questioned.
Since the claim has not been decided and was not placed before the
liquidator within the prescribed time, merely on the basis of the
attachment reflected in the Encumbrance Certificate, now it cannot be
said that the claim stands automatically revived. Therefore, the order of
attachment has to necessarily be set aside.
45. A Division Bench of this Court (Central Board of Trustees
Vs. The Deputy Registrar, National Company Law Tribunal and Otrs,
in W.P.No.26326 of 2024, dated 01.09.2025) has also taken a view that a
Government entity is a secured creditor within the meaning of Section
3(30) of the IBC. The said finding was also recorded by placing reliance
on Rainbow Papers‘s case. However, in view of the subsequent
development of law, the said judgment would not support the case of the
respondents. No doubt, there is no specific provision under the
Registration Act enabling the Registering Authority to delete an entry
already reflected in the Encumbrance Certificate. In this regard, a
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W.A.(MD)No.2662 of 2025
Division Bench of this Court in Tamil Nadu Mercantile Bank Ltd. v.
Sub Registrar and Another in W.P. No. 15451 of 2024, held as follows:
“21.With regard to deletion of the entry, namely,
the attachment in favour of the 2nd respondent, we do not
find any provisions in the Registration Act which permit the
registering authorities to delete an entry which is already
finding place in the Encumbrance Register/Certificate.
However, in terms of the customary practice and well settled
procedure, the Registrar is duty bound to cause a contra
entry stating that the said attachment in favour of the 2nd
respondent stands raised in view of the exercise of the
priority right by the Petitioner Bank by bringing the property
for sale in public auction and consequently, conveying the
said property in favour of the auction purchaser, Mrs.Kala
Ramu. Insofar as this limb of the prayer, we therefore direct
the 1st respondent to make an entry in the Encumbrance
Records to reflect in the Encumbrance Certificate, notifying
that the attachment in favour of the 2nd respondent in entry,
Document No.04 of 2022 dated 05.01.2022, stands cancelled
in view of the auction sale conducted by the Petitioner Bank
in favour of Mrs.Kala Ramu on 31.08.2023 and consequent
registration of the sale certificate which is also being ordered
in this writ petition.”34/36
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W.A.(MD)No.2662 of 2025
46. In view of the above, since the attachment is not binding on
the Registering Authority, the Registering Authority viz., the second
respondent is directed to make an appropriate entry in the Encumbrance
Certificate, clarifying that the earlier attachment will not operate as a bar
for the writ petitioner to deal with the property free from encumbrance.
It is further made clear that though it is stated that an appeal against the
rejection of the claim petition is pending before the NCLAT and an
application for restoration has also been filed, in the event the
respondents succeed in the said proceedings before the appellate
authority or any higher forum, the orders passed herein shall be subject to
modification in accordance with the outcome of such proceedings.
47. With the above directions, this Writ Appeal is allowed.
There shall be no order as to costs. Consequently, connected
miscellaneous petition is closed.
[N.S.K., J.] & [M.J.R., J.]
17.04.2026
Index :Yes/No
NCC :Yes/No
vsm
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W.A.(MD)No.2662 of 2025
N.SATHISH KUMAR, J.
AND
M.JOTHIRAMAN, J.
vsm
To
1.The Assistant Commissioner,
Srirangam (GST Circle),
Moolathoppu Melur Road,
Srirangam, Tiruchirapalli – 620 006.
2.Sub-Registrar, Keezhasathanur,
Palani Nagar, K.K.Nagar,
Tiruchirappalli,
Tamil Nadu – 620 021.
Judgment in
W.A.(MD)No.2662 of 2025
17.04.2026
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